As Government IT Spending Drops, Cloud Rises

Federal spending for information technology has peaked. It will decline at a gradual annual pace for at least the next several years, but cumulatively it will amount to a significant amount of money.

However, vendors that can provide the IT services that are moving to the top of the government’s requisition list will find solid marketing opportunities, especially in cloud and cybersecurity technologies. In three recently released reports, market analysts portrayed the current and prospective shape of the federal IT acquisition scene.

Annual federal IT spending will drop from US$112.5 billion in 2013 to $102.1 billion in 2018, according to a July report from Deltek. The spending level will decline at a compound annual rate of -2 percent.

“Without a doubt, budget pressure has pushed agencies to prioritize spending, to focus on mission-critical investments and keeping the lights on,” Kyra Fussell, senior research analyst at Deltek, told the E-Commerce Times.

Because its forecasting methodology covers a broader range of federal IT investment, Deltek estimates spending at nearly $20 billion more per year than that measured by the Office of Management and Budget. However, both forecasts show a decline in spending.

Measuring what it considers to be the “addressable” market for vendors, Deltek includes spending by independent agencies, the intelligence community, Congress, the federal courts and the postal service. OMB includes only components that are largely under executive branch direction.

Defense Segment Cuts Foreseen

The sharpest decline in IT spending will occur in the national defense category, where the annual budget will drop from $61.5 billion in 2013 to $53 billion in 2018, according to the Deltek study. Over the same period, civilian IT spending will decline from $40.9 billion to $39.6 billion per year, while IT spending for intelligence agencies and functions will slip from $10 billion to $9.5 billion.

Spending on IT hardware will decline markedly, from $23.3 billion in 2013 to $18.1 billion in 2018. Over the forecast period, annual software investments will dip from $12.6 billion to $11.4 billion, while spending for IT services will decline from $59.1 billion to $55 billion. Outlays for communication and network services will remain flat at $17.6 billion per year during the period.

For vendors, the positive side of the forecast is that the lower level of projected spending still presents an attractive market, as well as the continuing philosophy that IT investments pay off in greater productivity. Despite the shrinkage in the spending level, changes in the pattern of IT investments will offer vendors “pockets of opportunity” as agencies enlist IT as an enabler to lower costs and increase efficiencies, the Deltek report noted.

Navigating the landscape will be trickier than ever for vendors. For example, a smaller share of a declining federal IT budget will be allocated to innovative investments, classified as “development, modernization and enhancement” spending, Deltek predicted. Just 24 percent of total IT funding will be for DME projects in 2014, a decline from 27 percent in 2012.

Federal agencies will be even more conscious of getting more bang for the buck.

“Monitoring IT portfolios and coordinating more effectively within and across agencies will be important measures to shift focus to quality of spending rather than quantity,” said Fussell.

“Funding shortfalls will push out project milestones so that innovations intended to be implemented in the near term will take longer to be completed,” observed Alex Rossino, principal research analyst at Deltek.

“I also think that agencies are going to lean on cloud in a much bigger way than they have been in order to derive the computing power and solution scalability that they require,” he told the E-Commerce Times.

A Mushrooming Cloud

Despite the decline in overall IT spending, outlays for cloud configurations will grow significantly over the next few years, according to a July report from IDC Government Insights. Annual federal spending on cloud projects will grow from $2.3 billion in 2013 to $9.1 billion annually in 2017.

“There are clear indications that fiscal year 2014 will continue to be a flat year for cloud computing investments” at the federal level, said Shawn McCarthy, research director at IDC and author of the report.

“Yet beyond that, growth potential looks bright,” he said. “Investments should reach a critical mass around 2015 and beyond. A new emphasis on cloud solutions is expected to return within the next 18 months.”

Federal investment in cloud projects will tilt markedly toward the use of private platforms. “Promises of greater security, control, and privacy seem to hold the key to what federal agencies seek,” McCarthy said.

For IT vendors, the choice is significant. “It matters, because private cloud can sometimes be more challenging to deliver. That’s not always the result of things like compliance certification, because both private and public could be required to meet such certification thresholds — although it’s more common for private cloud providers,” McCarthy told the E-Commerce Times.

“The additional requirements are what can make private cloud more challenging. Contracts may require separate rack space or dedicated Internet connections. There can be limits on who can join the private cloud, which can make it more difficult to leverage economies of scale, and there may be different types of service level agreements,” he noted.

Gains Seen for Cybersecurity Investments

Cybersecurity will be another strong area for federal IT spending, with outlays moving from $12 billion in 2012 to $13 billion in 2014, according to an immixGroup analysis issued in late July. By 2017, the spending level could surpass $14 billion annually. The Defense Department will set the pace, with cyberspending set to grow from $3.2 billion in 2012 to $3.9 billion in 2013 and to $4.7 billion in 2014.

Federal agencies will be adjusting the mix of IT spending categories, with cybersecurity emerging as a major requirement, the analysis indicated.

“Cybersecurity is a priority for most, if not all, agencies — and it will continue to be on the forefront of agency needs for years to come, but I wouldn’t necessarily say it’s draining funding from other IT spending functions,” Stephanie Sullivan, government market consultant at immixGroup, told the E-Commerce Times.

“What we are seeing is that cyberinvestments are being protected from cuts more than almost anything else — so while funding isn’t being taken from other programs specifically for cybersecurity, other areas are likely to bear the brunt of future budget cuts in order to protect critical cyberspending,” she said.

Within the DoD, major cybersecurity IT investments in 2014 will include information assurance, at a level of $1.8 billion, and cyberspace operations, at $1.7 billion. Other DoD priority areas include the US Cybercom (Cyber Command), and cyberscience and technology.

On the civilian side, top spending areas for 2014 include several Department of Homeland Security programs, such as federal government intrusion protection, at $134.8 million, and continuous monitoring for federal cybernetworks at $165 million.

Another positive factor for vendors in dealing with a challenging federal IT market over the next few years is that in the cybersecurity area, the federal government has much to learn from the private sector.

“Agencies recognize that software vendors are the experts in the cybersecurity field,” Sullivan said, “and they’re virtually begging for stakeholder engagement.”