IT Funding

TechAmerica forecasts steep cuts in federal IT spending

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Pressures from sequestration, deficit reduction and the drawdown in defense spending will take a toll on federal IT spending over the next five years, according to a market forecast from the TechAmerica Foundation.

Federal IT budgets will total $70 billion for fiscal year 2014, according to the forecast, down from $78.9 billion in 2009 – the peak was $80 billion in 2010. The total climbs to $78.5 billion by 2019, but spending measured in constant dollars will remain essentially flat.

Agency CIOs are "fighting for dollars," said Robert Haas, a spokesperson for the TechAmerica Foundation.

On the civilian side, IT budgets are expected to drop to $38.3 billion in 2014, down from $40.9 billion in 2009. Spending on defense IT is forecast to drop to $31.7 billion in fiscal year 2014, and remain flat through 2019. The TechAmerica report does not touch on classified defense budgets, but the sense from the survey is that spending on IT in the intelligence community is subject to the same pressures that are driving down spending on other fronts.

Federal IT managers are increasingly resigned to "doing less with less," Haas said. Their ability to keep up with product lifecycles is diminishing, especially when it comes to mobile devices. More and more contracts are awarded on the basis of lowest price technically allowable. The lifetime of legacy systems is being extended, and spending on operations and maintenance is far outpacing spending on new projects and innovation.

The forecast is based on the assumption that across-the-board spending cuts under sequestration will continue through fiscal 2015, the most probable outcome from the current budget standoff according to TechAmerica. The TechAmerica forecast also allows for the possibility that budget negotiations will start up after the shutdown ends, and yield a half-year continuing resolution with a partial sequester that includes more targeted cuts.

Contractors should expect traditional business cycles to be altered in the near term because of the uncertainty over the timing of government funding. While there are some opportunities for vendors in priority areas such as cybersecurity, reason for vendor optimism is hard to come by in the forecast. Interviews with federal IT managers, procurement officers, congressional staffers and other government IT sources revealed a shift in the way front-line IT staffers are thinking about budget pressures. There is a new realization that sequestration was not a one-time event, and that across-the-board budget cuts are likely to continue for the foreseeable future.

The continuing government shutdown is also taking its toll, said Trey Hodgkins, senior vice president, global public sector at TechAmerica.

Medium-sized contractors are facing a liquidity crunch as they continue to pay salaries and expenses to be ready when government spins back up, and even larger companies will see bottom line consequences. For some companies, the revenues lost from a two- to three-week shutdown could eat up the total profit margin for the year, Hodgkins said. Some companies could face bankruptcy, and others diminished earnings.

"We should expect to see more workforce layoffs in the public sector market on the contractor side, particularly in the near term. 2013 was hard, but the next few years could be even worse," Hodgkins said.

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