Choppy Waters Ahead for the Federal IT Market, Part 2

Choppy Waters Ahead for the Federal IT Market, Part 1

A special congressional panel is facing a deadline of Nov. 23 to propose more than a trillion dollars in federal budget reductions over 10 years. If the panel fails, an automatic budget-cutting mechanism will take effect. Either way, the U.S. government will be launching a major austerity program that will affect virtually all agencies — and all government contractors.

As a result, federal agencies will be viewing their information technology investments in significantly different ways as the government adjusts to belt-tightening. Both civilian and defense programs will be affected. The good news for vendors is that federal funding for IT should remain flat over the next few years, at about US$81 billion per year. Thus the IT sector may be spared the consequences of significant budget cuts that will affect other industries.

Still, IT spending won’t be growing either, and vendors will be facing a much different business environment.

Vendors Need ‘New Architecture’

“The IT landscape is changing. If you look at federal programs for migrating to the cloud, for data consolidation, and other innovations, they will take a lot of preparation time and planning by federal agencies. Vendors will need a new architecture to accommodate this and be more attuned to government customers and IT integration,” Doug Gaines, director of market intelligence for immixGroup, told CRM Buyer.

For example, contracting arrangements for IT are likely to change to facilitate shared service arrangements. Agencies will lean even more on Government Wide Acquisition Contract (GWAC) and Multiple Award Contract (MAC) mechanisms. Such contracts have grown steadily since 2006 and amounted to nearly $40 billion worth of federal IT contracts in 2010, according to information presented by Deltek at the firm’s recent forum on federal IT trends.

Under the GWAC program, a roster of IT vendors are preselected by the General Services Administration (GSA). The vendors are available government-wide and save the agencies the time and expense of going through their own vendor-selection process. Essentially, IT projects then become orders issued against the existing GWAC contract, which significantly reduces procurement lead time and enables contracts to be awarded more efficiently.

GSA has closed the roster at 58 vendors, however. Providers not on the roster, whether they are major IT firms or smaller outfits, will need to partner with those on the roster as subcontractors.

“Positioning on contract vehicles will become increasingly important,” said Kevin Plexico, vice president for research and analysis at Deltek.

The GWAC vehicle brings another factor into play. With the time-consuming vendor selection already completed, providers will be asked to respond to bid requests much quicker.

“Companies must adapt to an accelerated proposal environment brought on by task order contracting,” Plexico said, with response times measured in a few weeks rather than a few months.

Shifting IT Operations

Another factor is how agencies will spend their IT dollars in the future. With an emphasis on moving much of IT to the cloud, and the consolidation of data centers as well, the question of what the agencies will retain for themselves is sure to surface.

“Government IT managers should focus on systems that are core to their mission — other common solutions may be outsourced in the coming years,” said Shawn McCarthy, research director at IDC Government Insights, in a recent presentation. In that case, an agency such as the National Institutes for Health (NIH) should aim its IT firepower on health research and outsource administrative IT tasks such as email or human resource functions.

Outsourcing will likely become even more contentious, according to a TechAmerica analysis. But outsourcing doesn’t automatically mean involving a commercial provider. With the cloud or other forms of shared services, an agency could retreat from using IT for some functional purpose itself, while still keeping that functional operation within the government.

“From the standpoint of a government agency, any system that they don’t manage themselves would be ‘outsourced.’ They essentially have an external resource that owns and operates the system for them. But that external resource could be either a commercial vendor or another government agency,” McCarthy told CRM Buyer.

Federal agencies are now figuring out how to meet specific targets for such transformations as cloud migrations and operational consolidation. Ironically, little if any specific budget funding is being allocated to implementing these changes. These transformations are most likely to require self-funding by the agencies, according to TechAmerica. Vendors that can help facilitate such changes should find a welcome hearing among federal procurement officers.

The shift to shared IT resources will be reflected in hardware and software spending. In the near term, consolidation will create opportunities for infrastructure software such as virtualization, information security and storage. As savings from cloud computing and consolidation are achieved, agencies are likely to shift spending to high-priority application software — particularly enterprise applications such as finance, human resources, and supply chain — or to specialized applications such as data analytics and other mission-specific purposes, notes the Deltek analysis.

With all the changes, there could be a window of opportunity for IT consultants to provide advisory services.

“There is some leveling off actually in that area, partly as a result of policies to reduce outsourcing, but on the other hand agencies may see an increased need for guidance to help them develop their strategies,” Deniece Peterson, Deltek’s senior manager for federal industry analysis, told CRM Buyer.

Hardware and Software Impacts

Investment in IT hardware such as servers, storage and communications equipment will be stable in the near term. Storage needs will grow, driven by data proliferation due to increasing transparency requirements and information-heavy, mission-based needs, according to Deltek.

Equipment choice will change. Mobile Internet and email use will surpass desktop Internet and email use by 2014, according to an immixGroup forecast of federal IT markets. In the long term, flat federal employment levels, consolidation, cloud computing, and the move to less expensive end-user hardware — such as smartphones, tablets and thin clients — will put downward pressure on the hardware market, predicted Deltek.

As a result of these trends, Deltek estimates that annual federal software investments will grow from about $10.1 billion in fiscal 2011 to about $13.7 billion in 2016. Hardware investments will gradually decline from an annual level of $13.5 billion in fiscal 2011 to $10 billion in 2016.

In the near term of 2012, forecasts vary in terms of agency IT spending. Judging by the range of estimates, the top IT spenders will be the U.S. Army at more than $8.4 billion, followed by the Navy at just over $8 billion, the Department of Homeland Security at about $6 billion, the Air Force at over $6 billion, the Defense Information Systems Agency at $5.6 billion, and the Department of Transportation at $3.7 billion.

Focusing on such big targets in the institutional sense may not be the best avenue for vendors, suggested IDC’s McCarthy.

Agencies are increasingly using more granular references to their IT investments with specific descriptions pegged to the federal enterprise architecture (FEA) system, he pointed out. These descriptions, numbering well over 150 categories, range from IT applied to “information technology and management” to “disaster recovery,” “diplomacy,” and “environmental management.” Vendors will be well advised to check out specific agency plans and IT functions to ensure their offerings meet upcoming requirements.

“Our message for product vendors and solution providers is do your homework,” said Gaines. “Money will continue to be spent and requirements will be formed where the needs are most critical. If an agency is telling you there’s no money to spend, you probably haven’t delivered the right message to the right prospect.”