IT market nears its bottom

2013 and 2014 might be the low point for the market, but who is expected to take the biggest hit?

The downward cycle of the federal contracting market should hit bottom in 2013 and 2014 before beginning a steady, modest climb.

But even with the expected declines over the next two years, the market remains a strong one, said Kevin Plexico, vice president of federal information solutions for Deltek. Plexico was one of the presenters at the company’s annual MarketView conference.

“The news might not be great, but look at other industries that have seen double-digit declines,” he said. “But it is unusual for this market, but it isn’t that bad. It is still a big pot of money.”

Even looking at the worst case scenario where sequestration forces 10 percent cuts in spending in 2013 and beyond, the budget is expected to rise slightly in 2014 and continue a steady climb from there.

The discretionary budget is expected to be $1.04 trillion in 2013 and $1.06 trillion in 2014. By 2021, it is estimated to reach $1.23 trillion, according to Deltek.

The IT portion measures about $120 billion currently according to the company’s new forecast model, which includes the IT budget data from Exhibit 53s that agencies file along with an estimate of the intelligence spending, embedded IT and IT spending by quasi-government organizations such as the Postal Service.

“There is a lot of IT spending outside of the IT budget,” Plexico said. “The Exhibit 53s are just the starting point.”

Between 2012 and 2017, defense IT spending is expected to fall by 3.4 percent. Civilian spending is expected to drop 0.7 percent, while intelligence spending on IT will grow 3.3 percent.

Plexico broke down the spending by services, hardware and software, with hardware taking the biggest hit, shrinking by 7.2 percent. Spending in fiscal 2012 is estimated to be $28 billion and by 2017, the figure will be $19 billion.

The drivers for the drop include the growth of mobile devices, which while increasing have a lower price point, Plexico said.

Other factors driving down hardware spending include infrastructure consolidation, cloud computing, longer technology refreshment cycles, and fewer government employees. A bright spot is rise in spending for storage hardware, Plexico said.

Spending on services has a smaller drop, going from $60 billion in 2012 to $58 billion in 2017. The driver here is the mandate to lower spending on professional services and the lower implementation costs of cloud computing, he said.

A bright spot is that agencies are spending more for data center consolidation, cybersecurity and modernization.

Software spending is flat and is expected to stay at about $13 billion a year.

One challenge that IT budgets face on Capitol Hill is the belief IT is a cost and not an investment in efficiency, Plexico said.

Roger Baker, CIO of Veterans Affairs department, said much the same thing in an earlier session. “IT is an investment to be maximized, not a cost to be cut,” he said.

But the best approach with appropriators is to explain the return on investment and not to ask for more money, he said. “Every dollar is sacred and hard to get, so you have to make the case

VA is spearheading a variety of IT rich initiatives such as electronic health records, telehealth, a new pharmacy information system, and improved benefits processing. “But we have an advantage over most agencies; VA is a single IT organization with one person controlling the budget,” he said.

As a result of that structure, VA has saved $1.5 billion over the last three years as it restructured its IT investment methodology. The savings were then invested back into VA.

“Imagine if we could apply that across government,” he said.

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