Not long ago, every big technology business in the land swarmed with consultants helping managers achieve total quality management, reinvention, five nines or Six Sigmas.

Nowadays, those consultants must be showing up in fatigues and bandoliers, for virtually any tech company worth its weight in bullet holes has added a Homeland Security division to its bureaucracy in the past few months.

Siebel Systems

(SEBL)

is believed to be one of the first to carve out a new business unit aimed at patronizing patriotism, but it was followed quickly by rivals

Microsoft

(MSFT) - Get Report

,

Oracle

(ORCL) - Get Report

,

Computer Sciences

(CSC)

and many others.

Do these efforts make any financial sense, or are companies assembling uniformed squads of program managers and lobbyists simply to pander to the

idee fixe du jour

?

The latter seems more likely, although the obsession is gathering speed. Microsoft, publisher of MSN Money, recently posted a help-wanted ad seeking a Chief Architect, Federal Homeland Security Partner. At Oracle, Homeland Security Solutions Vice President Steve Perkins says he's dedicated to helping partners use Oracle databases to "maintain critical infrastructure and effectively react to threats and emergencies."

This new era of corporate combat chic results from the simple fact that the federal government is one of the few large organizations in the world that seems willing to spend money at this time of waning demand and thinning budgets.

If my initial checks are correct, big-cap technology companies are going to be disappointed, as initial funding appears scant and competition intense. A couple of small companies that recently went public might be a better bet for investors aiming to play the trend, as I'll explain in a moment.

So far, the Feds are seeking so little money for technology as a percentage of their Homeland Security budget that it's unlikely that the business will be material for any of the large companies that so desperately need a new source of funding. Of the $37 billion sought by the Bush administration for its new Homeland Security department, only 1.75% is directly earmarked for computers, software, networking and consulting, according to Congressional documents -- although surely a lot more will be sneaked into "off-budget" emergency spending measures.

And as the money becomes available, the tech giants will find themselves competing against veteran defense contractors like

Northrop Grumman

(NOC) - Get Report

and

Lockheed Martin

(LMT) - Get Report

. These companies have used their hot stocks to acquire niche companies to give them enough software and systems-integration expertise to battle head-to-head for any information technology contract.

Operation Interoperability

Ben Gianni, vice president for Homeland Security at Computer Sciences, noted that most business in the space will not yield new sales for the large software vendors. Instead, the money will primarily go toward doing a better job of tying together all the stuff the vendors have already sold.

The watchword will be interoperability -- or the mission of ensuring that data generated by one security-related organization is quickly made available in a readable form to others, whether civilian, military or political.

A good example is the National Electronic Disease Surveillance System (NEDSS) that Computer Sciences helped to design and build for the Centers for Disease Control. The system pushes data about infectious diseases, biochemical agents and the like from the nation's disparate hospitals and paramedics to a central clearinghouse in the federal government.

The crux of Computer Sciences' role was the development of a set of data standards, called Health Level 7, that standardizes the way medical professionals communicate with each other about potential epidemiological outbreaks. It essentially allows hospital workers to retrieve information from the organization's Oracle, Microsoft or IBM database and type it into a new online template for analysis in Washington. Thus, old technologies are leveraged in a fresh format, with no additional funds flowing to Silicon Valley, Redmond or White Plains.

That contract was worth $16 million -- not even a rounding error for Computer Sciences, which recorded $11 billion in trailing 12-month sales. Gianni thinks the larger opportunities are well in the future, as the government moves on a much more deliberate calendar than commercial enterprises.

His company will bid, for instance, on a contract with the Immigration and Naturalization Service that seeks an information integration system to track travelers in the U.S. It will be worth $380 million, but don't expect that much to flow to any single vendor. Computer Sciences has teamed with archrival

Electronic Data Systems

(EDS)

and may need to bring others in, whittling down the value of the deal for all.

The Risks of Homeland Security Contracts

Putting a lid on companies' ardor to participate in the new business, however, are clauses in recent homeland defense contract proposals that require companies to take on unlimited liability for their work. This is in contrast to Pentagon contracts owned by companies such as Lockheed Martin, in which the government provides some federal indemnification in the event of the failure of a satellite launch.

Let's say that an information technology consortium puts together a network and sensor grid for radiological detection and it functions as proposed -- but an enemy "spoofs" and defeats the system, exposing thousands to nuclear contamination. Unless the government provides insurance beyond what the technology consortium can buy commercially, David E. Colton, vice president at a trade group called Information Technology Association of America, said he believes the nation's largest companies would decline to bid.

Northrop Grumman has already threatened to walk away from rolling out an anti-anthrax technology at post offices unless it is indemnified. The events of Sept. 11 resulted in $50 billion in litigation, and it is feared that future terror events could wipe out companies unable to secure enough insurance.

Two Potential Winners

If the trade group is able to lobby successfully for indemnification, surprise winners in the battle for the nascent Homeland Security bonanza could be a couple of smaller specialized defense contractors that went public this spring as valuations in the sector exploded:

SRA International

(SRX)

and

Veridian

(VNX)

. Both of these companies have excelled in the private sector for a long time, but are still small enough for new Homeland Security contracts to be meaningful drivers of results going forward.

Veridian is considered a pure play on the idea that future wars will be won by achieving "informational superiority" over the enemy. It specializes in creating battlefield data-analysis systems, wartime network security systems and battlefield data and hazard-sensing systems.

Showing how the mission has come home, on July 11 it announced a $1.3 million contract to assess the security risk at the nation's dams. A few months before, it received a $27.2 million Air Force contract to study the biological effects of directed energy, such as radar and other biological hazards on battlefields.

Veridian's trailing 12-month revenue is under $1 million, though, so for the moment I'm more interested in SRA International. SRA was started 24 years ago, has 2,100 employees and got half of its $313 million in trailing 12-month revenue from clients in the national security infrastructure.

Another 20% of its revenue comes from public health, where it helps security-related organizations like the Federal Emergency Management Agency. The rest comes from government-related strategic forecasting, software and computer systems integration. More than half its employees have security clearances and a third hold advanced degrees.

Ted Legasey, chief operating officer at SRA, said that if you construe the concept of Homeland Security in its broadest sense, there could be as much as $100 billion at stake. "We only need a small part of that to be very successful," he said. "It's perverse that we are benefiting from such a terrible set of events, but it's an important business for us."

Looking for Patterns and Problem Language

SRA specializes in designing exercises that the military and civil authorities run to practice their missions. It also designs, engineers and installs the systems and equipment that turn an empty room into a military or emergency command center.

They had just completed building the command center at the Pentagon that was destroyed on Sept. 11 and are now rebuilding it. These are stocked with big video displays, a lot of telecommunications products and require fresh approaches to fusing information rushing in from fat data pipes and presenting it to leaders in ways that are easy to analyze and act upon.

One of SRA's strengths, according to analysts, is its commitment to research and products in the emerging field of natural-language processing. One of its applications, sold currently to 85 financial services companies, reads every inbound and outbound message between stockbrokers and clients to discern if there is any problematic language; bad notes are quarantined and copied to compliance departments. The same technology is used by organizations such as the National Security Agency to look for patterns or linkages in satellite or cellular intercepts from bad guys.

Government is replete with what analysts call "stovepipe," or vertical information systems at agencies such as the National Security Agency (NSA), CIA and FBI that don't talk to one another. It would make sense for Homeland Security information technology officials to contract with an independent third party, such as SRA, to create a clearinghouse much like the type that Computer Sciences built for the epidemiologists -- a system that takes plain text in a standard format and provides filtering, analytics and display tools. The goal is to turn the mountains of data into useful information. "The impediments to success are not technical, they're organizational," said Legasey.

SRA's gross margins are in the 25%-30% range, net income is in the 3%-5% range, and trailing 12-month income was $7.4 million. The company says it expects to have no trouble growing 15%-20% per year, as it has in the past two decades, as long as threats to the U.S. continue. There's no long-term debt or intangibles, and

Fortune

magazine for three years in a row has rated the company as one of America's 100 best to work for.

A price-to-earnings multiple around 30 would make sense for a new public company growing at 20%. So with earnings per share estimated around 65 cents for fiscal 2002, investors seeking to add a Pentagon punch to embattled portfolios should consider the shares at $18 or less -- about a 20% decline from its recent perch at $23.

While Jon Markman cannot provide personalized investment advice or recommendations, he invites you to send comments on his column to

7jonmail@microsoft.com. At the time of publication, he did not own or control shares in any equities mentioned in this column.