Bloomberg Businessweek reports: 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 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, 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. 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., CACI, and BAE Systems, 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 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. [Continue reading…]