U.S. government agencies are gradually learning to deal with budget constraints in the management and procurement of information technology. The emphasis on productivity comes from the Obama administration, the ripple effects of budget sequestration, and congressional pressure for efficiency.
“Agencies continue to face budget constraints while trying to modernize IT systems, increase efficiency, and improve citizen services,” noted Deltek market analyst Angie Petty in a recent update of federal IT spending trends.
Federal civilian agencies will be operating in a challenging budget environment for at least five years, Deltek’s updated forecast indicates.
Sixty percent of agency executives and IT managers interviewed believed their organization’s IT budget would “remain flat over the next three years,” Deltek reported.
At the same time, agencies will be expected to improve performance in meeting mission goals and citizen expectations.
Agencies should “identify or develop ways to increase the efficiency and effectiveness of the IT investments of the agency,” Office of Management and Budget Director Shaun Donovan urged in a memo sent earlier this year.
Civilian agencies will spend about US$40.6 billion in 2015 for “contractor accessible” IT products and services, Deltek forecast in its June estimates. That level won’t change much, but will tick upward to $41.2 billion in 2017 before dipping back to $41.1 billion in 2020. [*Correction – Sept. 11, 2015]
The Deltek estimate covers not only IT spending by major departments and agencies included in the OMB’s tally, but also additional IT investments by the federal judiciary, operations of Congress, and intelligence functions that were not included.
IT Spending Rate Slows Down
A similar pattern emerged in other estimates.
For the federal government as a whole, “the times of 5 to 6 percent IT budget growth are gone, but we can expect modest increases of just over 1 percent compound annual growth rate across the next five years” Tim Larkin, a senior market analyst at immixGroup, told the E-Commerce Times.
A more optimistic take is that federal civilian IT spending will grow at a 4.3 percent CAGR between 2014 and 2019, which IDC Government Insights has projected.
Some of that growth already has occurred.
“We don’t expect to see growth beyond 2017 to be quite as robust as what we have seen between 2014 and the proposed 2016 budget year for civilian agencies,” wrote report author Shawn McCarthy, research director for IDC Government Insights.
Slightly more than 51 percent of the $49 billion projected for overall civilian IT spending in 2016 is actually accessible for contracting, IDC calculated.
That amounts to about $25 billion, which represents “a huge market opportunity,” IDC noted.
If that ratio were to apply uniformly over the next several years, the annual contracting potential would grow to $26 billion in 2017 and reach $28.5 billion in 2019.
In terms of methodology, the IDC figures largely utilize OMB’s basis for covered agencies but do not include the broader-based Deltek estimates.
Federal IT spending is always a bit lumpy, and it does not follow an identical pattern for all departments and agencies across the board.
Five agencies with big IT budgets show CAGRs ranging from the negative to a plus 1.8 percent rate between 2014 and 2019, IDC’s report shows. They are the departments of Agriculture, Justice, and Homeland Security, and the Social Security Administration and NASA.
On the other hand, other big IT departments such as Veterans’ Affairs, Commerce, Treasury, and Health and Human Services show substantial growth over the period, ranging from 8.5 percent to 10.1 percent CAGR.
Even within a single budget year, significant changes can occur.
“There always are adjustments made to IT budgets over the course of the year. Budget-wise, the most likely increase this year will happen because of security upgrades. We expect to see boosts to things like secure connection capability, directory services and access control, better remote configuration management, and network scanning tools,” IDC’s McCarthy told the E-Commerce Times.
Cost and Productivity
The broader message underlying each of the dollar spending forecasts is similar: The Obama administration’s mantra regarding IT procurement and management — to do more with less — is taking hold.
“The government is increasingly looking to IT service providers and systems integrators to not only deliver turnkey or cloud-based solutions, but also help make recommendations on where costs can be trimmed,” IDC said.
The constrained atmosphere for federal civilian agency IT spending was evident in the Deltek update.
“The fiscal 2016 budget is somewhat of a wish list, because the growth heavily relies on sequestration being repealed. However, it does offer clues into priorities,” said Deniece Peterson, director of federal industry analysis at Deltek.
“Deeper analysis into agencies’ IT program line items shows that if even part of the proposed growth occurs, much of that increase would be directed towards shoring up IT infrastructure,” she told the E-Commerce Times. “One way we are seeing this is a continued shift from new development spending to moving dollars into the operations and maintenance areas that support infrastructure.”
Agencies can drive significant cost savings through infrastructure standardization, consolidation, legacy system modernization and shared services, and it appears that agencies are hoping to invest more in the programs that help them develop consistent, enterprise-wide IT environments that are easier and less-expensive to manage, Peterson observed.
“In addition to infrastructure, we see agencies focusing their priorities on mission-critical systems and applications, and applying innovative procurement strategies to citizen-facing projects to achieve quick wins,” she said.
Vendor Guidance: Price and Efficiency Are Key
The productivity trend will require IT vendors to recognize several factors in their dealings with federal civilian agencies. For example, IT providers, especially those in the hardware segment, face lower profit margins as a result of increasing price sensitivity and the increasing use of lowest price, technically acceptable, or LPTA, as a procurement evaluation method, Peterson noted.
In addition, agencies often expect incumbent contractors to improve cost efficiencies over the life of a contract, especially on longer-term agreements.
However, “when these contracts are re-competed, agencies are more open to transition to a new contractor that may represent lower costs,” Peterson said.
“Contractors often have very difficult staffing issues to consider. Agencies expect to utilize the contractor’s A-Team, but pricing parameters may mean that contractors can only afford to propose their C-Teams. Also, contractors have to contend with increasing reporting requirements, which add to implementation costs, she pointed out.
“Hardware vendors need to keep a close eye on price points, while government buyers are becoming increasingly sophisticated when it comes to comparing price and functionality. Government buyers have multiple PC, server, storage, and network equipment vendors to choose from, with the option of buying their solution through a systems integrator,” McCarthy noted in the IDC report.
Additionally, hardware vendors should keep their focus on performance improvements and establish multiple sales outlets to reach federal buyers, he recommended.
When possible, that should include agreements with multiple IT service providers, because those service vendors have tremendous influence over the types of systems the government builds, McCarthy observed.
Cloud providers should be able to explain how their offering meets specific government standards, such as security compliance requirements and details of the service level agreements, he added.
The playing field for software vendors is shifting, and vendors need to understand those changes. For example, federal agencies are looking to cut their overall software licensing costs, noted McCarthy. As systems are consolidated, that will mean fewer overall licenses for enterprise software but more users per license.
*ECT News Network editor’s note – Sept.11, 2015: Our original published version of this column incorrectly stated that “U.S. government agencies will spend about US$40.6 billion in 2015 for ‘contractor accessible’ IT products and services,” according to Deltek’s forecast. The figure applies only to civilian agencies.