Special Report on Contractors: Flat budgets ahead

The good news for government information technology contractors is that the annual $60 billion federal budget isn't likely to decline any time soon. The bad news is that the budget isn't likely to increase much, either, according to government and industry experts."There aren't huge dollars available to increase the IT budget, but the IT pie is going to be divided differently," said Debra Stouffer, former chief information officer at the Environmental Protection Agency and now an executive at DigitalNet Holdings Inc."The agencies are looking to be more efficient and reapply their dollars to modernization projects. I don't think more money is going to go to support of legacy systems and infrastructure," said Stouffer, vice president of strategic consulting for the Herndon, Va., network management company.The Bush administration has requested $59.8 billion in IT funds for fiscal 2005, only a 1 percent increase over its 2004 request. The 2005 funds will be directed toward automation, consolidation and operations and maintenance needs, said Karen Evans, administrator for e-government and IT at the Office of Management and Budget.The small spending increase comes in sharp contrast to the dramatic jumps during Bush's first three years in office, when the federal IT budget grew nearly 15 percent annually. The IT budget was $39.7 billion in 2001, $44.8 billion in 2002, $52 billion in 2003, and $59.1 billion in 2004, according to budget documents. Bill Loomis, a managing director of the Technology Research Group at Legg Mason Wood Walker Inc. in Baltimore, said he expects federal IT spending to remain flat or grow by a small percentage this year and next. He attributed the slow growth to two factors: ballooning federal budget deficits and previous rapid growth in IT spending, which he said federal agencies are still absorbing.Even if the budget doesn't increase much, it's important to remember that a 1 percent jump over $60 billion is still a lot of money, said Scott Spehar, vice president of the federal business for Cisco Systems Inc. of San Jose, Calif. Spehar and others said the flattening budget will require contractors to fine tune their marketing strategies and pay closer attention to how agencies respond to tighter budgets. The changes may not be dramatic, but they could be crucial for contractors hoping to grow more rapidly than the government's modest projections."It's a competitive sport, and you have to try to win a little bit more than your fair share," Spehar said. FOCUS AT HANDDespite the slow growth going forward, IT spending will grow faster than many other sectors of the federal budget, Loomis said. He also said most IT growth will be in defense and homeland security. Mark Forman, the federal government's former IT chief, agreed. "Any program that is intensive in information that is related to homeland security or an outbreak related to security -- anything from mad cow disease to a hurricane -- you will see a jump in IT spending," said Forman, who left OMB last year to become executive vice president of worldwide services at Cassatt Corp., San Jose, Calif.The dramatic increases in IT spending in years past were prompted largely by the war on terrorism, both at home and abroad, following the Sept. 11 terrorist attacks, Forman said. The government's priorities haven't changed."If you see billions being spent on the war on terrorism in a supplemental [spending bill], a big chunk of that will be on IT," he said.Because of the focus on defense needs, some civilian agency IT purchases may be delayed, said Anne Altman, managing director of the federal unit of IBM Corp. of Armonk, N.Y. As a result, agencies will be racing to justify their IT programs "as having something to do with warfighting," said Michael Beckley, vice president at Appian Corp. of Vienna, Va. SPENDING WITH A PURPOSENo matter what the IT project, in this tight budget environment, contractors must help agencies justify their IT investments, industry executives and analysts said. By doing so, contractors increase the chances that their projects will be funded.Congress, OMB and the General Accounting Office all want to see demonstrated returns on the government's IT investments before talking about funding increases, said David McClure, a former IT official at GAO. He is now vice president of e-government at the Council for Excellence in Government, a think tank in Washington. Contractors often are asked to provide agencies with metrics that can be used to measure return on investment, Beckley said. Those measurements are used to build business cases submitted as part of the federal IT budget process. Providing those metrics is a relatively new practice."When we started doing a lot of government business three or four years ago, the imperative was to bring the technology in," Beckley said. "Now the imperative is to bring the business case in, whatever the technology." To help agencies write good business cases, contractors must demonstrate how their technology will help solve problems, said Ray Bjorklund, senior vice president and chief knowledge officer at McLean, Va., IT market research firm Federal Sources Inc."Occasionally, we hear about emerging companies that have great technology that could be beneficial to homeland security. Administration officials listen politely, and the small company walks away saying, 'I'm in,' not realizing they have to link the technology to what that agency is trying to achieve," he said.For example, if the agency needs to improve the safety of cargo shipments, the contractor must show how its radio frequency identification technology will track secure shipments without creating undue regulatory and investment burdens on industry, slowing the economy or disrupting other modes of transportation, Bjorklund said. Contractors should also help their agency customers tie their budget requests to programs that are reviewed under OMB's Program Assessment Rating Tool, said Bill McVay, vice president of e-government solutions at DigitalNet and a former OMB official. PART evaluates the purpose and design, strategic planning, management and results and accountability of federal programs. OMB is phasing in the tool over five years by reviewing 20 percent of programs each year."PART details show where agencies didn't get the efficiencies they needed because they didn't have the IT," McVay said. "If you tie the budget request to PART-reviewed programs, it's going to be easier to show why you need the money."Contractors can also lobby Congress to secure funding for their IT projects. The contractors can ask either for an earmark, which is a budget-line item for a project, or for funding for a pilot project that can be expanded over time, said Kathy Conrad, a senior vice president at Jefferson Consulting LLC, a Washington firm that helps IT companies sell to the federal government.For these approaches to work, the agency must support the project, Conrad said. If congressional appropriators ask the agency for an opinion about the project and don't get a positive response, the project may be doomed. And even if the contractor is able to secure funding without agency support, agencies don't view such "cram downs" positively and may look for ways to stall or eliminate the project, she said.  EYES ON A SMALLER PRIZEContinued consolidation of IT systems across the government could free up billions of dollars, Forman said. As a result, IT spending might decrease after a few more years of relatively flat spending, or agencies could keep reinvesting the savings into new applications that improve government productivity. [IMGCAP(2)]There are still plenty of manual processes to be automated and IT systems to be modernized, Spehar said. Even if a system is complete, the contractor always will be looking for ways to improve it, he said.Consolidation of IT projects across federal agencies already has led to fewer new IT contract starts, if not less spending, Bjorklund said.In 2000, for example, about 610 new IT contracts of more than $1 million were awarded and amounted to 13 percent of the total number of $1-million-plus contract transactions that year, including task orders and modifications, Bjorklund said. By 2002 and 2003, the percentage of new million-dollar contracts had dropped to 4 percent of total million-dollar IT contract actions, he said."Industry is generally disappointed that there are not a lot of really new, big, exciting things to chase," he said. "There are two wars this year and a new Department of Homeland Security, but there are not any radical changes on the horizon."Even so, industry executives said they see plenty of opportunities in the multitude of smaller projects. "There is a lot of incremental improvement going on, funded through increasing numbers of task orders. It is coming in smaller chunks that turn around very quickly, from identification of requirements to letting a contract or task order under an existing vehicle," said Jon Korin, executive director of strategic development for the information technology division of Northrop Grumman Corp."It continues to remain a situation where there are more opportunities available than we can bid," he said.Staff Writer Gail Repsher Emery can be reached at gemery@postnewsweektech.com.XXXSPLITXXX-The full fiscal 2005 budget almost certainly won't pass on time, government and industry experts said. Like the last two budget cycles, only the defense and homeland security portions of the budget are likely to make it through the congressional appropriations process by Sept. 30, the end of fiscal 2004, said Kraig Siracuse, a professional staff member of the Senate Defense Appropriations Subcommittee.The budget quagmire is all too familiar to both agencies and contractors, said Bill McVay, vice president of e-government solutions at DigitalNet Holdings Inc. in Herndon, Va. "In the last two administrations, I don't remember a year where there wasn't some long, drawn-out continuing resolution process," he said. When all 13 budget bills don't get passed on time, Congress must pass a resolution that continues funding at current levels until the budget bills do pass. Without a continuing resolution, the government must shut down. This fall's presidential and congressional elections further complicate the budget situation, because legislators and the president will leave Washington after Oct. 1 to campaign, government experts said. Siracuse said Congress might pass an omnibus bill that includes the 10 remaining spending bills before leaving town. If that doesn't happen, the outcome of the congressional and presidential elections will determine the budget's fate, said Tim Leeth, vice president of Jefferson Consulting LLC, a Washington firm that helps IT companies sell to the federal government. Initially, a continuing resolution will fund the agencies whose budget bills haven't passed. Between October and December, money will be doled out in one- or two-week increments, Leeth said. If the presidency and both houses of Congress don't change hands after the November elections, Congress likely will act on the budget bills in December, Leeth said. If power changes hands, Congress won't act at all, he said. "It will be practically a meltdown," he said. "They will just extend [the continuing resolution] until mid-February." That's when a new president, new House leadership or new Senate leadership can act on their priorities, he said.Two-week funding for months on end is debilitating for the agencies, because they can't plan anything that takes more than two weeks, Leeth said. Perhaps the biggest impact of a continuing resolution is that it puts new programs on hold. If contracts haven't been finalized and funding approved for new projects in the current year, work can't start on those projects under a continuing resolution. That's why it will be important to finalize contracts for new projects before the end of fiscal 2004, Stouffer said.XXXSPLITXXX-The IT budgets at the Labor Department and Environmental Protection Agency are flat. But Chief Information Officers Patrick Pizzella and Kim Nelson aren't complaining. They say the flat growth shows their organizations manage money well. "The agency has done a better job in the last couple of years of aligning our IT investments with agency priorities," Nelson said. In the past, EPA's request for IT funds was a wish list, she said."There was no way the budget would cover the wish list," Nelson said. "Now if an investment makes it through the review process, the certainty of funding is very high."The EPA's fiscal 2004 budget for technology and information management is about $400 million. Funding should remain steady in 2005 and 2006, Nelson said. One of the agency's top priorities is a permit compliance system that will capture information on water discharges from commercial facilities nationwide, Nelson said. The current legacy system is dependent on manual data entry and doesn't capture all the information required by federal law. The new system will receive reports electronically, saving time and money, she said. At the Labor Department, where the IT budget has been relatively flat for the past three years, Pizzella said executives look for IT programs that can be used across the department's agencies. The money requested for such cross-cutting initiatives has declined from $56 million in fiscal 2003 to $33 million in 2005, not because the projects don't work but because they do work, Pizzella said. [IMGCAP(2)]"It's a very successful way to eliminate IT redundancies and also build a spirit of cooperation among the agencies," he said. The savings are then poured into other IT jobs that need funding, Pizzella said. The department's cross-cutting initiatives include a centralized, electronic regulatory dockets system and a departmentwide integrated human resources, personnel, payroll and time and attendance system, according to budget documents.In fiscal 2002, the department got $396 million in IT; in 2003, $398 million. This year's budget is also $398 million. For fiscal 2005, which begins in October, the department requested $407 million. The 2 percent boost will cover inflation, Pizzella said.He expects the department's 2006 budget request to be similarly flat.