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Government IT Review - Cynthia L. Webb
Cloudy IT Spending Forecasts


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By Cynthia L. Webb Staff Writer
Thursday, July 15, 2004; 2:37 PM

Will government contractors have to go on a diet soon? A decade of federal IT spending growth, fueled most recently by ramped-up homeland security and defense efforts, may be tapering off, according to a study released Tuesday.

Market research firm Datamonitor predicts that the compound annual growth rate for federal IT spending will fall to 4 percent over the next five years, down from an average growth rate of 5 percent to 10 percent during the past decade.

"The impact of the decrease, however, is not expected to be felt immediately by IT vendors, since the government is on target to spend more than $46 billion during the current fiscal year, which ends in September," TechWeb reported. "Nevertheless, the slowdown is nearly a certainty given the government's changing approach in buying information technology and communications equipment. In the past, government agencies or departments within an agency would buy technology separately, leading to duplication of software and hardware, Jocelyn Young, analyst for Datamonitor said."

Datamonitor analyzed IT spending trends for federal agencies from the current fiscal year through 2009, Federal Computer Week noted. But even with the drop, there's some good news for contractors: "Despite battling with a number of recent challenges, vendors that sell to the U.S. federal government can still take advantage of much leaner sweet spots in this contracting market," Datamonitor said in a statement. The research firm said the government also is now more accountable about how it spends money and how it views buying technology products and services.

Among the sweet spots? Security-related work and customer-relation management, enterprise resource planning and human resource projects, FCW said. "Datamonitor officials expect those fields to account for about $7 billion of nearly $57 billion in IT spending in fiscal 2009. Software is growing faster than the overall IT market, while communications and hardware are showing slower growth, Datamonitor found."

More from the TechWeb article: "Beyond the general slowdown, IT vendors should expect greater scrutiny from federal officials. The government is expected to be more watchful in light of the role of contractors in the Iraqi prison abuse scandal and debate over whether major government contracts should be doled out to contractors not based in the U.S.."

Another Study's Similar Conclusions

Datamonitor's findings are somewhat similar to a forecast released last month by Reston, Va.-based Input. The Input study concluded that federal spending on information technology would increase 2 percent in fiscal year 2005 over 2004 levels. "This relatively modest increase compares to a 10 percent annual increase in 2004, a 50 percent annual increase in 2003, and a 100 percent increase in 2002, compared to each prior year," Input said. "According to the report, failing agency compliance to a mandate issued by the U.S. Office of Management and Budget (OMB) to fix IT security weaknesses is restricting the availability of funding for new security initiatives. For FY 2003, only 73 percent of federal IT systems were reported as having up-to-date security plans."

Chris Campbell, a senior analyst at Input, said the longer-term forecast looks better. "The low spending level increases we're seeing today will be short-lived," Campbell said in a statement. "By 2006, we expect IT security spending to return to a growth curve in-line with the overall federal IT budget." The five-year forecast? Federal government IT spending will climb at a compound annual growth rate of 5 percent from $5.6 billion this year to about $7 billion in 2009.

Campbell spoke to Washington Technology last month about the spending bind that agencies are in as they work to modernize their IT systems: "'It's a Catch-22,' he said. 'They didn't bring these systems up to specification to begin with, so now they are being required use existing funds to do that.' In order to use existing budget monies to fix security problems, the agencies have to get approval to re-appropriate funds from other projects, which in turn delays the process of getting the fixes made, Campbell said."

CIO Magazine shed light on how federal IT security spending will get divvied up: Some $3.4 billion of the $5.6 billion slated for this category in 2004 "will come as professional services (defined by INPUT as software development, design and consulting, education and training, and the professional services associated with systems integration). Another $560 million will be spent on software and another $1.7 billion will pay for equipment."

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