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The (Still) Developing Homeland Security Market

A question was asked a few months ago if a real market actually existed for homeland security focused products and technologies, or if it was entirely dependent on the government and more specifically the Department of Homeland Security, for its impetus. According to the January 10, 2007 report of the Homeland Security Research Corporation, the U.S. Homeland Security markets, driven by the government and private sectors, will grow approximately 50%, from $23.8 Billion in 2006 to $34.8 Billion by 2011 (assuming no new major terror attack). The private sector HLS market alone will grow from $4.8 Billion in 2007 to $6.7 Billion by 2011. The private sector is projected to be $28.5 Billion of HLS products and services are forecasted to be procured from the HLS industry during 2007-2011 by the private sector. These markets are analyzed and segmented by industry sector (e.g. banking & finance, chemical & HAZMAT, energy, water) and products/services category procured (e.g. perimeter protection systems, cyber terror security, biometric systems). Obviously, this is large enough and important enough for anyone’s attention.

One of the on-going debates is whether the risk-based approach to funding of new technologies (meaning funding established companies as opposed to smaller earlier stage companies) results in the desired solutions. There is also a discussion regarding the differences between first, second and third generation technologies, and their respective abilities to meet expectations and requirements.

As discussed in the Homeland Security Daily Newswire , quoting its director Bret Johnson, the Homeland Security and Entrepreneurship Center (HSIEC) at Northwestern University , says that the Homeland Security market is still developing and that certain technologies are more likely than others to receive funding support and reach the market. Specifically:

· Homeland security technologies that are close to deployment – This means that technologies that are not ready for market now or that require lengthy development will get less attention than those that either link to or complement existing systems

· Innovations which improve the security of critical infrastructure (transportation network; critical assets such as power, water, and food) but also have a dual/commercial benefit of providing operational efficiencies – These include software tools for emergency planning and response and those that apply to managing the operation of transportation systems

· Intelligence gathering, information analysis, and data analytics tools – These include the integration and connection of various sources of information and data for predictive modeling, threat analysis, and real time collaboration as well as new hardware for monitoring assets and information

· Products and services that enhance emergency preparedness, planning, and response for catastrophic threats including influenza epidemics and natural disasters – This includes the management of property and transportation assets and improving the interoperability of communications.

· Cybersecurity products that help improve the security of the nation's existing cyber infrastructure – This means a focus on identifying and assessing vulnerability and protecting the operation of telecommunication, banking, and finance, and large scale processing infrastructure assets

· Chemical, biological, radiological, nuclear, and explosives monitoring products – This includes sensors and detection devices that provide high reliability and quick detection or analysis.

All of this is a preface to a recently published report (November 2006) from the Civitas Group LLC, a strategic advisory and investment firm serving the homeland and national security markets. Civitas Group clients include Fortune 100 firms, leading security services providers, leading defense and information technology companies, early stage companies with promising technologies, and private investment firms. In a rapidly evolving homeland and national security industry, Civitas helps its clients build and implement successful strategies and grow their businesses.

This report is an update from the one issued in 2004. The focus here will be on the section that discusses the “dominant market characteristics” (of the homeland security market) outlining key issues about the homeland security market. Christian Beckner wrote about this report on Homeland Security Watch (I often refer to his site to learn about newly issued reports and gain his insight). However, please note that any use of the word “we” in this section refers to the Civitas Group.

These characteristics are (commentary mine):

1. Growth, Maturity and Expansion

The market is growing, according to Civitas, not only in the government sector, but also in the private area. The demand for homeland security related products results from the continued funding of innovation and adoption of new technologies through government contracts and funding, and through an expanding private sector. One important trend cited by Civitas was the emergence of second-generation products being introduced to meet end-user requirements. Another point of view on these second generation technologies (products) is that the first generation may not have met market expectations, and therefore many of the segments of the still emerging homeland security market may be penetrated by these second (or perhaps later, third) generation technology solutions.

2. Centrality of Government Policy

Clearly, the evolution of U.S. government policy influences major technological developments, “driving its growth and affecting critical issues related to standards, adoption cycles and spending in both the public and private sectors of the market.” The involvement of the federal government helps to promote market growth but also creates impediments (e.g., concerns over privacy and civil liberties, the potential for regulation, and lack of clarity on procurement policy).

3. Innovation

Since much of the current technology is not meeting expectations, there is a considerable amount of research, development, test and evaluation (RDT&E). Largely, this is being funded by the U.S. government in programs of “Homeland Security Advanced Research Projects Agency (HSARPA), the Defense Advanced Research Projects Agency (DARPA), government research labs, and universities.” Civitas’ report then notes that the government funding also “provides direction to private entities about the priorities of the government, allowing them to align their own work with the public sector’s path.” The final observation here is that “Security requirements will drive further development and full acceptance and integration of once esoteric technologies, such as biometrics, data assessment engines and radio frequency identification (RFID).” It should be noted that both biometrics and RFIDs are still in the evolutionary stage, although some ascribe “panacea properties” to both.

4. Systems Integration

Both government and private sector end-users are seeking integrated systems over stand-alone products. This means that technologies from smaller companies are either integrated within a larger integrated system, or never even considered (if the companies involved are not, or cannot align themselves with the larger systems integrators). There is also a trend toward linking “traditional physical security tools and hardware with software based “logical” components.” Again, this trend favors the larger systems integrators, making it difficult for companies with products that “are difficult to integrate into larger solutions (e.g., providing products with proprietary, or non-standard data formats)” to compete.

5. Provider Consolidation

Large companies are continuing to acquire smaller and mid-sized companies that have technology, patents or market channels in intelligence and homeland security. Civitas projected an acceleration of this “roll-up” process when Defense Department budgets are reduced when (if) the Iraq and Afghanistan conflicts are resolved (from current events, this acceleration is probably a few years off). First-tier integrators will continue to search for second and third tier companies. This consolidation, however, “will bolster further venture and private equity investment in early stage security services and technology firms and result in a market increasingly defined by a number of large companies at the top, a large and vibrant pool of small, innovative companies, and fewer in the middle.”

6. Customer Fragmentation

Homeland security is said to be a “discipline of disciplines.” This presents a challenge to companies, large and small, especially those from the DoD market. The diffuse sales landscape requires companies to sell to customers of varying sizes, locations and needs. Much of the acquisition funding from the federal government is being pushed to the states and municipalities through a number of programs. Additionally, the commercial sector of the security market requires some companies with only government sales experience to retool their sales efforts and marketing programs.

While this trend affects the larger companies, often, the smaller and early stage companies are not in the position to compete for contracts without alliances with the large integrators. This requires a cultural change by both large and small players. The result is a possible downward pressure on pricing (local governments cannot afford much needed systems if priced for sale to the federal government), and implies market power for companies with established sales channels to the state and local levels.

7. Differentiation from the Defense Market

The characteristics of the end-user market differs from the traditional security or Defense Department customer:

· the homeland security market is focused on protecting a different constituency than defense

· operations and support (O&S) costs (and total cost of ownership) tend to be a leading consideration in homeland security.

· the average homeland security buyer does not have the logistics and support capabilities as in the military; the seller is therefore expected to have these capabilities

· often, the homeland market will trade performance for cost savings in a manner uncharacteristic of the defense market.

8. Expansion and Migration

Dual-use, or the ability to sell a product or technology to both government and commercial end-users, is more important than ever. In many ways, the ability to migrate applications from the government to commercial markets will influence eventual success of the suppliers. Examples are the interchangeability of technologies between military or border security with protection of critical infrastructure in the commercial sector, or the ability to take a homeland security-centric technology and apply it to the intelligence or defense areas. This “transfer of technology” might also be possible from homeland security to medical or pharmaceutical applications (think biological agent attacks and sensors).

9. Operational Centrality

Since September 11th, businesses have become increasingly sensitive to the questions of security in general. Issues like physical security, access control, identification of authorized individuals, cybersecurity, critical infrastructure, and disaster recovery are all more important. For example, data back-up today means much more than keeping a copy of your files on a CD or external hard drive. In fact, it means much more than having an off-site data resource. Think redundancy.

The Civitas report is only 36 pages long and can easily be read. These are some of the points raised that, in their opinions, will determine the evolution of the market for homeland security related technologies.