Government Shutdown: U.S. Tech Market Consequences

The insanity of the U.S government shutdown has furthered implications in various economic sectors, and as the economy faces catastrophic consequences, the tech industry is estimated to see decline and damage for fourth quarter 2013 and first quarter 2014.

Economists have quantified that each week the federal government shutdown continues, 0.1 to 0.2 percentage points will be taken away from fourth quarter real GDP growth, said Andrew Bartel, senior analyst at Cambridge, Mass.-based Forrester Research.

"The emerging consensus is that if it's a four-week shutdown, the expected 2.5 percent reduces to 2 percent," said Bartel. "It looks small, but a percentage of slowdown could translate to hundreds, thousands of jobs that don't occur and a million dollars of tech buying that will not occur."

[Related: Public Sector VARs Brace For Government Shutdown Impact ]

If the government adopts House Speaker John Boehner's six-week extension proposal, there will be a 5 percent drop in the fourth quarter, he said. With the uncertainty companies face, those dealing with the federal government will certainly pull back, Bartel said.

"Companies that are dealing with the federal government, directly or indirectly, are going to be experiencing uncertainty with their revenues, and it will cause them to be cautious when it comes to tech purchases," said Bartel. "We are expecting $3 million in revenue from federal contracts that's on hold. That is $3 million of revenue we're not going to get. We better pull back on spending on other investments because that revenue is not coming in."

The tech industry faces cutbacks and losses in business investments and consumer spending, said Bartel.

"Federal government represents about 8 percent of U.S. tech spending. Right now we can assume that there is none of that federal spending occurring in October," said Bartel. "If the shutdown does not end and goes into November, there is a real risk that will be lost. It's hard to say how much, but 2 percentage points, of the 8 percentage federal government represents, will be lost."

Greg Douglas, vice president of business development at Eatontown, N.J.-based Yorktel, said his company does less than 50 percent of work in the public sector and is currently waiting to resume work.

"We are affected like the rest of the government, where our employees are waiting to resume work," said Douglas. "We are just repurposing our workers wherever possible in the public sector and waiting for the government to resolve as a whole."

NEXT: Shutdown Affects Small Federal Government IT Service Provider

However, federal government IT service provider Frontier Technologies is currently being "impacted in a big way," said Jayshree Moorthy, CEO of the Wilmington, Del.-based company.

"So many of our proposals, contracts and everything that should have come out by now are on a big hold and we don't know what's going to happen," said Moorthy. "As a small business, we have lenders that work with us, so they look at us on an annual basis. So, if we cannot record revenues this year, it wont look good for us next year."

If the government isn't paying Frontier Technologies, the company will not be able to pay its suppliers and distributors, said Moorthy.

"It's going to be down from the government all the way down to the suppliers," said Moorthy. "The biggest fact is that everybody somehow can make it, but us small businesses, we get scrutinized by everybody, not only government but lenders and creditors, so it makes it very difficult."

According to Moorthy the entire tech industry might not have cause for major concern as a whole; however, the impact of the shutdown brings concern over time.

"From my standpoint, if this continues, it will be disastrous and impact us all," said Moorthy. "We don't want to look bad on paper; our ratings go down and we are always being judged. So if we don't make our payments, it is going to be tough on our credit, so we are always trying to protect that."

Although the tech sector faces declines in the fourth quarter and there will be less IT spending, the industry will stand strong, said Moorthy.

"Regardless of what you say and what you do, the federal government's IT tech market is still huge and won't really go away," said Moorthy. "It may have come down from $150 billion to $100 billion, but there is a lot of support and voice for small businesses. If we want to stay competitive as a country, we need to be on the leading side of technology."

NEXT: Shutdowns Bound To Occur And VARs Must Innovate Businesses To Keep Up

Phillip Walker, CEO of El Segundo, Calif.-based Network Solutions Provider USA, believes the shutdown and sequestration combination might possibly lead to consolidation for federal solution providers.

"The shutdown has caused a lot of paranoia and uncertainty in the market," said Walker. "You have to make a decision one way or another. There are solution providers who only do government and have very little private clients; they'll need to venture out. If sequestration takes away 50 percent, you might need to scale back."

However, Walker said he remains wary and also hopes that the loss estimates Forrester predicted help keep solution providers from going "down that dark alley."

"I think that it's a sneaky number. What it's going to do is still unknown," said Walker. "Something else could balance it out, and right now that is what we have to deal with. It's not for certain."

For Frontier Technologies, 65 percent of its revenue now comes from the federal government, while 30 percent of revenue is generated from the private sector, said Frontier Technologies' Moorthy.

"We were a really big federal government provider; our mix was 90 percent federal work to 10 percent private sector at one time," said Moorthy. "Over the years and after 2008, we made a conscience decision to focus on the private sector."

Although government shutdowns happen and it's a part of business, VARs need to innovate in their businesses, he said.

"Many businesses may try to go the other way, but the bottom-line is the key to sustaining value and rebuilding your business," said Moorthy. "If you can do that, you just have to make things happen; survive now and wait for things to get better, which it will."

PUBLISHED OCT. 16, 2013