The 2.9% solution

Top 100 federal contractors and their smaller counterparts are resigned to the prospect of little or no growth in government information technology spending during the next two years, especially by civilian agencies.They are more concerned that 2007 has ushered in an era of increased oversight by Congress and the government's regulatory agencies coupled with a slowing of contract awards."This is going to be a challenging few years," said Tony Pease, enterprise program partner for governmentwide acquisition contracts at Unisys Corp., of Blue Bell, Pa.A new survey of federal acquisition prospects supports those concerns and predicts that the slowdown in spending for professional services and IT will continue through fiscal 2008, or through the end of the 110th Congress, which has already made fiscal and contractual oversight a priority.Oversight as a function of Congress is nothing new, of course. Woodrow Wilson wrote in 1885, "It is the proper duty of a representative body to look diligently into every affair of government and to talk much about what it sees."Frank Pugliese, managing director of DuPont Government Solutions and former commissioner of the General Services Administration's Federal Supply Service, said he favors oversight ? to a point. "But my fear now is that it will swing too far in the wrong direction and really cause some problems.""When you look at most of the folks who are going to be playing in that oversight game now," he said, "you only have a handful who can really get into the nitty-gritty, people like [Rep.] Tom Davis [R-Va.]." He said Davis' former career in the private sector gave him a proper understanding of what oversight entails.According to the survey by market research firm Federal Sources Inc., near-term contracting opportunities will be influenced primarily by the continuing global war on terrorism, Defense Department outsourcing of noncore services and bipartisan support for the wars in Iraq and Afghanistan."There is going to be an increased emphasis on domestic priorities in the new Congress, which could be good for spending," said Ray Bjorklund, senior vice president and chief knowledge officer at FedSources, a government market analysis firm based in McLean, Va. He predicted a substantial upswing of about 2.9 percent in fiscal 2009, the Bush administration's final budget.Among likely brakes on spending, the survey cited: "The mode before was speedy acquisitions, get things awarded," Pease said. Now, government agencies are more cautious.Another brake is the continuing resolution under which all civilian agencies have been operating. It limits them to fiscal 2006 funding levels and bars new programs, said Al Blumenthal, executive vice president at Indus Corp., of Vienna, Va."The result has been that not only have agencies been prevented from starting new IT initiatives [without] prior congressional authorization and funding," he said. "But additionally, IT expenditures for many agencies have been reduced as they have struggled to fund increased fixed fiscal '07 incremental expenses at the fiscal '06 funding level."Blumenthal said the current federal IT market was the most difficult for growth he'd seen since Indus was established in 1993.Pugliese agreed that agencies are spending cautiously. But, he said, even a flat federal IT market is a large one.Pugliese likened the current IT picture to the real estate market. "It was fairly overheated, and now there's kind of a correction going on. I don't really see it being a nose dive in value, because there is still a lot of work out there that is directly tied to IT."As long as Congress battles over funding the war in Iraq, there will be little sense of urgency on Capitol Hill to address procurement priorities, said Chris Fountain, president and chief executive officer of SecureInfo Corp. With the executive and legislative branches controlled by different parties, he said, "politics naturally plays a role.""Where you see disagreement between the branches, that's when things slow down," he said. "To the extent that procurement is slowed, you'll have less spending?and some things won't get funded at all."But Paul Polcsan, vice president of business development at Serco Inc., of Vienna, Va., said projected growth of 2.9 percent is not an alarming figure. "It doesn't bother me at all," he said, because there is still a great deal of contracting work to be won.The administration's proposed fiscal 2008 budget calls for $489.5 billion in spending, excluding supplemental and emergency appropriations, up from the estimated $488.9 billion in the fiscal 2007 budget, Bjorklund said. For fiscal 2009, the survey predicts federal purchasing to reach $503.7 billion.Capital investment in IT hardware, including computers and components such as processor chips, is expected to grow from $111.4 billion in fiscal 2006 to an estimated $142.5 billion in fiscal 2007 and $149.7 billion in fiscal 2008, Bjorklund said.Military purchasing is expected to grow at 2.7 percent, a slightly slower rate than on the civilian side, but where actual expenditures are much higher, the survey finds. DOD purchasing is expected to increase from $299.9 billion in 2006 to an estimated $359.8 billion in fiscal 2008 and $369.6 billion in fiscal 2009.Telecommunications purchasing by the military is expected to nearly double in fiscal 2008, rising to an expected $7.2 billion from $3.6 billion in fiscal 2006. Bjorklund called that "one of the very nice pluses" in the overall procurement outlook. "I haven't seen increases like that in a long, long time."The FedSources survey also predicts a big increase in military spending for professional services including research and development, from $67.4 billionin fiscal 2006 to an estimated $71.6 billion in '07 and an expected request of $72 billion for fiscal 2008."When you have a flat market, everyone is after market share ? and we're no different," Pease said, adding that Unisys' strategy is to retain its current contracts and not try to be everything to everyone."This is a real transition year for everybody," he said. Pease called GSA's new Alliant contract vehicle, expected to be unveiled later this summer, "a make-or-break award for a lot of industry partners, including us. We don't want to go the way of Sprint on Networx."Pugliese said contractors' concern about the number of contract vehicles available is nothing new. "Competition is healthy," he said.Pugliese added that when he was FAS commissioner, he always had the same answer: Contracts that are successful will survive, and the others will disappear. "It all sorts itself out, and I think it has ? a little bit."