Outlook 'robust': IT funds flow to defense, homeland security

Of the 1,400 projects with business cases for 2004, 771 are on the "at-risk list" and could lose their funding, according to OMB's Mark Forman. The at-risk projects total $20.9 billion in proposed 2004 IT spending.

Henrik G. de Gyor

Information technology services firms with significant work in the Defense Department and the Department of Homeland Security will be winners under the Bush administration's proposed $59.3 billion federal IT budget for fiscal 2004, industry executives and analysts said.

The spending increases are focused on agency modernization, homeland security, the war on terrorism and bioterrorism readiness, creating an outlook for federal IT services firms that analyst Cynthia Houlton called robust.

"From an outsourcing and technical services perspective, those companies are very strong, maybe even stronger than in fiscal '03," said Houlton of RBC Capital Markets in New York.

Homeland security is the biggest priority in President Bush's $2.2 trillion budget request for fiscal 2004, said Mitchell Daniels, director of the Office of Management and Budget. The budget, published Feb. 3, includes $36.2 billion in funding for the 22 departments and agencies merged into the Department of Homeland Security, up 64 percent since the terrorist attacks of Sept. 11, 2001. The department will spend about $3.75 billion on IT, according to OMB.

Overall, the administration is requesting $59.3 billion for information technology, a $6.7 billion increase over its $52.6 billion request for 2003. The increase includes $1.6 billion that was not previously identified as IT spending, and $5.1 billion for homeland security, the war on terrorism and other modernization IT spending.

Outside of homeland security work or agency modernization projects, contractors are unlikely to see their agency customers get funding boosts, said Jim Kane, president and chief executive officer of IT market research firm Federal Sources Inc. in McLean, Va.

Ernst Volgenau, president and chief executive officer of SRA International Inc., said the fiscal 2004 budget priorities translate into an opportunity to grow his company, which went public last year.

"I'm happy to see some of the priorities coincide with areas in which we're working," such as homeland security and missile defense, Volgenau said. Missile defense received more than $9 billion in the 2004 budget. SRA of Fairfax, Va., has work with many component agencies of the Department of Homeland Security, including the Coast Guard and Federal Emergency Management Agency.

The defense budget focuses funds on command, control, communications, computers, intelligence, surveillance and reconnaissance -- areas in which SRA specializes, Volgenau said. So-called C4ISR was used successfully during the Desert Storm conflict and now in Afghanistan to make precise connections between reconnaissance vehicles and the weapons brought to bear against the enemy.

"That's going to be an important area for a long time," Volgenau said.

Like SRA, Anteon International Corp. has significant work at the component agencies of the Department of Homeland Security, putting the Fairfax, Va., firm in a good position to capitalize on the administration's IT spending focus, said Joseph Kampf, president and chief executive officer.

"We see the IT portion of the 2004 budget as addressing areas in which we are very well positioned," Kampf said, such as emergency response. The company built FEMA's disaster response system.

Money is also being allocated in key areas such as logistics modernization, and also training, modeling and simulation to prepare military troops for conflict, Kampf said.

"DoD is transforming itself into an information-smart fighting force, using IT and integrating systems in order to be able to address the threat more quickly, with better information [that] everyone shares ... so we can make the best decisions and have the best outcomes," Kampf said.

Valerie Perlowitz, president and chief executive officer of Reliable Integration Services Inc. in Dunn Loring, Va., identified a different kind of contractor opportunity in the budget: helping federal departments develop enterprise architectures, or modernization blueprints that enable them to target IT investments that foster effectiveness and efficiency. The 2004 budget proposal includes $1 billion to help agencies develop their enterprise architectures.

"It's one of the things we have been doing a lot," Perlowitz said, "helping CIOs develop enterprise architectures with meaningful metrics to help justify their business cases for their projects, to show that expenditures for IT will provide value in support of the agency's mission, [and] that there is not overlap [with other IT projects]."

OMB insisted on more business cases to prepare for the 2004 budget request than it did the previous year. For the 2003 budget, OMB required business cases for major IT projects worth at total of $18 billion. For 2004, OMB thus far has collected business cases for 1,400 major projects collectively worth $35 billion.

And OMB plans to scrutinize even more spending before fiscal 2004 begins Oct. 1. By September, OMB will have received several hundred more business cases for all projects worth more than $5 million each, Forman said.

The business cases must show that the project would provide significant value to the agency mission, had a reasonable likelihood of meeting goals and objectives, incorporated sufficient IT security, did not duplicate other investments and helped achieve the President's Management Agenda, a cornerstone of which is expanded electronic government. Projects with inadequate business cases are at risk of not receiving funding.

Of the 1,400 projects with business cases for 2004, 771 are on the "at-risk list," Forman said. The at-risk projects total $20.9 billion in proposed 2004 IT spending.

Nearly 700 of the at-risk programs have inadequate IT security. More than 600 fail to address the human resources and process changes needed for success. Last year, some at-risk programs were allowed to go forward but resulted in unacceptable cost and schedule overruns, Forman said.

"Where we had projects that exceeded 10 percent in cost overruns, every single one of those was on the at-risk list in last year's budget. We know that if it's on the at-risk list and we let it go forward, chances are we are going to end up with a cost overrun," Forman told an audience of IT contractors at a budget briefing Feb. 4. "So we are going to be a lot more vigilant this year, and diligent in working with the agencies, and I'd ask you in the community to focus on this as well."

Helping agencies ensure IT funding through top-notch business cases is an opportunity and a necessity for contractors, FSI's Kane said.

"One of the key messages we've been giving to our clients is that part of the sales and development process has to be the integrator coming in to help make the case for those programs," he said.

"There are going to be winners and losers associated with this budget. The winners will be companies that can pursue enterprisewide [projects] and show strong economic and programmatic benefit, and help their customers sell that business case at OMB. The losers are going to be companies that ... do not have respect for OMB's strong influence on this sector," Kane said.

But OMB's emphasis on justifying IT investments through a rigorous business-case process is not just an opportunity to win -- or lose -- work, IT executives said. It's also good business for the government.

"This budget shows great alignment among the mission of government, the new environment the government is operating in and a focus on results rather than the focus on technology for technology's stake," said Jon Korin, executive director of strategic development at Northrop Grumman Information Technology in Herndon, Va.

High-level scrutiny of IT investments will continue year-round in the component agencies of the Department of Homeland Security, according to the budget proposal. In fact, all homeland security spending will receive close attention, Daniels said.

"We really have to concentrate this year on how well we are spending, not nearly on how much. What's not yet clear is that we are spending in the right places to reduce the total threat level," Daniels said.

OMB last July instituted a temporary freeze on new IT investments in agencies slated for the new department, pending high-level reviews of those IT plans. New investments will continue to be modified to address the government's overall homeland security needs, rather than only the needs of one agency, according to the budget document.

"If you're the contractor for a program that gets held up, that is going to be bad. But from the standpoint of the interest of the country and the government, it's a good thing OMB is subjecting these programs to a higher level of scrutiny," said Payton Smith, an analyst with IT research firm Input Inc. of Chantilly, Va. *

Staff Writer Gail Repsher Emery can be reached at gemery@postnewsweektech.com.

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