'04 IT Spending Breaks Trend

While a slim budget increase in the request is nothing new, what I do find surprising this year is the consistency of the fiscal year 2004 figure. The prior year's budget request for 2004 was $59.4 billion, so the current fiscal year 2004 estimate of $59.1 billion in spending is actually a decrease of roughly $300 million from the request.

This decrease runs counter to the trend for the past eight years, during which actual IT spending by the federal government for any given year has exceeded the corresponding budget request by an average of 13 percent each year. That means that for the past eight years, federal agencies have spent, on average, 13 percent more for IT products and services than what the president has initially asked for, except for fiscal year 2004.

What does this change suggest? Well, first and foremost, it suggests that the U.S. government is moving out of the crisis-mode spending that has characterized the past five years. We saw a tremendous increase in IT spending in 1999 responding to the so-called Y2K bug. The government responded to that emergency primarily by replacing equipment and software that might not be Y2K-compliant with new products.

Almost on the heels of the Y2K crisis, the Sept. 11, 2001, terrorist attacks and the subsequent homeland-security crisis happened, which has driven IT spending for the past three years.

Today, the Department of Homeland Security has been established and is stabilizing itself in terms of organization and leadership. An enterprise architecture--a plan for the development and operation of IT systems by the department--has been outlined and is being implemented. Homeland security is no longer perceived to be the product of a crisis. It has been established as a routine mission of the federal government, and the current budget request reflects that.

The budget numbers for fiscal year 2004 suggest that the U.S. Office of Management and Budget (OMB) is finally realizing its goal of implementing a more disciplined and thoughtful IT-budgeting process. Mark Forman, who until the middle of last year was the administrator for E-Government and IT at OMB, reportedly said, "This also is probably the first year where there is decent integration between IT spending and the results of OMB's Performance Assessment Results Tool analyses."

This means that agencies are, perhaps for the first time ever, being forced to justify IT spending plans with defined performance metrics. It also means that government contractors can expect federal-agency contracts to become increasingly results-oriented in the years ahead.

Although "performance-based contracting" has been a goal for federal agencies for several years now, adoption of this procurement methodology has been sporadic at best. With a results-oriented budget process, however, agencies can carry the same requirements all the way from the request for funding through to the actual scope of work in the solicitation document. This type of contracting gives vendors much more flexibility in the types of solutions they build for federal agencies, but at the same time, it has the potential to open up the competitive field to companies that might have been excluded by more rigid technical requirements.

All in all, the fiscal year 2005 budget request means that companies selling to the government are going to have to be much smarter about how they market to federal agencies. With tighter restrictions on funding, agencies will be much more selective about the types of IT projects they pursue, and about the companies they choose to do the work. This will increase competition in an already competitive marketplace.

Payton Smith ([email protected]) is the manager of public-sector IT market analysis at Input.