Increased spending on both information technology services and the federal IT workforce went hand-in-hand for years. But as budget pressures increase, growing the IT workforce initially seems to be taking priority over directing money to IT contracts. Is this a long-term shift?
Deltek’s five-year forecast predicts a slight increase in immediate spending on IT services contracts — from $39.5 billion in fiscal 2011 to a peak of $40.8 billion in 2013 — with a subsequent contraction to $36.5 billion in fiscal 2016.
The efforts that will drive that early peak — data center consolidation, increased cybersecurity spending and a move toward cloud computing — are likely to mean fewer contract dollars in the longer term. Mature cloud computing technologies and successful data center consolidation efforts will result in IT savings, ending the days of double-digit growth in this market, at least for now.
To make things more challenging for contractors, competition for IT service dollars is growing more intense. In the first six months of 2011, for instance, 17,000 new companies registered as IT services providers in the federal government’s central contractor registry, marking a 12 percent increase.
But in a surprising turn, the federal IT workforce could be an even more daunting competitor. In past years, the government’s efforts to bolster its workforce — its ranks grew 14.6 percent from 2006 to 2010 — did not limit contract spending, which grew 35 percent in the same time period.
However, increasing budgetary pressure means those two trends can’t continue in tandem and, thus far, federal hiring appears to be taking precedence. From 2009 to 2010, the federal IT workforce grew by 8 percent, while spending on IT services contracts grew by just 4 percent.
The data suggests a goal of increased insourcing of IT work, which is unusual given that the federal government historically has struggled to hire and retain talented IT workers.
The government has made overcoming this limitation a focus, but it is unclear whether these efforts will be sustained under ever-growing budget pressures.
In fact, both Congress and the administration have made shrinking the overall federal workforce a priority, and have also pledged to reduce the number of IT services contracts. If both reduction efforts succeed, then the IT needs that drove that contract growth in the first place may exceed what the federal IT workforce can handle alone.
John Slye is senior principal research analyst at Herndon-based Deltek, which conducts research on the government contracting market.