Federal IT Opportunities: Steady Funding, Constant Challenges

The good news for federal information technology managers — and the vendor community — is that government IT budgets will remain stable for the next few years in terms of projected spending. An additional potential benefit is that a recent budget agreement will support agencies for two years, removing some of the uncertainty that has characterized recent government funding.

The spending stability doesn’t mean federal IT procurement will remain boringly routine, however — far from it.

The government-wide flat-funding scenario masks the fact that the pace of spending will proceed at different rates among individual agencies. As a result, vendor opportunities will emerge within departments and agencies that have more energetic IT investment programs, according to several recent reports. Investments will involve a wide range of activities, posing challenges for vendors.

First, on an overall funding basis, federal IT investments will remain close to US$80 billion every year from fiscal 2016 to 2021, according to theProfessional Services Council, which released its latest forecast at its 2015 Vision Conference last month.

In constant dollars, civilian IT spending will dip from $49 billion in fiscal 2016 to $48 billion in 2021, while defense-sector spending will edge up from $30.5 billion in 2016 to 30.7 billion in 2021, the forecast said.

The departments of Health and Human Services, Treasury, Veterans Affairs, Agriculture and Justice will see more aggressive IT spending, according to the PSC analysis. Within the Defense Department, the Air Force will show a sprightly pace of IT investment through 2021.

Vendors Need a Flexible Approach

Marketing opportunities are available even in the face of funding, program and policy challenges, Robert Haas, PCS’s team chair for the federal IT budget outlook, told attendees at the event. Vendors should “be a trusted partner to your agency” and “bring flexible, innovative, cost-effective solutions to the problem.”

Agencies will continue to struggle with devoting more funds to innovative projects, known as development, modernization and enhancement spending, versus operation and maintenance — or steady-state expenditures, he noted. For 2016, DME will remain at a relatively low level of 23 percent of all federal IT spending, in line with recent years.

Yet even a flat allocation for DME across the government will involve some interesting IT market opportunities at some agencies, an analysis byimmixGroup released at its Government IT Sales Summit last month showed.

For example, the Department of Health and Human Services’ proposed 2016 IT budget of $11.3 billion includes $4 billion for DME programs. These include $313.1 million for IT related to operating health insurance market exchanges and $59.9 million for the Centers for Medicare and Medicaid Services for a quality-assurance initiative related to various IT functions, including infrastructure and management.

Innovation Spending Projects

At agencies where the ratio of DME is on the low side, a number of projects still have some hefty funding support. The Department of Homeland Security is aiming to spend $150.3 million to transform a fragmented and paper-based system dealing with benefits processing to an electronic program at U.S. Citizenship and Immigration Services. The VA is planning to spend $197.9 million in DME funds in 2016 for its 21st Century medical and patient records program.

Within the Defense Department, the U.S. Army has allocated $3 billion to DME projects in fiscal 2016. The department’s Defense Information Systems Agency projects it will spend $470 million for the defense enterprise computing effort, which involves core data centers and other functions, including email and business programs.

Another factor that could tilt spending toward innovative IT projects will be adherence to the Federal Information Technology Acquisition Reform Act, which became law last year. Agency progress in meeting FITARA standards has been disappointing to date, according to a study released in last month by the House Committee on Oversight and Reform.

Agency implementation of the law is still in the early stages, PSC’s Haas noted. The requirements of the act, such as enhanced transparency, better risk management, and the expansion and deployment of special, expert teams known as “IT cadres,” eventually will help drive IT investments.

“FITARA holds a lot of promise,” he told the E-Commerce Times.

In terms of the types of spending for more innovative aspects of IT, cloud technology and big data are advancing as areas of interest to federal agencies, according to an updateDeltek issued earlier this year.

The federal addressable cloud market will grow from $2.35 billion in 2015 to $3.10 billion in 2016 — a significant jump for one year. In 2020, federal cloud spending will reach $6.20 billion, according to the Deltek forecast.

“Policy imperatives from Congress and the White House, as well as the need for innovation, agility, and cutting costs, have motivated agencies to take a good, hard look at cloud solutions,” Alex Rossino, senior principal analyst at Deltek, said in the report.

The pace of cloud adoption is picking up even though agencies “continue having difficulty understanding how to procure cloud using available acquisition methods,” he said. The awkwardness in contracting vehicles is being addressed and improvements are evolving.

“Fundamentally, what needs to occur is that agencies need to be given a flexible budget authority that is on-demand and which contains money that is multiyear applicable,” Rossino told the E-Commerce Times. Such an approach matches the inherent characteristic of cloud capability as an on-demand IT resource.

In the same report, Deltek estimated that federal big data spending will show steady growth, from $1.62 billion in 2015 to $1.95 billion in 2016, and then will reach $3.18 billion in 2020. Big data allocations are picking up even though budget concerns have slowed the pace of procurements.

“Despite the steep learning curve associated with big data solutions, agency pilots, niche uses, and ongoing dialogue with industry is increasing awareness and understanding of big data that Deltek believes will translate into accelerated spending through the end of this decade,” Rossino said in the report.

Cybersecurity Spending a Constant Factor

Hovering over all federal IT operations, if not over all government activities, is the threat of cybersecurity breaches.

“Persistent and diverse threats, growing interconnectivity, and the criticality of technology and data to the mission of federal agencies make securing their information systems more crucial than ever,” Deltek said in a separate report on federal information security, also released in October.

Federal agency demand for “vendor-furnished information security products and services” will increase from $8.6 billion in fiscal 2015 to $11.0 billion in 2020, reflecting a compound annual growth rate of 5.2 percent, according to the forecast.

“Government-wide IT policies will continue to embed cybersecurity into the fabric of federal IT acquisitions and management. Security is widely impacting acquisition policy, contract types, and RFPs,” the report said.

Deltek noted several areas of focus for cybersecurity attention, including security operations service; governance, strategy and compliance; security tools and appliances; and identity and access management.

The reports from PSC, immixGroup and Deltek underscore the reality that agency discipline will be the order of the day in federal IT spending in the foreseeable future. However, valuable productivity gains associated with IT may ensure that funding will remain at stable levels even as overall federal spending comes under closer scrutiny.

“We typically don’t comment on projections outside the current budget year. However, it is worth noting that OMB has asked agencies for another 5 percent cut to their overall budgets in their fiscal 2017 submissions,” said Tomas O’Keefe, market intelligence consultant at immixGroup.

However, he told the E-Commerce Times, that directive “may or may not impact agency IT budgets.”