GOVERNMENT IT REPORT

Federal IT Spending Cautiously Creeps Upward

As Washington hunkers down for an era of tight federal budgets, information technology vendors can take some comfort in a projected modest rate of growth in federal IT investments. Between 2011 and 2016, federal spending for IT should grow by 12 percent, in total, for an average compound annual rate of growth of about 1.7 percent.

Even with those small gains, vendors can expect agencies to be much more careful in how they go about IT procurement.

Federal agencies will spend about US$99 billion in total on IT in 2016, versus $93.6 billion in 2011, according to the latest forecast by federal contracting consultant Deltek.

The amount of IT spending that is actually available for government contractors will grow from $84.1 billion in 2011 to $91.3 billion in 2016, the forecast notes. Deltek’s figures are generally higher than those provided by the Office of Management and Budget (OMB).

“OMB reports primarily on executive branch agencies, while our forecast includes the legislative branch, judicial branch, intelligence agencies, and quasi-government entities such as the Postal Service,” Deniece Peterson, senior manager for federal analysis at Deltek, told the E-Commerce Times.

Deltek calculates what it calls the “addressable” level of spending, which excludes what the government spends on IT employee salaries, to get closer to a figure that is actually pursuable by federal contractors.

Agency Spending Patterns Change

The growth in projected IT spending is attributable to several factors.

“Information technology is an enabler for cost savings. It fills capability gaps left by an understaffed workforce, and it allows for capabilities that agencies need to meet mission goals,” Peterson said.

However, unlike the past, when nearly all agencies were able to spend more for IT, the future will be characterized by a “triage” approach, Peterson predicted.

“Some agencies will receive increases, while others will see budget cuts. The agencies that conform to the administration’s most important priorities will see increases at the expense of other agencies,” she said. While IT is not immune from cuts, the IT function is not a “direct target” when it comes to reducing federal spending.

One factor for maintaining the level of IT spending at current levels with no radical cuts is that the efforts to improve IT productivity, such as using cloud technology or eliminating duplication in data centers involves initial “up front” investment. A cautious Congress could withhold some of these investments and thus perpetuate IT spending at existing levels.

A Tricky Transition Ahead

“As it is, much of IT spending in the government is almost ‘entitlement’ spending — running the stuff already in place. There are some areas for big savings over time, such as consolidating redundant systems, or adding business process tool layers to make future changes easier,” Chip Gliedman, a vice president and principal analyst at Forrester, told the E-Commerce Times.

“However, getting the funds to get those replacements implemented still requires spending on the old systems until the cut-over date, which may be a few years away. Even with a business case that is compelling, you still need to find the money for that new project. This is looking to be a big problem for the next few years,” he said.

In broad terms, IT spending for defense related functions will increase from $33.2 billion in 2011 to $35.4 billion in 2016, the Deltek forecast shows. For civilian projects, it will jump from $39.5 billion to $41.8 billion, while for intelligence services, it will grow from $10.3 to $12.8 billion.

In its June 2011 “Federal Technology Forecast, 2011-2016,” Deltek also projected spending in four major technology segments. Spending for IT services will dip from $39.5 billion in 2011 to $36.5 billion in 2016, while outlays for communication will jump from $21 billion to $31 billion. In the 2011 to 2016 period, software investments will grow from $10.1 billion to $13.7 billion, but hardware spending will drop from $13.5 billion to $10.0 billion, Deltek said.

A key area for growth in federal IT spending, according to Deltek, will be in the security segment. Spending will grow from $8.6 billion in 2011 to $13.3 billion in 2016 for a variety of security purposes, including the following: improvements in assessment and effectiveness of cybersecurity; real-time monitoring and reporting; cloud security; and wireless security. IT security spending will also cover intrusion detection and protection programs, access/identity management, and cybersecurity training.

While the trend for IT spending at the federal level is at least positive, gains will not come automatically, given the budgetary environment. Vendors will have to keep close tabs on overall policy, as well as spending priorities within each agency.

“The current political climate, combined with an inability to fully fund governmental operations through the fiscal year makes even short-term planning uncertain,” Forrester noted in its report, “Industry Innovation: U.S. Federal Government,” released in May.

Congress will continue to apply spending pressures, and the fiscal 2011 and 2012 appropriations and debt ceiling debates “will set the tone,” even with the potential for a new administration, the Deltek forecast notes.

The scale of budget cuts will be a key factor for IT spending, according to the report.

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