Federal IT Contractors Can Thrive Amid Tight Budgets

Amid ongoing budgetary pressure, federal agencies are tightening their belts as they aim to do more with less.

But while that climate poses obvious challenges for government contractors in all industries, those in the IT sector can look forward to some significant opportunities, according to a new study from the Deltek, a software and services company catering to government contractors and professional services firms.

“While the overall market is declining, we see some pockets of opportunity that companies can tap into to soften the impact on their business,” Deniece Peterson, director of Deltek’s GovWin IQ Federal Industry Analysis program, said in a statement.

The report comes at a time when the federal IT operations are undertaking a seismic, multi-year transformation as government agencies respond to several administration mandates spanning cloud computing, data-center consolidation, mobility and other areas.

That means that even as overall hardware acquisitions, for instance, are expected to decline, agencies will still be in the market for targeted purchases and have a need for contractors to assist them with their transition to the cloud.

Just last week, officials from the General Services Administration hosted government contractors for an event to discuss the agency’s call for information about how cloud-brokerage service providers can help federal IT teams further their agencies’ business objectives.

Overall, Deltek is projecting that federal IT spending levels will dip from $121 billion in 2012 to $112 billion by 2017, a decline of nearly 7 percent, or a 1.4 percent reduction measured by compound annual growth rate.

The Deltek forecast takes an expanded view of the federal IT apparatus, citing a report from the Government Accountability Office that found that the White House’s Office of Management and Budget (OMB) typically lowballs federal IT spending levels. OMB has pegged federal IT spending at $79 billion annually, but that figure excludes IT investments in the legislative and judicial branches, as well as 58 executive agencies, according to the GAO.

The move to the cloud and the consolidation of data centers are designed to achieve a dramatic reduction in the government’s IT footprint, as underused facilities will either be closed or merged, and legacy systems are phased out. That figures to create an opportunity for contractors that can assist with those initiatives as well as analytics providers to help CIOs root out wasteful or duplicative systems.

“Data-center consolidation and the administration’s new digital strategy are forcing agencies to inventory their existing infrastructure,” said Deltek analyst Alex Rossino. “This will undoubtedly uncover redundant and unused assets and impact demand for hardware and software.”

Deltek also sees some targeted areas for growth as the federal government expands its role in specific segments such as health care and cybersecurity.

But the downward pressure on agency budgets will persist, Deltek anticipates. And IT spending is likely to check in at roughly the same level regardless of whether the so-called budget sequestration occurs — a set of mandatory spending cuts that would be triggered by the failure of lawmakers to reach an agreement on deficit reduction by Jan. 3, 2013. TechAmerica, a leading industry advocacy group, has been actively campaigning to avert sequestration, holding a series of events in Washington featuring prominent lawmakers who have warned of the disproportionate impact the cuts would have on the defense industry.

Peterson noted that new contracting rules mandating transparency and other provisions have also made it harder to secure government contracts, a condition that could squeeze the margins of companies that rely heavily on doing business with various departments and agencies.

“The cost of doing business with the federal government in many areas is going up,” she said.

“If companies don’t adapt, they are going to find themselves in the wrong place at precisely the wrong time,” Peterson said. “Companies need to think about how they strategically position for the growth segments that remain and adapt their cost structure to be more efficient and productive.”

Kenneth Corbin is a Washington, D.C.-based writer who covers government and regulatory issues for CIO.com.

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