Classified IT market growing and the data shows it

Publicly-traded government contractors over the past year have touted classified business as a revenue base growing in importance as agencies increasingly bring certain technology-related work behind closed doors.

The recent round of first quarter earnings reports tells part of the story. Raytheon reported almost half of first quarter contract bookings in its government services business were classified. Leidos booked $1.3 billion in classified intelligence community awards during the quarter.

ManTech International reported an award of “meaningful size” with an unnamed Defense Department agency for managed enterprise IT services the company says is similar to other programs won last year in terms of size and specs.

There is some underlying data that supports the notion of certain specific technology areas becoming more secretive and hence becoming less public. Bloomberg Government estimates DOD classified IT budgets will rise to $10 billion for fiscal 2019 from $9.4 billion in fiscal 2018 and $8.5 billion in fiscal 2017.

Figures from Defense Department budget data and analysis of those numbers by consulting firm Avascent show another part of the story. Avascent pegs classified spending on procurement and so-called “RDT&E” technology spending at $48.6 billion for fiscal 2018 to show an almost 13-percent year-over-year increase.

Those research, development, test and evaluation funds support the development of new systems or expansion of performance of fielded systems. Classified procurement, RDT&E and operations-and-maintenance spending across DOD is due for a 14.8-percent increase in fiscal 2019 under the White House’s defense budget request.

And then there is cybersecurity. The extent to which is secret is hard to determine, but DOD’s fiscal 2019 budget request shows it asked for $8.5 billion in cyber funds to show a 4.2-percent increase from 2018.

Chris Meissner, a principal at Avascent who specializes in public sector IT, said DOD’s budget request for fiscal 2019 also represents the first time the three main service branches have detailed their O&M spending on cyber. That O&M spend greatly outweighs procurement and RDT&E, he said.

“Before we didn’t see the full picture, but the O&M budgets have made it much clearer in how cyber funds are spent and show significant growth in all three accounts,” Meissner said.

Joey Cresta, public sector IT market analyst at Technology Business Research, said the acceleration around classified activity is occurring as the U.S. is more heavily investing in efforts to regain technological advantage over adversaries in electromagnetic and cyber warfare.

And thus, that means bringing more development and testing work under tight lock-and-key as adversaries are looking to get their hands on those same tools.

“At the same time, the U.S. faces attempts to undermine democracy and economic institutions through cyber attack. There is very real recognition of the need to reinvest in technology to offset these emerging capabilities in EW and cyber, which I suspect is driving the high volume of investment in classified contracts,” Cresta said.

DOD released annual unclassified summary of the National Defense Strategy in January that details the department’s aims of maintaining the U.S.’ technological advantage as commercial tools become more readily available to everyone.

The first of its kind in 10 years, the National Defense Strategy replaced the Quadrennial Defense Review and unlike its predecessor is classified, while the 11-page unclassified memo describes DOD’s approaches in vague detail without much in the way of specifics.

Meissner said the strategy’s classified nature could be an “indication there may be more initiatives in the classified market versus not.”

The strategy does specifically call out artificial intelligence and autonomy as an area DOD plans broad investments in. Barriers to entry for those advanced technologies are lower and are thus expanding to more actors, the strategy says.

“One of the areas of keen interest in R&D is how artificial intelligence can become infused within the broader defense enterprise,” according to Meissner.

He also highlighted the strategy’s emphasis on space systems, manned and unmanned platform teaming, dedicated unmanned and ISR systems and new platform concepts as among the document’s key themes.

“They all speak to R&D priorities we’re seeing preserved around technological superiority to combat near-peer threats,” Meissner said.

Space is also becoming an increasingly classified domain, according to various comments by Northrop Grumman executives over the past year as they prepare to become an even larger space player through their pending Orbital ATK acquisition. We know DOD asked for $12.5 billion in unclassified national security space spending for FY 2019 at a 9-percent increase from FY 2018. That likely indicates an increase in classified space spending also.

Cresta sees IT modernization efforts at intelligence agencies as not only focusing around the backbone of their infrastructures but also adoption of machine learning, artificial intelligence and analytics tools to greater integrate data from multiple sources.

This is “creating broad opportunity across enterprise and mission IT” for vendors seeking intelligence community work, he said.

Budget figures from the Office of the Director of National Intelligence also at least indicate broader opportunities for vendors. When adding up the White House’s requests for both the National Intelligence Program and Military Intelligence Program, overall budgets are due to go up 7 percent to $78 billion this fiscal year and another 4 percent next fiscal year to $81 billion.

Those top-line numbers are the only visibility available to observers with respect to intelligence agency funding as the rest is classified, but tell at least part of the story.