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High Stakes

By CIOinsight  |  Posted 04-02-2007 Print

High Stakes

To grasp how a scandal of this magnitude could have occurred — and gone undetected for almost 10 years — you have to understand how the defense and intelligence market works, the companies and the competition, and the size of the contracts involved.

Of course, what drives the market in the post-Sept. 11 world is money, lots and lots of it. In the wake of the terrorist attacks on New York and Washington, D.C., the Bush administration has substantially boosted spending on Pentagon and intelligence systems. According to Input, an independent federal government market research firm, the Department of Defense's spending on information-technology services and solutions is expected to increase from $31.5 billion in federal fiscal year 2005 to $36.4 billion in federal fiscal year 2010. While spending on intelligence-related activities by the federal government remains highly classified, Input estimates that total addressable information-technology spending for U.S. intelligence agencies in federal fiscal year 2005 was $10.9 billion. Input projects that will jump to approximately $13.6 billion by fiscal year 2011.

In addition, according to Input, the so-called Intelligence Community Management Account (ICMA) has been given $580 million in discretionary budget authority in fiscal 2007, almost three times what it had in fiscal 2006. These funds are earmarked to pay for the infrastructure and personnel required to support the newly created Director of National Intelligence and implementation of the Intelligence Reform and Terrorism Prevention Act of 2004, which President Bush has said will make the country's "vast intelligence enterprise ... more unified, coordinated and effective."

According to John Slye, a senior analyst with Input, much of the Defense Department spending is earmarked for what the market research firm calls "warfighting" systems and so-called Network Centric Warfare Systems. The latter utilize information technology via real-time networks to allow increased information sharing, collaboration and shared situational awareness. The hoped-for end result: greater self-synchronization, speed of command and mission effectiveness by the military.

To implement these initiatives, the Defense Department will spend almost $9 billion in 2007 on tactical data links, combat support systems and information processing systems, according to Input. Another $14.2 billion is slotted for leased communications lines, computers, servers and networks, and an information warehouse, according to Input. The remainder of the budget is to be spent on business systems, computer security, and program office support and CIO executive support. "The DOD has changed from an emphasis on ships, guns, and tanks and planes to a focus on information knowledge and timely, actionable intelligence," Input noted in one of its recent reports.

Based on Securities and Exchange Commission filings by a number of vendors that deal with the intelligence community — including ManTech International and L-3 Communications — the CIA and other intelligence agencies, including the National Security Agency (NSA), the Defense Intelligence Agency (DIA) and the National Reconnaissance Office (NRO), are increasing their demand for data and text-mining solutions to enable them to extract, analyze and present data gathered from the massive volumes of information available through open sources such as the Internet. This increased focus on national security, homeland security and intelligence has also reinforced the need for interoperability among the many disparate information-technology systems throughout the federal government, specifically for enterprise systems that enable better coordination and communication within and among agencies and departments.

Intelligence agencies are also adding secure and non-secure voice, data and video communication for office, battlefield and other network applications as well as intelligence data collection, surveillance and reconnaissance.

The spending on classified, or "black box," systems and services attracts a variety of vendors, many of which, like MZM, started out small and quickly fattened. Among them: CACI International, SRA International, ManTech International and L-3 Communications.

But these days, defense and intelligence are relying increasingly on big integrators like EDS, Raytheon, Computer Sciences Corp. and Science Applications International Corp. (SAIC), as well as divisions of large defense contractors such as General Dynamics, Lockheed Martin and Northrop Grumman, and consulting firms such as Accenture and BearingPoint.

There has also been consolidation in this market, according to Input's Slye. As an example, L-3 Communications merged in 2005 with San Diego-based defense contractor Titan in a $2.65 billion, all-cash deal. "Titan was a major player in this market," Slye says. That same year, ManTech acquired Gray Hawk Systems, which provides critical infrastructure protection, counter-intelligence/counter-terrorism mission support, information processing and warfare systems engineering. In announcing the acquisition, ManTech stressed that more than 90% of Gray Hawk's 500 employees had security clearance and 70% had high-level clearance, a key asset in dealing with mission-critical national security programs.

CACI acquired the defense and intelligence divisions of American Management Systems for $415 million earlier this year.

"The danger of these consolidations," says POGO general counsel Amey, "is that ultimately the government is going to have less and less choice when it comes to selecting vendors." That, of course, would mean that the remaining contractors would have increasing leverage in dealings with the feds. "The procurements have gotten bigger and bigger," Slye says. "The scope of the systems is so huge that the intelligence agencies are using integrators not only to implement them but to act as program managers."


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