Companies cope with tight federal budget

Some firms are better positioned than others to adjust to the new world

The proposed fiscal 2007 budget, which shows continued tightening of discretionary spending in most agencies, came as no surprise. But it is a challenge for contractors who must keep the federal dollars flowing or suffer business setbacks.

Some companies can try to take advantage of the lean years by offering products or services that help agencies accomplish more at a lower cost. President Bush’s budget proposal increases information technology spending in most civilian agencies, but only slightly in most cases. Often, those increases are earmarked for specific projects focused on improving efficiencies.

For many contractors, a tight budget means holding on until spending begins to rise again, said Mark Amtower, a consultant specializing in the federal market.

“Focus your marketing and sales strategies on the agencies that love you best,” he advised companies. “You have to focus on your home ground and make sure you don’t cede market share.”

The business environment for smaller firms trying to gain subcontracting partnerships is becoming a challenge, too, Amtower said. Large contractors are the main beneficiaries of the Defense Department’s $30.5 billion IT spending plan for fiscal 2007, and the paths to their doors are well-worn by hopeful suitors.

“It is a bleak outlook,” Amtower said. The federal government “remains the largest game in the world, but it has definitely taken a stronger turn than a lot of us would have thought as recently as two to three months ago.”

Some companies are feeling more confident, however. Merlin Technical Solutions, for example, a midsize integrator that specializes in service-oriented architecture and commercial software, expects the unrelenting focus on efficiencies to speed adoption of SOA.

“I think we are poised really well,” said John Trauth, executive vice president of federal government systems at Merlin. The company also offers information assurance and network engineering services.

Although IT would gain marginally overall in fiscal 2007, a number of specific projects have sustained serious funding cuts in recent budgets. Those cuts can be hurtful for contractors involved in those projects, said Valerie Perlowitz, founder, president and chief executive officer of Reliable Integration Services.

For example, Perlowitz expected a 20 percent cut in the fiscal 2006 budget for a contract her company holds. At the end of the process, however, that cut had swelled to 50 percent, forcing Reliable to decide what to do with security-cleared employees for whom the company no longer had enough project work.

“You don’t want to get rid of them, but if the funding is not there, it’s not allowing an opportunity to grow,” Perlowitz said.

The fiscal 2007 budget proposal includes similar funding cuts, but it also establishes a line of business for IT infrastructure. That initiative could be a boon for integrators able to offer consolidation services and similar cost-saving measures related to infrastructure, Perlowitz said.

However, the new budget proposal has forced her to rethink the company’s future, she said. “It’s taking a step back and asking where are we going to spend our efforts over the next six to 12 months,” she said. “Most of us did our business planning back in October or November. Here we are in February and we’re back at that stage again.”

Sounding a more positive note, the IT Association of America applauded the budget request for its emphasis on DOD and Homeland Security and the inclusion of important projects in the civilian sector.

“Civilian officials struggling with tightening budgets will find IT a valuable tool in conducting business more efficiently and effectively,” said ITAA President Robert Laurence in a written statement.

Homeland security market
could be tough

As the civilian agency with the largest single proposed increase in its information technology budget — $4.4 billion, 26 percent more than the $3.6 billion budgeted in 2006 — the Homeland Security Department is a tempting target for contractors.

But Larry Allen, executive vice president of the Coalition for Government Procurement, said going after obvious targets such as DHS can prove frustrating.

When DHS was created following the 2001 terrorist attacks, many companies immediately perceived it as a new market for technology, even though its component agencies had existed for decades.

As a result, Allen said, technology officials are unlikely to convince any DHS agency now that their companies offer truly novel solutions.

“By now, the path to DHS is well worn by people who have promised bigger and better widgets,” he said. “You have something of a jaded workforce there.”

— Michael Hardy

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