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April 2013 Issue #5

Perspectives Department of Homeland Security (DHS) Contract Funding, 2008 2012

Introduction The Department of Homeland Security escaped the brunt of sequestration this year with the signing of the Consolidated and Further Continuing Appropriations Act, 2013 (Public Law 113-6). Previously, the latest report from the Office of Management and Budget (OMB) had calculated that DHSs budgetary resources would be reduced by nearly $3.2 billion (B) from $62.6B to $59.4B due to sequestration. Despite avoiding these mandatory, across-the-board reductions in budget, similar to the Department of Defense (DoD), the budget and contracting environment is returning to the more traditional, competitive environment. As organizations, especially business development teams, plan for the current and future fiscal years, it is crucial to comprehend how DHS procured historically given specific budget conditions. Based on these patterns and trends, informed business decisions can be made to position for the current and the out years. The following brief examines all unclassified DHS-funded prime contracts to the private sector from fiscal year (FY) 2008 to 2012 and provides a variety of analyses of the DHS contracting enterprise. DHS presents a large and attractive market for the private sector particularly in the constricting budget environment; contractors will only be successful if they can properly identify the sub-markets to pursue and the means by which to access those opportunities. DHS Budget Authority and Direct Obligations Over the last five full fiscal years, the total DHS budget authority, including supplemental appropriations, has ranged from a high of $62.5B in FY08 to a low of $54.8B in FY11. The enacted FY12 budget provided DHS with total budget authority of approximately $59.7B an amount 4.4% lower than the peak in FY08. However, DHSs budget authority has actually been more stable than this seemingly large range suggests; exclusive of the Disaster Relief Fund, total DHS budget authority has not deviated more than 3% from the average over the last four fiscal years (i.e., FY09 to FY12).
DHS Total Budget Authority and Direct Obliga9ons for Contractual Services and Supplies, FY08-FY12
Billions $70 $60 $50 $40 $30 $20 $10 $- FY08 FY09 FY10 Government Fiscal Year Total Budget Authority Direct Obligadons for Contractual Services and Supplies FY11 FY12 45% 40% 35% 30% 25% 20% 15% 10% Direc9on Obligga9ons for Contractual Services and Supplies, % of Total Budget Authority

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On average over these five fiscal years, direct obligations for contractual services and supplies, whether from the private sector or other government departments and agencies, accounted for 36% of the total budget authority. However, this ratio reached a low of 32% in FY12 when total direct obligations for contractual services and supplies at DHS decreased 8% year-over-year from $20.7B to an estimated $19.1B. This decline is largely attributable to an increase in the share of obligations devoted to personnel compensation and benefits, and this trend is expected to continue in FY13. Total Prime Obligations The remainder of this analysis focuses on the portion of total DHS direct obligations for contractual services and supplies directed to private sector contractors in the form of prime contracts. Aside from slight deviations in FY10 and FY11, DHS-funded prime contract obligations to the private sector have accounted for approximately 68% of total DHS direct obligations for contractual services and supplies during this five year period. These prime obligations to private sector contractors reached a high of $14.9B in FY09. Meanwhile, DHS-funded FY12 prime obligations reached only $13.1B, representing a 12% year-over-year decline. With persistent pressures on total budget authority combined with continued crowding-out effects from personnel compensation and benefits obligations, the trajectory for top-line obligations to the private sector are likely to remain flat, at best.
DHS Direct Obliga9ons for Contractual Services and Supplies v. DHS-Funded Prime Contract Obliga9ons, FY08-FY12
Billions $25 $20 $15 $10 $5 $- FY08 FY09 FY10 Government Fiscal Year DHS Direct Obligadons for Contractual Services and Supplies FY11 FY12 80% 70% 60% 50% 40% 30% 20% 10% 0% DHS-Funded Prime Contract Obliga9ons, % of Direct Obliga9ons for Contractual Services and Supplies

Total DHS-Funded Prime Contract Obligadons to Private Sector

It is also important to note that, while this analysis examines all DHS-funded prime contracts to the private sector, not all of these contracts are necessarily contracted out of a DHS contracting office. In fact, in FY08, nearly $1.3B, or 9%, of DHS-funded prime obligations were contracted by contracting offices in other Federal departments and agencies, such as the Department of Defense (DoD) and the General Services Administration (GSA). Since FY08, the amount of annual prime obligations contracted
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April 2013 Issue #5

by non-DHS contracting offices has declined to the $500 to $700 million (M) range. On average, these contracts have accounted for just over 4% of total annual DHS-funded prime obligations. While relatively small on a percentage basis, these contracts are not inconsequential and accounted for nearly $680M in DHS-funded FY12 prime obligations to the private sector.
DHS Contracted v. Non-DHS Contracted Prime Obliga9ons, FY08-FY12
Billions $16 $14 $12 $10 $8 $6 $4 $2 $- FY08 FY09 FY10 Government Fiscal Year DHS Contracted Non-DHS Contracted FY11 FY12 16% 14% 12% 10% 8% 6% 4% 2% 0% Non-DHS Contracted Prime Obliga9ons, % of DHS- Funded Prime Obliga9ons

Products, Services, and Research & Development From FY08 to FY12, an average of 72% of DHS-funded prime obligations was directed towards service contracts. Contracts for products and for research and development (R&D) services have consistently accounted for the remaining 23% and 5%, respectively. In FY12, prime obligations for services totaled approximately $9.7B, while obligations on product- and R&D-centric prime contracts accounted for $2.8B and $650M, respectively.
DHS-Funded Prime Contract Obliga9ons, Products v. Services v. R&D, FY08-FY12
Billions $16 $14 $12 $10 $8 $6 $4 $2 $- FY08 FY09 FY10 Government Fiscal Year FY11 FY12 Unlabeled R&D Products Services

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As expected, the two largest categories of services spending are (1) Professional, Administrative, and Management Support services and (2) IT and Telecommunications services. These accounted for approximately $2.6B and $2.4B in FY12 prime obligations at DHS, respectively or 52% of total prime obligations on services contracts. This proportion is marginally lower than the 58% and 55% shares garnered in FY10 and FY11, respectively. This trend may continue in the short-term as expenditures on more essential services for example, utilities increase in both absolute and relative terms. # Service Category FY12 DHS-Funded Prime Obligations $2,628.5 2,396.0 1,709.2 694.7 457.7 1,766.1 $9,652.2 % of FY12 Services Total 27% 25% 18% 7% 5% 18% 100% (in $ millions) To complement spending on IT and Telecommunications services, the top product category in terms of FY12 DHS prime obligations was Automated Data Processing (ADP) Equipment, Software, Supplies and Support Equipment or generally IT-related products (see table below). FY12 prime obligations totaled nearly $830M, which represented approximately 30% of the $2.8B in total prime obligations on product- centric contracts. This 30% share in FY12 is a jump from the FY08-FY11 average of 25% primarily attributable to year-on-year increases in obligations on prime contracts related to ADP Equipment (ADPE) System Configuration and ADP Software. # 1 Product Category FY12 DHS-Funded Prime Obligations $829.9 515.8 229.9 169.8 143.7 894.5 $2,783.5 % of FY12 Products Total 30% 19% 8% 6% 5% 32% 100% (in $ millions)
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1 Professional, Administrative, and Management Support 2 IT and Telecommunications 3 Utilities and Housekeeping 4 Maintenance, Repair, and Rebuilding of Equipment 5 Architect and Engineering All Other Service Categories Services Total

ADP Equipment, Software, Supplies and Support Equipment 2 Ships, Small Craft, Pontoon, and Floating Docks 3 Alarm, Signal, and Security Detection Systems 4 Aircraft and Airframe Structural Components Communication, Detection, and Coherent Radiation 5 Equipment All Other Product Categories Products Total

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DHS-funded prime obligations on R&D contracts have remained relatively stagnant since FY09. FY12 obligations totaled nearly $653M a mere 2% year-over-year increase. However, one area that deviated significantly from past years is Medical R&D, which spiked from $6.7M in FY11 to $192.3M in FY12. Nearly all of this increase is due to approximately $185M in FY12 prime obligations to support the National Biodefense Analysis and Countermeasures Center (NBACC) contract held by Battelle Memorial Institute. # R&D Category FY12 DHS-Funded Prime Obligations $239.1 192.3 134.3 32.9 26.2 27.8 $652.6 % of FY12 R&D Total 37% 29% 21% 5% 4% 4% 100% (in $ millions) Contracting Dynamics This following section examines the means by which DHS-funded contracts are actually contracted. Understanding the value of private sector-addressable spending and the capabilities being acquired is vital; however, understanding how DHS procurements are truly conducted is equally important. Lack of access to certain key contract vehicles or lack of requisite socioeconomic designations, for example, could render specific market segments less accessible or even completely inaccessible. Type of Award In FY12, $8.2B, or approximately 63% of DHS-funded prime obligations, was obligated via delivery orders on new and existing indefinite delivery contracts (IDC). This is down from a five-year high of $10.6B obligated via delivery orders in FY08, which accounted for 72% of that years total prime obligations. This downward trend in use of delivery orders has been counterbalanced by increases in usage of definitive contracts and blanket purchase agreements (BPA). DHS-funded prime obligations awarded via definitive contracts reached $2.7B in FY12, effectively increasing its share of the total to 21% from just 13% in FY08. Similarly, for BPAs and basic ordering agreements (BOA) in aggregate, the share of total prime obligations rose from 9% in FY08 to 14% in FY12, or approximately $1.8B in FY12 obligations. This phenomenon may be partially attributable to the general decline in utilization of DHSs EAGLE contract vehicle since FY08. The eventual award of all functional categories and tracks under DHSs EAGLE II program could potentially reverse this trend.

1 Other Defense 2 Medical 3 Other 4 General Science/Technology 5 Defense Systems All Other R&D Categories R&D Total

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April 2013 Issue #5

DHS-Funded Prime Contract Obliga9ons, by Type of Award, FY08-FY12

Billions $16 $14 $12 $10 $8 $6 $4 $2 $- FY08 FY09 FY10 Government Fiscal Year FY11 FY12 Purchase Order BPA / BOA Denidve Contract Delivery Order

Type of Contract In terms of type of contract, over 60% of DHS-funded FY12 prime obligations were made on fixed price type contracts, amounting to just over $8.0B. Cost reimbursement contracts were the second most utilized type of contract at DHS, garnering $2.3B, or 18%, of FY12 prime obligations. In general, aside from labor hour contracts, the distribution of prime obligations between types of contracts has remained relatively constant at DHS over the last five years. Obligations on labor hour contracts appear to have more than doubled from roughly $480M, or a 3% share, in FY08 to over $1.0B in FY12, representing an 8% share. However, there is some degree of uncertainty due to the relatively large proportion of unlabeled contracts, particularly in FY08 and FY09.
DHS-Funded Prime Contract Obliga9ons, by Type of Contract, FY08-FY12
Billions $16 $14 $12 $10 $8 $6 $4 $2 $- FY08 FY09 FY10 Government Fiscal Year FY11 FY12 Unlabeled Other Order Dependent Combinadon Labor Hour Time and Materials Cost Reimbursement Fixed Price

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Extent of Competition

April 2013 Issue #5

In general, the degree of competition at DHS has increased over the last five years. An increasing proportion of DHS-funded prime obligations are issued through full and open contracts; conversely, a decreasing amount is geared towards non-competitive contracts, including follow on awards. In FY12, obligations on full and open contracts reached nearly $10.9B, or 83% of total DHS FY12 prime obligations. Non-competitive contracts, inclusive of non-competitive follow on contracts, totaled approximately $1.7B, or 12% of total FY12 obligations; this is a substantial decrease from the FY08 non- competitive prime obligation total of $3.0B, or 21% of all DHS-funded prime obligations that year.
DHS-Funded Prime Contract Obliga9ons, by Extent of Compe99on, FY08-FY12
Billions $16 $14 $12 $10 $8 $6 $4 $2 $- FY08 FY09 FY10 Government Fiscal Year FY11 FY12 Unlabeled Follow On to Competed Acdon Competed under SAP Not Competed Full and Open aper Exclusion of Sources Full and Open

Type of Set Aside The Federal government has established small business targets of 23% of prime contracts for small businesses; 5% of prime and subcontracts for each of women-owned small businesses (WOSB) and small disadvantaged businesses (SDB); and 3% of prime and subcontracts for each of HUBZone and service- disabled veteran-owned small businesses (SDVOSB). DHS is aiming to exceed these goals and has established a target of 32% of prime contracts for small businesses. Persistent pressures to meet these targets, at both the government- and department-wide levels, have undoubtedly had some impact on the use of set aside contracts. In fact, prime obligations on non-set aside contracts at DHS decreased from $13.1B in FY08 to approximately $10.2B in FY12 a decrease in share from 90% to just 78% of total annual DHS prime obligations. Over this same period of time, prime obligations on set aside contracts increased from $1.5B to over $2.9B. Out of the four primary socioeconomic classifications with contracting targets (i.e., WOSB, SDB, HUBZone, and SDVOSB), SDVOSB set aside contracts experienced the most growth between FY08 and FY12. Over the last five years, prime obligations on such contracts grew from $47.1M to $311.7M, increasing their share of DHS-funded prime obligations from 0.3% to

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2.4%. The utilization of set aside contracts at DHS is not expected to wane and should only strengthen in the out years.
DHS-Funded Prime Contract Obliga9ons, by Type of Set Aside, FY08-FY12
Billions $16 $14 $12 $10 $8 $6 $4 $2 $- FY08 FY09 FY10 Government Fiscal Year FY11 FY12 Unlabeled All Other Set Asides HUBZone SDVOSB 8(a) Small Business No Set Aside

DHS Contractors DHS may have as many as 34,000 private sector contractors supporting its mission and operations. Despite significant consolidation over the last decade, this environment remains diverse and highly competitive. In FY12, the top ten DHS contractors in terms of FY12 prime obligations controlled one- quarter, or $3.3B, of the market. Notably, four of these contractors were not in the top ten in FY11; additionally, the top two contractors in FY11 dropped out of the top ten in FY12. FY12 Contractor Rank 1 CSC 2 Lockheed Martin 3 SAIC 4 IBM 5 Bollinger Shipyards 6 General Dynamics 7 Battelle Memorial Institute 8 Securitas AB 9 HP 10 The GEO Group All Other Contractors Total FY11 Rank 3 5 6 4 13 7 62 41 9 14 FY11 DHS-Funded Prime Obligations $533.6 452.3 403.6 474.6 187.2 316.9 48.2 66.2 241.7 166.3 11,965.9 $14,856.3 FY12 DHS-Funded Prime Obligations $670.3 531.3 396.5 352.6 282.8 269.6 239.9 208.9 195.4 182.3 9,758.5 $13,088.2 % of FY12 Total 5% 4% 3% 3% 2% 2% 2% 2% 1% 1% 75% 100% (in $ millions)

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While there is some degree of volatility from year to year in terms of contract awards and obligations to private sector contractors at DHS, many of the traditional large systems integrators and government consulting / professional services firms have consistently received significant funding from DHS over the last five years. The ten contractors shown in the table below received 23% of all DHS-funded prime obligations between FY08 and FY12 reaching a total of $16.5B across the ten companies. # Contractor FY08-FY12 DHS-Funded % of FY12 Prime Obligations Total $2,399.9 3% 2,222.2 3% 2,162.7 3% 2,022.5 3% 1,650.8 2% 1,388.7 2% 1,378.1 2% 1,129.2 2% 1,108.7 2% 1,042.4 1% 55,095.9 77% $71,601.1 100% (in $ millions) Conclusion Without a doubt, DHS is a large, complex government organization and its contracting environment is similarly large and complex. While there are doubts about the future attractiveness of the general Federal market, the private sector-addressable market size, particularly at DHS, is and will remain large, and pockets of growth and opportunity will persist. While the analyses presented above provide strategic perspectives regarding DHS writ large, granular analysis of specific bureaus, offices, programs, and contracts is a logical next step and would provide the necessary tactical information to guide ever crucial business development and sales decisions.
Notes on Methodology: This analysis examines all unclassified prime contracts awarded to the private sector that are funded and/or contracted by DHS. Contracts funded by DHS may not necessarily be contracted by a DHS contracting office. This analysis excludes all grants and m ay exclude some contracts whose estimated value is below $3,000. Some figures may deviate from other published numbers due to rounding errors and/or typographical errors in government budget documents and contract data. Company-specific data may not account for recent acquisitions and are based on government-provided contract and vendor information. Sources include the Federal Procurement Data System Next Generation, DHS Budget-in-Briefs and Congressional Budget Justifications, and OMB budget documents.

1 IBM 2 CSC 3 Lockheed Martin 4 SAIC 5 General Dynamics 6 Unisys 7 Northrop Grumman 8 Boeing 9 Accenture 10 Booz Allen Hamilton All Other Contractors Total

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About The Soter Group

April 2013 Issue #5

The Soter Group provides services to both the Federal government and the commercial entities that support it. Our Commercial Services Division provides market research and strategic advisory services to commercial clients seeking to enter or grow in the Federal government security market. Justin Taft, President & CEO, and Peter Wong, Associate, authored these perspectives. The Soter Group welcomes the opportunity for our research to be cited in third-party reports. To learn more, please visit www.TheSoterGroup.com and/or email info@TheSoterGroup.com. Report April 2013: Perspectives Department of Homeland Security Contract Funding, 2008 2012

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