Input forecasts only modest growth in IT budgets

Political climate could make agencies wary of undertaking new IT projects, Input says

Editor's note: This story was updated at 10:35 a.m. April 6, 2007. Please go to Corrections & Clarifications to see what has changed.

Proposed new administrative rules and reporting requirements for federal contracting would dampen information technology sales, according to market research firm Input. Company analysts say those accountability measures could slow an already slow-growing federal IT market.

Federal IT spending will maintain its modest growth rate for the next two years because the political climate will make agencies wary of beginning major new projects, according to Input’s new market report. President Bush’s fiscal 2008 budget proposal would increase civilian agency IT spending to $65.5 billion, a 2.6 percent increase compared with budgeted spending for fiscal 2007.

Kevin Plexico, executive vice president of operations at Input, said the new Democratic-led Congress is sparring with Bush over the budget and the 2007 continuing resolution, which is discouraging large agency investments and hindering robust market growth.

However, the federal IT market is stable, despite sputtering growth, according to Input. The firm expects a 5 percent increase in federal IT spending through 2012, when it will reach about $80 billion.

Recent federal IT budget figures show a 2.9 percent increase from 2003 to 2008. That followed an 11.9 percent spike in spending from 1998 to 2003 caused by Year 2000 date code remediation efforts and the government’s response to the 2001 terrorist attacks, Plexico said.

Agencies’ IT investments
Another factor slowing the market’s growth is agencies’ lack of confidence in capitalizing on new IT investments, Plexico said. However, several chief information officers at Input’s 2007 Market View conference last week said they disagree. 

Lisa Schlosser, CIO at the Department of Housing and Urban Development, said CIOs are doing their jobs. “We’re always looking at our business needs and prioritizing what we’re spending on,” Schlosser said. “That’s what we do.”

Darren Ash, associate CIO at the Transportation Department, said the Office of Management and Budget wants agencies to use their IT equipment to the maximum extent possible before spending more on IT equipment. Karen Evans, OMB’s administrator for e-government and IT, has instructed federal CIOs to “do it right, fix security and make sure it’s functional before you think about new stuff,” Ash said.

Plexico said the federal IT market will continue to grow because of a steady expansion of government programs, the fast pace of technological innovation and OMB’s interest in improving efficiency through its lines-of-business initiatives.

Those initiatives could make funds available for other projects. Schlosser said that OMB’s Infrastructure Optimization Line of Business initiative, for example, could lower agencies’ costs for infrastructure by 16 percent to 27 percent.

‘Rules change, I’ll change’
Several industry leaders at a March 27 Market View event sponsored by Input painted a darker picture of the procurement market. Jim Leto, president and chief executive officer of GTSI, said his concerns are the Democratic majority in Congress and the continuing resolution under which agencies are operating.

“That scares me,” Leto said. The funding situation is peskier than paralyzing, he said, but lawmakers’ priorities have changed.

Austin Yerks, president of CSC’s defense integrated solutions and services division, said that in the 1970s, relationships between the private sector and agencies were open. But the pendulum has swung back.

“If we’re not careful, we will fall back to the era of mistrust,” Yerks said.

No-bid or sole-source contracts
Carlton Jones, CEO of Multimax, said the procurement community is in a sullen state. However, he and others who have been active in the federal market for decades said they have sailed through the flotsam and jetsam of past rule changes.

“These things tend to iron themselves out,” Leto said. “If the procurement rules change, I’ll change.”

Lawmakers say they want to reduce the number of no-bid and sole-source contracts, which have been on the rise in recent years. The House passed the Accountability in Contracting Act March 15, which would restrict such contracts and require more competition.

“We know that transparency and accountability in government have not been the norm,” House Majority Leader Steny Hoyer (D-Md.) said during a floor debate about the bill. “We need to restore the public’s faith in its government.”
Trends in the federal information technology marketKevin Plexico, executive vice president of operations at Input, said the federal information technology marketplace is evolving in several ways.
Plexico made the following market forecast for 2007.
  • The federal IT marketplace will expand in the areas of services and software contracts, and IT equipment sales will decline.
  • Federal agencies will increasingly rely on the private sector for services.
  • Overall market growth will be slow during the next two years, but traditional rates of growth will resume in 2009.
  • The market will favor large companies that can respond to the IT consolidation trend in the federal government.
  • Congress will focus on oversight and acquisition reform.
— Matthew Weigelt


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