2012 budget feeds tougher competition

The Obama administration’s proposed 2012 budget of $3.73 trillion dollars, unveiled today, contains cuts aimed at trimming the federal deficit by $1.1 trillion over 10 years.

If it is enacted, half of all government agencies would see their funding reduced from fiscal 2010 levels, eliminating or reducing 200 federal programs for a projected savings of $33 billion in fiscal 2012.

But all the numbers are not yet in. Specifics about federal IT programs should be available within the next few weeks when the agencies unveil their individual plans for 2012.

“I’ve been crunching numbers since 10:30 this morning, and I don’t see a lot of growth in agencies overall," said Ray Bjorklund, senior vice president and chief knowledge officer at FedSources, a government market intelligence provider. "In fact, it’s probably going to be a double-digit decline in contract spending."

Bjorklund said he is awaiting publication of the department and agency spreadsheets that break down IT spending before he can make specific assessments of how the proposed budget will affect the government contracting industry.

But it is clear that this kind of budget will increase competition among contractors, said Paul Strasser, senior vice president and general manager at Dynamics Research Corp.

"The freezing of discretionary spending makes competition increase, so in the future you really have to hold on to what you've got," Strasser said.

Cost also will be a more important factor going forward. "The name of the game is going to be delivering what you promise at a lower cost," Strasser said. "The days of coming in with a low-ball offer and then not delivering are over. If you stumble, you're done."

The opportunities for contractors will be in helping agencies with cost reduction and efficiency, said Kevin Plexico, senior vice president of research and analysis services at Input. "There will be opportunities to help agencies with their consolidation efforts," he said.

Strasser agreed. "Companies that can help with the efficiency and effectiveness of the dollars agencies spends will do well," he said.  

Traditionally, the government has spent more on IT than it requests, with 2011 being the exception. "I think we'll see a return to that pattern in 2012," Plexico said, in part because of pent-up demand for IT to carry out consolidation efforts.

Among the few agencies that saw their budgets grow, the Treasury Department was a surprise, Bjorklund said. He attributed the growth to increased insourcing at IRS and the concurrent acceleration of spending on the IRS modernization program.

The proposed $14 billion Treasury budget represents a 4 percent increase above the 2010 enacted level.

The Veterans Affairs Department is also doing relatively well, in part due to the VA budget increase that was built into the 2011 budget to expand its contact work, he said.

And although there will be increases in spending for transportation, Bjorklund said that despite the hype for high-speed rail construction, he doesn’t see much spending in that area going directly to federal contractors.

“I think what’s going to happen – because the numbers are suggesting that – that there’s going to be a lot of spending through grants to states and local authorities,” he said.

The big winner remains the Defense Department, which “always gets the lion’s share of the budget," he added.

Taking into consideration the current 2011 budget, what the administration considers the effects of the continuing resolution to be and the 2012 IT budget request, Bjorklund said, the overall budget shows only a 1.3 percent increase. "That’s not particularly gangbusters," he said.

“Just in that small handful of [available] numbers associated with the IT budget, the increase in the number of major investments is only a few initiatives," he said. "That’s hinting to me that, again, much as we saw last year, there’s not a lot new in the budget."

Bjorklund said that although there is a lot of talk about new technologies such as cloud computing, spending on them will probably be buried within some larger IT infrastructure initiative.

“What that means is that companies that are working in this area are going to have to look for smaller projects or they are going to have to figure out how to exploit some of the broader initiatives because this isn’t necessarily going to be a classic capture management scenario or going after the ‘big win,’ ” he said.

William Walsh, senior partner at the Venable law firm who advises contractor clients, said the shrinking 2012 budget, as well as those expected in the following years, is pushing small and midsize contractors to give serious thought to mergers and acquisitions even as the top echelon at DOD, including Defense Secretary Robert Gates, rejects that idea for the Tier One contractors.

The small and midsize companies are saying the budget is constrained and “it is going to [continue to] decrease presumably, so maybe this is a time to get out,” Walsh said. “Those companies will see these budgets as a brake on opportunities to growth in the future.”

“It seems to me that at the middle market level or even lower, we may see a keener interest by those companies thinking about an exit strategy,” Walsh said.

He noted that in the last six months of 2010 Venable closed approximately seven merger-and-acquisition deals in the federal contracting space. Based on a busy first six weeks of 2011, Walsh said he expects that momentum to continue this year.