Federal IT spending to increase 5 percent, analyst says

Market research firm Input estimates annual federal IT budget will rise 5 percent annually despite proposed freeze in discretionary spending.

The Obama administration’s fiscal 2012 budget proposal calls for a five-year discretionary spending freeze and $33 billion in other cost-cutting targets and reductions.

If you are either selling IT to the federal government or work on a federal IT program, this might cause a moment of insecurity. But not to worry – too much – says Brian Haney, a senior vice president at market research firm Input Inc.

“The situation for us in the technology market is not as dire as it’s made out in the press,” he told an audience of IT resellers at a conference sponsored by Ingram Micro, the Santa Ana, Calif.-based IT distributor and supply-chain integrator.

Of the president’s $3.7 trillion 2012 budget proposal, Haney pointed out, only $1.2 trillion represents the discretionary budget, accounts from which IT funds are normally drawn.

And nearly two-thirds of that budget – or $720 billion – will be excluded from the freeze because it funds programs at the Defense and Homeland Security departments and other agencies considered essential to national security.

That leaves $398 billion in non-essential, non-security related spending – a third of the discretionary budget – that would be subjected to a freeze. “It’s important to keep that in perspective,” Haney told the reseller crowd.

Despite the slow-down, federal IT spending to commercial contractors is expected to grow about 5 percent annually, according to Input, which sizes the 2010 federal IT market at about $86 billion.

By 2015, that would rise to about $110 billion in IT products and services contracted out to commercial suppliers. The growth will be due in part to demand for contractors rising slightly faster than overall IT spending,  Haney noted.

“The way the employee hiring and retention practices work today, the federal government will use the contracting community more as a proportion of total IT spend,” he said.

“It’s not a bad market to play in when you consider many of the commercial markets are experiencing negative growth,” Haney said.

Joseph McCrone, Ingram Micro’s area vice president for government, education and VAR sales, said that, despite the modest forecast, the federal IT market remains robust, especially for channel suppliers.

“Federal has the greatest value proposition for resellers,” he said, “what with compliance regulation and the logistical and physical requirements around product prep, UID tagging and all those things that go along with federal business.”

Government-specific, value-added reselling is “starting to build more,” he said.

There are some 2012 budget winners too. The General Services Administration is up 123 percent, a boost Haney attributed to the impact of the economic stimulus as well as GSA’s designation as “the cloud computing owner.”

“You’ll start to see GSA start to channel that money out in terms of contract dollars to make that happen,” Haney said.

He noted a current mandate by the federal government to in-source more aims to return 100,000 jobs now performed by contractors back into the federal government over the next few years.

But Haney is skeptical. “It is not going to happen,” he said. “It’s important for the administration to say that inherently governmental jobs move back in-house. The reality is that it is not going to happen for the next couple of years.”

“The role contractors play in this community is not going to change in the next 24 months unless government does something completely radical to start bringing folks back into their ranks.”

In the area of acquisition reform, Input anticipates a big increase in task order contracts as agencies turn away from costly GWACs (Governmentwide Acquisition Contracts), which come with layers of compliance requirements.

“[Agencies] said, look, if I’m going to have this scrutiny why am I going to pay big fees to somebody else,” Haney said. Instead, he predicted agencies will dust-off their IDIQ-type contracts and re-compete them.

Bid protests will also rise, he said, adding they have become a part of doing business in the federal government. “It’s just an inevitability,” he said, bringing with it higher proposal costs for contractors and staff overhead for agency contracting offices.

In the end, Haney said, next year’s proposed budget is IT friendly.

“Expect a contentious battle over 2012 funding,” he said. “But in the grand scheme of things we are not talking about huge dollars. The argument is about small pools of funding right now that seem large but are small in proportion to the total and they don’t tend to center around technology.”

The bottom line, Haney told IT sellers, is: “Don’t panic -- your agencies are still spending. The real message here is don’t be a jack of all trades, focus on your niche; be agile.”