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Experts predict billions less in IT spending

Oct. 21, 2012 - 01:23PM   |  
Contractors should expect “anemic” growth in IT spending, as agencies plan for smaller and shorter IT contracts and set their sights on projects that will produce cost savings, according to an annual industry forecast.
Contractors should expect “anemic” growth in IT spending, as agencies plan for smaller and shorter IT contracts and set their sights on projects that will produce cost savings, according to an annual industry forecast. (Getty Images)

Deficit reduction measures — whether automatic sequestration cuts or a bipartisan cost-cutting agreement — will leave agencies with billions of dollars less to spend on information technology over the next five years, according to an annual industry forecast.

TechAmerica Foundation, which a year ago projected annual IT spending as high as $85.7 billion in fiscal 2017, last week downgraded its forecast by about $10 billion a year to $73.5 billion in spending this fiscal year and $77.2 billion in 2018. The marginal annual increase in IT spending amounts to a compound annual growth rate of less than 1 percent, or a 5 percent increase, according to the new forecast.

As overall discretionary spending is squeezed, IT spending is not immune to those cuts, said Robert Haas, a spokesman for the foundation.

Contractors should expect “anemic” growth in IT spending, as agencies plan for smaller and shorter IT contracts and set their sights on projects that will produce cost savings, according to the forecast.

Under the administration’s Shared First strategy, agencies already have been told to consider sharing IT systems and contracts instead of creating their own.

“It could be your contract that’s getting consolidated, and that’s really the challenge to our industry partners as we deal and work through the federal budgets,” Haas said. As the contracts are consolidated, the renewals may not be as reliable as they once were, and in some cases, companies may have to compete for that work, he said.

Most successful will be companies that can respond to OMB’s 2014 budget guidance, which directs agencies to invest in projects that will show a return on investment within 18 months, including projects to improve citizen services or administrative efficiencies, share services, adopt cloud computing, and improve IT security and information assets.

“New projects that expand the mission are less frequent today,” said Ira Entis, president of Agilex Technologies’ government services sector. “Instead, we’re seeing agencies target programs that allow them to operate more efficiently. Areas like analytics and system modernization are hot right now.”

Entis said Agilex, a professional IT services firm, is seeing a shift to smaller and shorter contracts and task orders because of expected budget cuts and because agencies are using agile development — or developing IT projects faster in smaller increments.

Other emerging opportunities for contractors, according to the forecast: helping agencies with business process re-engineering, or rethinking how they do work; creating new approaches for employees to access departmentwide data; and managing and protecting data across mobile devices.

The forecast

The forecast projects that civilian IT spending will rise less than 7 percent over the next five years, from $40.8 billion this year to $43.5 billion in 2018. Defense Department IT spending is expected to increase 3 percent over the same period, from $32.7 billion to $33.7 billion.

The forecast is based on data analyses and hundreds of interviews with federal executives, Congress, think tanks and industry experts. It assumes that Congress and the White House will agree on a bipartisan solution to modify sequestration and avoid the steep, across-the-board cuts that would reduce federal budget deficits by $1.4 trillion beginning Jan. 2 through 2021, TechAmerica Foundation spokesman Trey Hodgkins said.

The forecast anticipates there will be a modification of those cuts that would reduce sequestration cuts by about $529 billion. The solution could include tax reform and other scenarios that would generate revenue and reduce the need for immediate, steep cuts. Ultimately, however, the forecast expects this alternative solution will equate to a $1.4 trillion reduction in the budget deficit over 10 years.

“It’s not changing the outcome, it’s changing the mechanism to achieve the outcome” of lower government spending Hodgkins said.

Last month, an OMB report listed IT accounts that would be cut if automatic sequestration cuts take effect Jan. 2. They include:

• The General Services Administration’s electronic government fund, which includes funding for, a $1 million cut.

• GSA’s Federal Citizen Services Fund, a $3 million cut. The fund pays for the salaries and expenses of GSA’s Office of Citizen Services and Innovative Technologies. The office oversees governmentwide cloud computing initiatives and houses a new federal cloud security program, known as FedRAMP.

• National Institute of Standards and Technology, a $47 million cut in scientific and technical research and services.

• Department of Homeland Security Office of the Chief Information Officer, a $26 million cut.

“As far as the ability for contractors to plan and to be surgical about how to address the challenges, it [OMB’s report] did not provide a lot of insight,” Hodgkins said.

Companies cautious

For now, companies are trying to understand how deficit-reduction measures will affect them.

“If the dollars are not obligated, the contract is in trouble,” Hodgkins said. “If the dollars are obligated, they’re supposed to be protected [from sequestration],” but that isn’t clear.

Over the past nine months, a number of Elvis Oxley’s potential small-business clients — well-qualified with strong management and innovative IT offerings — have passed on federal opportunities because they’re scared off by the word “sequestration,” said Oxley, president of Oxley Consulting, a Washington-based firm that markets small businesses to federal agencies.

“They don’t want to get into something and then have opportunities evaporate due to unknown budget items,” Oxley said.

For small businesses that choose to bid on select contracts given the current budget environment, Oxley suggests they consider competing for spots on governmentwide acquisition contracts (GWACs), which agencies are increasingly using to speed the procurement process.

Given the budget uncertainty, Hodgkins said some companies are considering whether to leave the market altogether and find business elsewhere.

“Companies need to pay a lot of attention to what this is going to look like in the out years and plan for the worst, understand where their contracts are going — or not going, as the case may be,” he said.

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