Report: Mixed forecast for fed market

Agency belt-tightening will affect some IT spending, DOD could decline

Next year will be good for the information technology community that does business with the federal government but not nearly as lucrative as previous ones, according to a recent market forecast.

Faced with billions of dollars in costs for the war on terrorism and hurricane recovery projects, agencies are tightening the belt on other expenditures, including IT, the Government Electronics and IT Association (GEIA) said in its annual report.

GEIA downgraded its predicted market growth rate compared with the forecast it issued last year. The organization expects the market to grow from $64.7 billion in fiscal 2006 to $74.4 billion in fiscal 2011. That translates to an annual growth rate of 2.9 percent, lower than the 3.6 percent growth GEIA predicted in its market forecast last year.

GEIA expects the Defense Department IT budget to grow slightly faster than the civilian side -- 3 percent per year compared with 2.8 percent -- because of the war, security needs and infrastructure upgrades.

DOD spending to slow

Despite the predicted annual growth, GEIA warns that with DOD spending at near-record levels, defense industry officials can expect such spending to slow and then sharply decline by fiscal 2011. The spending growth that the 2001 terrorist attacks sparked will fall back into a normal pattern, GEIA predicts.

Cecil Black, director of market assessment at Boeing, urged his industry colleagues to lower their expectations.

Black, who presented a DOD budget forecast at GEIA's 2005 Vision Conference in Falls Church, Va., in late October, said the department will spend most of its budget in the next decade on fighting global terrorism, returning the country's depleted military forces to a state of readiness, and modernizing defense training, logistics and acquisition.

Nearly every major facet of military operations is in need of modernization to become efficient and effective, Black said. But military personnel budgets and operations and maintenance costs will squeeze funding for modernization programs and other DOD priorities, he said.

DOD's fiscal 2006 budget contains $30.1 billion for IT and national security systems, according to GEIA's budget forecast. The defense IT budget will grow to $34.8 billion in fiscal 2011, but defense industry analysts at the conference warned that DOD plans to start few new projects in an environment defined by streamlining and consolidation.

Defense vendors that succeed in the future will be those that offer innovative approaches to slow or stop increases in DOD's operations and maintenance costs, Black said. Operations and maintenance spending is growing 3 percent a year faster than inflation.

In fiscal 2006, the greatest growth in DOD's IT spending -- 4.1 percent -- will be on efforts to improve health care, defense analysts say.

Other opportunities await innovative companies that can help DOD reduce the cost of developing and deploying new technology, Black said. A company that can do that "will be a hero to the nation," he said.

Analysts say poor logistics planning and inefficient distribution of supplies have plagued military operations in Iraq. Mike Kush, Army account executive at CapGemini, urged defense industry officials to focus on business opportunities in logistics modeling and simulation. "The opportunities here grow daily," he said.

Another area ripe for investment is weapons systems prognostics, which uses smart agents to predict failures in complex systems, Kush said. Business opportunities also abound for companies offering simulation and modeling that could help DOD save money on training, he said.

Spending on information security will consume 4.6 percent of DOD's fiscal 2006 IT budget, other analysts predict.

But barring another major terrorist attack, DOD will sharply curtail overall procurement spending and research and development funds by fiscal 2010 and 2011, according to GEIA's forecast. A $21 billion shortfall in procurement spending in fiscal 2006 will make it impossible to sustain all DOD programs now in the development pipeline, Black added.

Although the 2001 terrorist attacks changed DOD's priorities and the defense industry, the department's spending is a major factor in the country's growing budget deficit. Black said DOD will soon be asked to help reduce that deficit, which will require the department to cut back or abandon programs in development. But no one knows which programs will be cut and by how much.

Regular appropriations for DOD will continue to grow, peaking in fiscal 2007 and declining to fiscal 2003 levels by fiscal 2016, Black said. Supplemental spending most likely will peak in fiscal 2006 and decline faster than regular appropriations, he added.

Civilian agencies also face a budget squeeze

For civilian agencies, the growth rate is forecast at only about 2.8 percent for fiscal 2006. The civilian portion of the federal IT budget is expected to run about $34.6 billion in fiscal 2006, and it is expected to grow to $39.6 billion by fiscal 2011.

That accounts for more than 7 percent of the discretionary budget and an average annual growth rate of 2.8 percent for the next five years.

"The squeeze on [IT] budgets is forcing agencies to make some difficult choices," said Mary Freeman, GEIA budget chairwoman and director of business development at Verizon Federal Markets.

Karen Evans, the Office of Management and Budget's administrator for e-government and IT, said the war on terrorism and hurricane relief efforts will take precedence over IT spending in next year's budget.

But she also said OMB is moving ahead with plans for greater consolidation and cross-agency IT projects.

"IT is a utility, and it's dependable, and it's there," Evans said.

But industry executives at the GEIA conference seemed less certain. "It's an unpredictable future," said John Williams, director of business development at Northrop Grumman IT.

Nevertheless, there are some bright spots, according to GEIA's agency-by-agency analysis. The government will spend more on IT for disaster recovery after learning lessons from hurricanes Katrina and Rita. But some of that money may come from other sources, the report states.

The Social Security Administration is starting to implement systems for baby boomers who will begin retiring in 2008. And although much of SSA's work is in-house, outsourcing may start to increase, the forecast states.

The U.S. Agency for International Development's project budget is increasing, but its management budget is decreasing. In real terms, the IT budget is dropping, but labor costs have increased 6 percent. Nevertheless, USAID has financed 10 new locations by deferring IT upgrades.

The General Services Administration will continue to see some growth, but although GSA schedules will stay strong, they may not see double-digit increases in coming years.

Michael Hardy contributed to this report.

Slight increase for civilian IT

Civilian agencies are planning to spend money in fiscal 2006 for information technology but slightly less than they spent in fiscal 2005. Here are some highlights from a Government Electronics and Information Technology Association market analysis and forecast.

  • About $1 billion of the Homeland Security Department's budget request for fiscal 2006 is for the ongoing electronic baggage-screening program.
  • The Department of Health and Human Services is uncertain how much funding will be available for health IT initiatives.
  • The Treasury Department must rein in out-of-control licensing costs.
  • The Commerce Department doesn't anticipate much growth in IT expenditures for a couple of years.
  • The overall Justice Department budget is not growing at the rate of inflation. The FBI has at least 35 percent of the Justice Department's IT budget.
  • NASA's IT budget has been declining steadily since 2001.
  • The Education Department has heavily outsourced many functions and cannot make much more of its budget available to industry.

Source: Government Electronics and Information Technology Association

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