Will federal IT contracting survive the 'age of austerity'?

Although federal agencies are projected to spend $91.3 billion annually for IT products and services by 2016, some industry experts say that for government contracting this is the dawning of the “age of austerity”.

“I don’t think that the [Obama] administration yet knows precisely how much money they have in their accounts. And consequently that delay in the appropriations cycle has created some uncertainly among the customer base,” said Ray Bjorklund, chief knowledge officer at Deltek Inc. The market analysis firm hosted MarketView 2011, “Federal Technology Forecast 2011-2016,” an annual federal contracting assessment, on July 15.

“A lot of agencies are going to be very, very cautious,” he added, when it comes to spending on new IT programs.

Guess what will be affected first in the current appropriations cycle? he asked rhetorically. “It’s going to be the contracts.”

Bjorklund, a member of the event’s IT acquisition reform panel, predicted a decline in federal contract spending in fiscal 2012 that will continue for several years.

“The concept of constantly saving money in technology means you’re going to be spending less on technology, which means less money for contractors,” Bjorklund said.

Breaking down the numbers, Deltek’s senior vice president of the research and analysis services, Kevin Plexico, said the 2011 discretionary spending budget of $1.2 trillion included $550 billion for contracting. Of that amount, $80 billion was spent on IT products and services, or about 6.5 percent of the total.

That represented a three percent decrease from the 2010 budget amount.

And although the prediction is for IT spending to rise to $91.3 billion by 2016, largely going to cloud computing, security and data center consolidation, Plexico said, “Based on what we’re seeing early on from the appropriators of the 2012 budget is that we’re headed for additional reductions.”

After years of continual growth in both IT and discretionary spending, “we’re tracking negatively,” he said.

However, many of these predicted reductions will go for subsidies and grants to states and local governments, Plexico added.

Turning to the state of governmentwide acquisition contracts such as Alliant, Plexico said, “We haven’t seen them trend up in five years. They’ve been relatively flat while those agency-specific, task order-based contracts have been taking off.”

“So what we’re seeing is larger agencies are setting about establishing their own task-order based contracts,” Plexico said. “We see this all military branches moving this way.”

“The challenge is that [this movement] reduces effectively the number of major prime contract opportunities for the companies that happen to win these vehicles,” Plexico said, and added that he expects this trend to continue.

Plexico also predicted that congressional pressure to reduce agency spending will continue well beyond 2012.

“We don’t see an end to the tunnel short of a major economic recovery when all of a sudden tax revenue goes through the roof,” he said. “Unless something like that happens, we’re not going to dig out of this problem quickly. It’s going to take a long period of time.”

However, he added, “We think that the IT budget will be a bit more insulated in terms of cuts relative to other areas of government [because] networks and servers will still have to run in order for agencies to do their jobs. And, frankly, technology still plays a critical role in the agencies.”