The Beltway Bandit Behind the Passport Scandal

My hunch from last night was correct: Stanley Inc. (also known by the name of its subsidiary Stanley Associates) is one of the employers of contract workers who improperly viewed the passport file of Sen. Barack Obama. It now seems that the files of Senators McCain and Clinton were violated as well, so perhaps the speculation about political skulduggery is unfounded.

Yet that still leaves a host of questions related to the growing reliance of the State Department and other federal agencies on contractors such as Stanley, which until today was far from a household name. Yet it’s been around for more than three decades, making its money—like the scores of other Beltway Bandits that populate the office buildings of the Washington, DC area—from the federal spigot.

Stanley started as a maritime consultant and now provides “information technology services and solutions.” In its most recent 10-K filing, Stanley reported getting 65% of its revenue from the Pentagon and 35% from more than three dozen civilian agencies, most notably the State Department.

Stanley used to be a pretty small operator, but over the past decade it has grown at the remarkable rate of 33% a year, reaching more than $400 million. Although the company is publicly traded, it is majority-owned by officers, directors and employees (the latter through an employee stock ownership plan).

While the passport contract is the one in the news, Stanley is largely a military contractor. It brags that some 53% of its 2,700 employees have Secret or Top Secret security clearances. CEO Philip Nolan is ex-Navy, and his board includes retired generals from the Army and the Marine Corps. Stanley doesn’t produce weapons—it provides the systems engineering, operational logistics and other services that keep the high-tech war machine running.

In the 10-K filing, where it is addressing investors rather than the public, the company is blunt about why it expects continuing growth: “increased spending on national defense, intelligence and homeland security” and “increased federal government reliance on outsourcing.” In other words, its business strategy is fundamentally based on the continuation of the “War on Terror” and the steady hollowing out of the federal workforce.

The company goes on to list the specific risk factors that might affect the value of its shares. Here’s one of particular interest (see pp.20-21):

Security breaches in sensitive government systems could result in the loss of customers and negative publicity.

Many of the systems we develop, integrate and maintain involve managing and protecting information involved in intelligence, national security and other sensitive or classified government functions. A security breach in one of these systems could cause serious harm to our business, damage our reputation and prevent us from being eligible for further work on sensitive or classified systems for federal government customers. We could incur losses from such a security breach that could exceed the policy limits under our professional liability insurance program. Damage to our reputation or limitations on our eligibility for additional work resulting from a security breach in one of the systems we develop, install and maintain could materially reduce our revenues.

It will be interesting to see if the passport scandal has this negative effect, or if the federal government protects Stanley from its operational shortcomings.

Note: It’s just been reported that another company–Analysis Corporation–is also involved in the passport scandal. More on them later.