Dry Years Ahead in Federal IT Forecast
With flat growth projected in federal IT spending, integrators look to state and local markets
With information technology spending in the civil agencies market projected to decline at a steeper rate than previously forecast, systems integrators are turning to business opportunities in outsourcing and state and local governments.
The Washington-based Electronic Industries Association forecasts IT spending for civil agencies will be $16.7 billion in fiscal 1997. The organization's latest five-year forecast, released in June, projects spending in this market will decline at -1.8 percent annually through 2001.
"While this rate of decline is greater than last years' forecast, the contracted portion of civil agency IT spending should remain relatively flat," the EIA said in a June 26 statement at the eighth annual EIA Federal Information System Opportunities Conference in Crystal City, Va.
"It's a declining market for federal integrators. They're preparing for the reduction in federal IT spending by looking at the state and local markets," said Bob Patterson, general manager of civil programs at Boeing Co., Seattle, and chairman of EIA's civil agency analysis team. "We will have more and more contracts open in the state and local arena."
"With similar services and IT being offered to both the federal, state and local areas, we will see integrators merging their federal, state and local divisions into a single public sector," he said.
"Despite the flat growth forecast, the federal government has come to realize that IT is a mission-enabler. Without IT, critical tasks cannot be performed," said George Shaw, vice president of strategy and planning at Hughes Information Technology Systems, Reston, Va., who also contributed to the five-year EIA forecast.
EIA study teams found that civil agencies are sharpening their focus on their mission and developing plans to outsource non-mission critical functions. Another force affecting the civil market is the trend toward intergovernmental business agreements, such as the transfer of programs to state and local governments, an EIA spokesman said.
Total federal information technology budgets are forecast to show a growth rate of -1.5 percent annually over the next five years, according to EIA reports. The forecast is based on analyses prepared by teams of EIA member companies and interviews with government officials and investment firms. EIA represents the nation's electronics manufacturers.
EIA's forecast for the federal telecommunications market last year was on target. Telecommunications applications "are in" and "technology for its own sake is out," EIA said. The study teams cited government organizational structure changes, cooperative associations among agencies and changes in thinking by agency chief information officers as evidence of the change in how government managers view the role of telecommunications.
"No one buys IT for IT's sake anymore. You must demonstrate the return on investment for the client," said Mary Freeman, EIA conference chairman and manager of market research in government markets at AT&T, Basking Ridge, N.J.
Though state and local governments are facing the same budget squeeze, the combined markets are larger than the federal market, and they are spread out, Freeman said. "The more nimble companies that can mobilize faster will seize new markets in big cities," she said.
The federal government alone has about 30 to 40 agencies. Going after state markets would mean multiplying that figure by 50, or for companies pursuing city or county markets, by 100, said an industry official.
"The World Wide Web will drive the state and local IT market into the hands of integrators. Agencies will put up resources to give the public information. They don't want to be at a disadvantage to the public because that's who the governments serve," an industry official said.
With an estimated 15 million state and local employees, compared to 3 million federal workers, the Internet and Web will change how integrators will work with the government, business and citizens.
"Outsourcing was classically not an IT function, but we [will] see it play a greater role in DoD and civilian agencies," said John Klem, vice president of Federal Sources, a market research firm in McLean, Va. "The wild card in all this is the year 2000 problem. Because the systems in place do not have the flexibility to change, it's going to add more money to IT spending," Klem said.