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Outlook 2005

Technology Firms Expect Growth In Government Specialty Work

By Ellen McCarthy
Washington Post Staff Writer
Monday, January 3, 2005; Page E01

Six years ago two government contracting veterans, former CACI International Inc. executives, founded SI International Inc. in Reston. Although the region was packed with companies building technology systems for the government, they thought there was room for another. SI International now has 2,000 employees and is hiring 200 to 300 more.

The fact that federal contract spending isn't expected to grow as fast as it has in recent years doesn't bother SI's executives. Although funding may drop off or become flat in some areas, they expect government demand to remain strong for their specialty -- designing, building and securing communication networks.

Spending on federal technology programs such as the U.S. Visit system for securing the borders, inspected in Atlanta last year by Homeland Security Secretary Tom Ridge, is expected to increase this year. (Ric Feld -- AP)

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"The guys who are not getting the budget attention are the guys who build big platforms, like atomic submarines," said Thomas E. Dunn, SI International's chief financial officer. "We're very bullish about hiring for the next 12 months."

Federal spending on contractors is expected to grow more quickly than it has historically, though not quite at the booming pace of the three years after Sept. 11, 2001. And the growth will likely be uneven, with contractors that specialize in technology services growing the most in 2005, according to experts.

In the Washington region, government spending for companies this year is expected to increase 9.5 percent, bringing the total to $52 billion, according to estimates by Stephen S. Fuller, a George Mason University professor.

The increase that Fuller projects for this year exceeds the 7 percent average annual growth rate that local contractors experienced from 1995 to 2000. But it's down markedly from increases of 14.9 percent in 2004 and 16.9 percent in 2003, he said.

Analysts predict that the kinds of programs most likely to slow down include big defense systems, equipment and vehicles. For example, the Pentagon is reportedly considering cuts in spending for big-ticket programs such as the F/A-22 Raptor, the fighter jet being built by Lockheed Martin Corp. of Bethesda.

Major initiatives such as the Homeland Security Department's U.S. Visit program, which employs technology to monitor borders, are expected to continue to get priority. Spending on programs that improve battlefield communications is also expected to increase.

The information technology budget request from the Office of Management and Budget for fiscal 2005 totaled $59.9 billion, compared with $59.3 billion the previous year, according to Input Inc., a Reston market-research firm. Chris Campbell, a senior analyst with Input, said much of that money will go to information security services, data mining, online learning and financial management systems.

Joseph A. Vafi, a government contracting analyst with Jeffries & Co., also expects funding to grow significantly for many communication and technology initiatives. For example, the budget request for the Army's Information Technology Agency, which contracts for the Pentagon's network security, telecommunications and data management centers, was $223.92 million for fiscal 2005, up $29.5 million from the previous year.

Similarly, the Air Force Combat Information Transport System, a project to use commercial products and systems to update the Air Force's communication network with high-speed data and telecom systems, is expected to get a $169.2 million increase, pushing the 2005 total to $408.3 million. Portions of that contract, which is part of a $9 billion program to modernize Air Force communication systems, already have been awarded to General Dynamics Corp. and Northrop Grumman Corp.

The Homeland Security Department is requesting $181. 6 million to fund modernization of U.S. Citizenship and Immigration Services technology, up from $176.8 million in fiscal 2004. The 2005 budget request for the U.S. Visit program was $340 million. The program could eventually cost $10 billion over 10 years. In June, Accenture LLP was awarded a contract to manage the program.

Campbell said reorganization of the intelligence community also could increase technology spending.

But some information technology spending could drop off, said Ray Bjorklund, senior vice president and chief knowledge officer at Federal Sources Inc., a McLean market research firm. He said companies that have already updated their technology will spend less to maintain their systems. For example, the Transportation Department and the Treasury Department are expected spend 4 percent less on technology, according to Federal Sources.

Beyond information technology, demand is likely to increase for government contractors that can take over entire business functions such as human resources management, Bjorklund said. "A lot of government agencies are saying 'I need to stick to my core mission, and everything else I can outsource.' "

Bjorklund also said he expects more mergers and acquisitions in the government contracting sector. "The basic rule of thumb is that Wall Street is looking for double-digit growth. It's hard to achieve beyond single-digit unless you do acquisitions," he said. Most of the buying, he predicted, will be not by the largest contractors but from medium-size, publicly traded companies acquiring smaller firms.

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