How Sept. 11 changed government contracting forever

The market underwent a rapid transformation after the Sept. 11 terrorist attacks. Government contracting hasn't been the same since.

When terrorists hijacked four planes to use them as weapons and killed thousands of innocent people in the process, a chain reaction started that quickly swept across the country.

Today we live with many of those changes, from heightened security checkpoints at airports to more requirements to get a driver’s license.

Government contractors saw their market changed overnight, with a rush of government spending on new security priorities, creating an abundance of business opportunities.

Ten years later, contractors still feel the impact, including the types of business opportunities available, the role of the financial markets and the relationship between contractors and government agencies.

But other changes have been at work as well. Some are counteractions to the reaction to the Sept. 11 attacks. Others would have happened anyway.

Either way, contractors have been in a near-constant state of evolution over the past decade. That condition is likely to extend well into the next decade.

A need for speed

The biggest game-changer was the sudden awareness of the security vulnerabilities that threatened the United States and the need to address those vulnerabilities.

“We weren’t naive anymore,” said Tony Jimenez, founder and CEO of MicroTech LLC.

Before the attacks, terrorism was thought of as something that happened somewhere else.

“What Sept. 11 brought home was that we were vulnerable,” said Cyril Draffin, vice president of homeland security at Northrop Grumman Corp.

The government reaction was to rapidly start addressing security issues, which meant the allocation of funds and the awarding of contracts. First, there was the creation of the Transportation Security Administration and then the Homeland Security Department.

Other agencies such as the Justice and State departments increased their spending on security. More money also began flowing to state and local governments in the form of grants.

The heightened security concerns also led the United States to launch the wars in Afghanistan and Iraq, and supporting those efforts also helped fuel an explosion of spending with government contractors.

In fiscal 2000, the contractors on Washington Technology’s Top 100 rankings had an aggregate of $26.8 billion in prime contracts. In fiscal 2010, the number had climbed to $132 billion. Much of that growth was driven by the need to support warfighters and to support intelligence and homeland security initiatives.

“The clock speed of contracts and task orders increased significantly,” said Paul Leslie, CEO of Dovel Technologies. “With 9/11, money moved very quickly, and companies had to adjust and modify their business development efforts and response times.”

The government wholly embraced the use of indefinite-delivery, indefinite-quantity contracts because agencies could move quickly to address a need. That trend has become a fact of life in the government market as these large task-order contracts have become the vehicle of choice for buying services and products.

“The increased use of IDIQ contracts and the quicker turnaround of those activities has changed how we do contracting,” said David Zolet, president of business development for Computer Sciences Corp.’s North American public-sector business.

Security concerns also changed how contractors and customers interacted.

“You used to be able to move on and off military facilities,” Jimenez said. “The only place they seemed to check your ID was the PX.”

The current lockdown state of many government agencies, military and otherwise, creates challenges for contractors. “It limits the ability to market your company,” Jimenez added.

There was also less need for security clearances pre-Sept. 11.

“But a lot of the changes are good because it separates the wheat from the chaff and you have to be a much more professional organization today,” he said.

Wall Street wakes up

As the market exploded in terms of spending, companies grew rapidly and, unlike the 1990s and the dot-com era, Wall Street began to notice the government market’s growth potential, said Jerry Grossman, a managing director with the investment bank Houlihan Lokey.

“You had this migration of interest to the government,” he said.

And the market lived up to its potential, with spending on IT services between 2002 and 2006 growing at 10 to 15 percent a year. The earnings of many public and private government contractors during that time were growing at 20 to 25 percent a year.

“The third leg of the equation was that the government was outsourcing more,” Grossman said. “Companies really saw their growth rates get turbo-charged.”

Wall Street’s interest sparked the initial public offerings of a slew of companies such as ManTech International, SI International SRA International, Veridian Corp., Anteon International, MTC Technologies, Sciences Applications International Corp., ICF International, NCI Inc. and DigitalNet.

The window on IPOs came to a close for the most part by 2006 as the market cooled and growth rates returned to more traditional levels.

But Grossman doesn’t expect Wall Street to walk away from those as budget cuts hit the government. “Sept. 11 planted in people’s minds — the public, the taxpayers, investors — the continuing importance of defense, national security, intelligence and homeland security,” he said.

Strategy shifts

For some companies the rapid growth in the market created a management dilemma: how to balance the pursuit of short-term business opportunities with more sustainable business.

SAIC won a contract to install and integrate the communications, electronics and other command and control equipment on mine-resistant, ambush-protected vehicles known as MRAPs. The military needed a lot of them and needed them fast in Iraq and Afghanistan. The program delivered thousands of vehicles and was up and running in less than a year. But as the wars wind down, those kinds of projects won’t continue.

“That’s an example of a near-term opportunity but not something that is sustainable,” said Deborah James, executive vice president for communications and government affairs for SAIC. She ran the program, based out of Charleston, S.C., for the company. “But I certainly hope and believe that the speed and agility we gained will stay with us."

At the same time it is critical that companies focus on more sustainable business areas, particularly in light of the current budget and economic environment. For example, cybersecurity is an area James and other executives consider a sustainable market.

“I don’t care what business you are in, cyber is important to you,” she said.

While threats to people and property remain real, cyber threats have increased in their frequency and ferocity in recent years.

In today’s current budget environment, which some executives said the boom in homeland security spending caused, cybersecurity is seen as an areas that will continue to be funded.

“Cyber would have evolved even without Sept. 11,” Draffin said. “But it is a reminder that people want to do us harm on our own territory.”

A lasting legacy

The aftermath of the terrorist attacks ushered in a new relationship between contractors and government agencies.

“We had this massive growth the first four or five years after Sept. 11, but that’s just the numbers,” said Stan Soloway, president of the Professional Services Council, an industry group, and a Washington Technology columnist.

“What has so dramatically changed in the last decade is that the government’s highest-priority missions require sophisticated technology and related skills, and that’s where the government really struggles to compete for people,” he added.

The government doesn’t have the resources to hire enough people with the high-end technology skills in areas such as cybersecurity, counterterrorism and data analytics to meet the needs of the government mission.

People with those skills can command a salary more than twice what the government can pay. “It’s not greed by contractors; it is what the commercial market dictates,” he said.

It doesn’t mean the government can’t hire any of these people, but it can’t hire enough, so the question is more of balance, Soloway said.

“How that mission-critical work is performed by the government has changed permanently,” he said. “Sept. 11 really kicked that off, and that’s the biggest fundamental change to the market of the last decade. And there is no indication that it is going to change over the next decade.”