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World News for World Changers

Jun 24

Booz Allen, the World’s Most Profitable Spy Organization

By Drake Bennett and Michael Riley, Businessweek, June 20, 2013

In 1940, a year before the attack on Pearl Harbor, the U.S. Navy began to think about what a war with Germany would look like. The admirals worried in particular about the Kriegsmarine’s fleet of U-boats, which were preying on Allied shipping and proving impossible to find, much less sink. Stymied, Secretary of the Navy Frank Knox turned to Booz, Fry, Allen & Hamilton, a consulting firm in Chicago whose best-known clients were Goodyear Tire & Rubber (GT) and Montgomery Ward. The firm had effectively invented management consulting, deploying whiz kids from top schools as analysts and acumen-for-hire to corporate clients. Working with the Navy’s own planners, Booz consultants developed a special sensor system that could track the U-boats’ brief-burst radio communications and helped design an attack strategy around it. With its aid, the Allies by war’s end had sunk or crippled most of the German submarine fleet.

That project was the start of a long collaboration. As the Cold War set in, intensified, thawed, and was supplanted by global terrorism in the minds of national security strategists, the firm, now called Booz Allen Hamilton (BAH), focused more and more on government work. In 2008 it split off its less lucrative commercial consulting arm—under the name Booz & Co.—and became a pure government contractor, publicly traded and majority-owned by private equity firm Carlyle Group (CG). In the fiscal year ended in March 2013, Booz Allen Hamilton reported $5.76 billion in revenue, 99 percent of which came from government contracts, and $219 million in net income. Almost a quarter of its revenue—$1.3 billion—was from major U.S. intelligence agencies. Along with competitors such as Science Applications International Corp. (SAIC), CACI, and BAE Systems (BAESY), the McLean (Va.)-based firm is a prime beneficiary of an explosion in government spending on intelligence contractors over the past decade. About 70 percent of the 2013 U.S. intelligence budget is contracted out, according to a Bloomberg Industries analysis; the Office of the Director of National Intelligence (ODNI) says almost a fifth of intelligence personnel work in the private sector.

It’s safe to say that most Americans, if they’d heard of Booz Allen at all, had no idea how huge a role it plays in the U.S. intelligence infrastructure. They do now. On June 9, a 29-year-old Booz Allen computer technician, Edward Snowden, revealed himself to be the source of news stories showing the extent of phone and Internet eavesdropping by the National Security Agency. Snowden leaked classified documents he loaded onto a thumb drive while working for Booz Allen at an NSA listening post in Hawaii, and he’s promised to leak many more. After fleeing to Hong Kong, he’s been in hiding. (He didn’t respond to a request for comment relayed by an intermediary.)

The attention has been bad for Booz Allen’s stock, which fell more than 4 percent the morning after Snowden went public and still hasn’t recovered. Senator Dianne Feinstein (D-Calif.), who chairs the Select Committee on Intelligence, has called for a reexamination of the role of private contractors in intelligence work and announced she’ll seek to restrict their access to classified information. Booz Allen declined to comment on Snowden beyond its initial public statement announcing his termination.

The firm has long kept a low profile—with the federal government as practically its sole client, there’s no need for publicity. It does little, if any, lobbying. Its ability to win contracts is ensured by the roster of intelligence community heavyweights who work there. The director of national intelligence, James Clapper—President Obama’s top intelligence adviser—is a former Booz Allen executive. The firm’s vice chairman, Mike McConnell, was President George W. Bush’s director of national intelligence and, before that, director of the NSA. Of Booz Allen’s 25,000 employees, 76 percent have classified clearances, and almost half have top-secret clearances. In a 2003 speech, Joan Dempsey, a former CIA deputy director, referred to Booz Allen as the “shadow IC” (for intelligence community) because of the profusion of “former secretaries of this and directors of that,” according to a 2008 book, Spies for Hire: The Secret World of Intelligence Outsourcing. Today Dempsey works for Booz Allen.

It’s possible that fallout from the Snowden revelations will lead to significant changes in intelligence contracting. The Senate intelligence committee has been pressuring spy agencies for years to reduce their reliance on contractors. And in the age of the sequester, even once untouchable line items such as defense and intelligence spending are vulnerable to cuts.

Yet conversations with current and former employees of Booz Allen and U.S. intelligence officials suggest that these contractors aren’t going anywhere soon. Even if Snowden ends up costing his former employer business, the work will probably just go to its rivals. Although Booz Allen and the rest of the shadow intelligence community arose as stopgap solutions—meant to buy time as shrunken, post-Cold War agencies tried to rebuild after Sept. 11—they’ve become the vine that supports the wall. As much as contractors such as Booz Allen have come to rely on the federal government, the government relies on them even more.

Edward Snowden was not hired as a spy. He’s a mostly self-taught computer technician who never completed high school, and his first intelligence job was as a security guard at an NSA facility. In an interview in the Guardian, he says he was hired by the Central Intelligence Agency for his computer skills to work on network security. In 2009 he left for the private sector, eventually ending up at Booz Allen. The job he did as a contractor for the NSA appears to have been basic tech support and troubleshooting. He was the IT guy.

People in intelligence tend to divide contract work into three tiers. In the first tier are the least sensitive and most menial jobs: cutting the grass at intelligence facilities, emptying the trash, sorting the mail. In classified facilities even the janitors need security clearances—the wastebaskets they’re emptying might contain national secrets. That makes these jobs particularly hard to fill, since most people with security clearances are almost by definition overqualified for janitorial work.

Snowden, with his computer expertise, fit in the middle tier: people with specialized skills. When the U.S. military first began ramping up its use of contractors during the Vietnam War, these jobs made up much of the hiring—the Pentagon was desperate for repairmen for its increasingly complex weapons and transport systems. Also in this tier are translators, interrogators, and investigators who handle background checks for government security clearances. Firms such as CSC (CSC) and L-3 Communications (LLL) specialize in this tier. Booz Allen competes for some of that work, but it tends to focus on the highest tier: big contracts that can involve everything from developing strategies to defeat al-Qaeda in the Islamic Maghreb to designing software systems to writing speeches for senior officials. Tier three contractors often are, for all intents and purposes, spies—and sometimes spymasters.

The large-scale hiring of intelligence contractors can be traced directly to Sept. 11. The al-Qaeda attacks triggered a bipartisan chorus on Capitol Hill for more and better intelligence—and correspondingly massive increases in the federal budget to pay for it. There’s evidence that the effort has disrupted terrorist plots. It has also created a lot more contractor work. The intelligence community had been shrinking throughout the 1990s; with the Soviet Union gone, intelligence didn’t seem as important to politicians, and there were budget cuts and a wave of retirements at the CIA, NSA, and DIA. In late 2001 the only way to get enough experienced people to meet demand was with contractors, many of them the same experts the government had trained decades before and then let go. “We were able to expand very, very quickly by using contract personnel,” said Ronald Sanders, then ODNI’s associate director for human capital, in a 2008 call with reporters. “They were able to come in quickly and perform the mission even as we were busy recovering the IC’s military and civilian workforce.”

Contractors such as Booz Allen were seen as a temporary measure—surge capacity—to give the government time to hire and train its own employees. Michael Brown, a retired rear admiral, tells about trying to develop the Navy’s cyberwarfare programs in 2001. None of his personnel were cybersecurity experts, so he trained Navy linguists—traditionally considered some of the brainier sailors—for the job. “The Navy was able to use contractors to augment those trainees while it developed a permanent program,” Brown says. He himself now works for RSA Security (EMC), a Bedford (Mass.) cybersecurity company that does a lot of business with the government.

As the government intelligence workforce has grown, however, contractor head count hasn’t returned to pre-Sept. 11 levels. In the 2008 interview, Sanders said only 5 percent of contractors working for various intelligence agencies were for “surge requirements.” In a report published this March, the Senate intelligence committee complained that “some elements of the IC have been hiring additional contractors after they have converted or otherwise removed other contractors, resulting in an overall workforce that continues to grow.” The ODNI’s public affairs office disputes this, saying “core contractor personnel” has been cut by 36 percent since 2007.

Proponents of intelligence contracting say there are good reasons private firms have become a permanent part of the landscape. Not every task requires a full-time federal employee. Building a classified facility or a new database is a short-term project that’s ideal for contract labor—the job takes a few months or a couple years, and it doesn’t make sense to hire and train new employees just for that. In theory, contract labor is cheaper, since the government isn’t on the hook for the worker’s salary after the job is over, much less his health care or pension. For the military, it’s often the only way to get additional work done without violating the caps on manpower written into legislation. And it’s abetted by the dysfunctional funding environment in Washington, where money even for long-term projects is increasingly appropriated in year-to-year emergency supplemental spending bills, creating a sense of uncertainty that makes it harder to hire permanent employees.

Senior intelligence officials also say contractors are a pipeline to innovation in the private sector. The contemporary version of Q’s laboratory—that storied incubator for James Bond’s spy toys—is Silicon Valley, where startups are developing technology that can discern patterns and connections in oceans of raw data, among other feats of computer science. In an interview with Bloomberg Businessweek, Vice Chairman McConnell points out that while Booz Allen is well-known for hiring former spies like himself, the company also recruits heavily from tech. A 2008 study by the ODNI reported that 56 percent of intelligence contractors provided unique expertise not found among government intelligence officers.

"As DNI, I absolutely wanted the lift and creativity and the power of the private sector," says McConnell, using the initials for his old job. "Because I’d become irrelevant if I didn’t stay in tune with technology and its evolution. The most innovative, creative, dominant country in the world is the United States, and it’s mostly because of the efficiency of the free market."

Even so, spending can spin way out of control. According to the ODNI, a typical contractor employee costs $207,000 a year, while a government counterpart costs $125,000, including benefits and pension.

Booz Allen and its competitors are able to keep landing contracts and keep growing, critics charge, not because their expertise is irreplaceable but because their Rolodexes are. Name a retired senior official from the NSA or the CIA or the various military intelligence branches, and there’s a good chance he works for a contractor—most likely Booz Allen. Name a senior intelligence official serving in the government, and there’s a good chance he used to work for Booz Allen. McConnell and others at Booz Allen are quick to point out that the contracting process has safeguards and oversight built in and that it has matured since the frenzied years just after Sept. 11. At the same time, the firm’s tendency to scoop up—and lavishly pay—high-ranking intelligence officers once they retire suggests the value it places on their address books and in having their successors inside government consider Booz Allen as part of their own retirement plans.

Rich contractor salaries create a classic public-private revolving door. They pull people from government intelligence, deplete the ranks, and put more experience and knowledge in the private sector, which makes contractors even more vital to the government. “Now you go into government for two or three years, get a clearance, and migrate to one of the high-paying contractors,” says Steven Aftergood, who heads the Project on Government Secrecy at the Federation of American Scientists. That’s what Snowden did. “You have to have a well-developed sense of patriotism to turn that money down,” Aftergood says.

As a result, says Golden, the headhunter, a common complaint in spy agencies is that “the damn contractors know more than we do.” That could have been a factor in the Snowden leak—his computer proficiency may have allowed him to access information he shouldn’t have been allowed to see.

Changing things, however, may be easier said than done. “At the very highest level, whether at the White House or the Pentagon, there will always be a contractor in the room,” says Golden. “And the powers that be will turn around and say, ‘That’s a brilliant plan, how do we make that work?’ And a contractor will say, ‘I can do that.’”

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