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Where Did The Money Go?

From tight pockets in October to the spending frenzy in August, another federal fiscal year has come and gone. Here's what we learned.

Fiscal year 2007 wasn't just like any other year for federal government. A continuing resolution stifled spending, political scandal increased contracting oversight, and a controversial war ate up discretionary funds. According to Reston, Va.-based research firm Input, the enacted federal IT budget took a dip of more than $1 billion; not a substantial amount, but still discouraging. But the news isn't all bad.

While confirmed numbers won't likely be available for at least another couple of months, Input estimates total federal IT spending in 2007 to be $77.4 billion. And, despite budget uncertainty, agencies still went on the standard spending frenzy during the fourth quarter. Input expects those months of July through September to account for 34 percent of annual spending, or $22 billion. As is typical, second-quarter spending by federal agencies will likely be more conservative.

Still, with dollars spent being substantial, a fair share of opportunities filtered to the channel. And the more strategic solution providers knew where to find them.

"This year is not a representation of what's happening in the [federal IT] industry," said Alan Bechara, president of Chantilly, Va.-based PC Mall Gov. "The continuing resolution did impact business and caused opportunities to be more compressed. Specific contracts like First Source took time to become active; others were audited and recompeted. Agencies are trying to figure out the mandates, what contracts are appropriate and how to use them. But I don't think it's a major decrease in IT spending as much as a change in where the money went."

Contracts And Mandates Drive Purchasing
Budget challenges are nothing new for the federal government. Neither are delays in the appropriations bills that ultimately determine what agencies have to spend. But, in 2007, bipartisan politics complicated matters further, as the Democrat-controlled Congress passed a year-long joint resolution for most agencies, free of earmarks that specify funds for a particular purpose. That led to a closer review of proposed initiatives and more conservative spending by agencies, as many saved the more ambitious initiatives for fiscal year 2008.

"There's budget fatigue," said Stan Soloway, president of the Professional Services Council. "The cost of the war steals a lot out of the budget, and appropriations bring uncertainty we had hoped to avoid. [Industry] was clearly feeling the brunt of the continuing resolution."

The two agencies that managed to have their appropriations bills passed—the Department of Defense (DoD) at $448 billion and the Department of Homeland Security at $34.8 billion—fared best. Other civil agencies were left wondering how much they had to play with, and the channel companies that target them were were just as uncertain as to where they would find their next win. According to Input, the Office of the Secretary of Defense (OSD) ranks first in terms of dollars that went to IT in 2007, with an estimated $7 billion spent. Ranked second was the Army, with $6.2 billion in spending, followed by the Air Force, with $5.8 billion.

"On the government side, it was not a good year for civilian agencies," said Shawn McCarthy, director of research for government vendor programs with Government Insights, an IDC company. "Except for the Department of Homeland Security, all other agencies saw their IT spending—and most other spending—frozen at 2006 levels. DoD fared better because it saw special bills, which increased funding, however, weapons and surveillance funneled off much of these extra dollars. New PCs and software did not trickle down to many DoD desks," McCarthy said.

Federal IT dollars filtered predominantly to the large government-wide acquisition contracts (GWACs). While one-off purchases are typically frequent enough to sustain business for smaller VARs, agencies are now more often compelled to leverage the volume pricing offered through the large procurement vehicles. Solution providers listed as prime or subcontractors dominate the market.

"So many agencies are using their own IDIQ [indefinite delivery-indefinite quantity] contracts, which are essentially licenses to hunt for the 30 companies that won," said John Slye, manager of federal industry analysis at Input. "Those companies and their teams are all that ever see the task orders."

Irvine, Calif.-based Govplace was lucky enough to be among those listed on a number of major contracts in 2007, including the Department of Homeland Security's First Source, NASA's Solutions for Enterprise-Wide Procurement (SEWP) and the Army's IT Enterprise Solutions program (ITES). Like many, the company also saw much of its revenue materialize in the last quarter of the year.

"Federal for us [was] very back-loaded to September," said Sean Burke, president of Govplace. The solution provider traditionally focused on state government for the majority of its business, but expanded its federal efforts earlier this year. "It's the hurry-up-and-wait philosophy, which definitely puts a strain on our resources. I think this is a good year for us because of the contracts we hold, however the off-contract general business is down."

A close look at the current, most lucrative, contracts, combined with the various mandates passed down by the Office of Management and Budget (OMB), provides a hint at the areas of technology winning dollars. GSA's Networx, for example, provides federal agencies with telecommunications and networking services, which commanded $2 billion of 2007 spending, according to Input. In particular, expansion in wireless communications for military, emergency and law-enforcement initiatives drove spending. The aforementioned First Source, SEWP and ITES contracts all primarily focus on commodity goods—PCs, servers, monitors, storage, and so on—that agencies purchase as part of consolidation and modernization initiatives, or to supplement their existing infrastructure. According to Input, federal agencies spent an estimated $3.4 billion on PCs, $6.3 billion on servers, $1.2 billion on storage and $3.3 billion on application software products. The latter reflects a growing demand for data-management solutions, which will contribute to $6.8 billion in spending on software by 2012.

"Growing exponentially is a need for access to data, analysis of data, and to represent data in new ways," said Mike Bradshaw, head of Google's Federal Enterprise. Google recently developed an application for the Environmental Protection Agency to monitor potential toxic sites with an active 3-D map; as toxic levels for a particular location go up, so does its elevation on the map. A number of agencies also use the vendor's geospatial software, Google Earth and Google Maps, to monitor satellite imagery that supports their fundamental missions, creating a customized globe that can be maintained behind the firewall.

"Make my data as easily available as information on the Web, and make sure it's secure: That's what federal customers are looking for," Bradshaw said.

Certainly, security remains a primary focus for agencies. Total spending on security is expected to total $5.9 billion, thanks partially to the Information Systems Security (ISS) Line of Business initiative, which requires agencies to implement a set of risk-based, cost-effective controls and measures that protect information contained in federal systems, and also to increase awareness following the string of security breaches. More recently, OMB handed down a mandate requiring a standardized, governmentwide security configuration for all deployments of the Microsoft Windows operating system.

"Everyone in government is still focused on storage and security," Bechara said. "More of the complex virtualization and consolidation efforts went on, which is not unique to this year. At the same time, agencies are finding their systems to be way too out of date; some have not done a refresh since the Y2K."

Services Dominate
The top priorities for federal agencies in 2007 continued to be improved efficiency and reduced costs, which led to significant spending on professional services. Across segments, professional services were the single largest market in federal government, accounting for one-quarter of total services spending, Soloway said. More specifically, the need for professional IT services resulted in an estimated $9.7 billion in federal spending, according to Input forecasts, as systems integrators helped federal customers maximize their data and infrastructures.

Also used as a means of cutting costs and improving processes, outsourcing resulted in an estimated $13.8 billion in spending, according to Input. That market is expected to grow at a faster rate than any, as OMB directives push agencies to transition certain business functions to service providers, such as desktop and application management and even security.

"Agencies need a way to buy less and share more," Bradshaw said. As part of its expansion into the federal market, Google and its partner systems integrators host a range of applications for agencies, from e-mail to collaborative spreadsheet and word processing solutions that allow people to contribute to one document in realtime via the Internet—similar in concept to white-board applications. "This group of customers is looking for an alternative to the rip-and-replace strategy that still meets the requirements for core functionality with lower operational expenses," he added. "This puts the operational burden on us and our partners."

Looking Ahead
With the wars in Iraq and Afghanistan still eating up funds—regardless of whether a withdrawal happens—and continuing budget delays, fiscal year 2008 could mirror 2007 in terms of opportunities. The House has completed most appropriations bills, but with average budget increases of 8 to 10 percent proposed, President Bush is intending to veto most.

So, with the same challenges looming, where should solution providers focus their resources? According to Input, a number of factors will influence budget growth during the next few years. The bad news is that spending will be conservative as Uncle Sam tries to balance the budget by 2012. At the same time, demands for greater transparency and accountability in federal contracting, combined with reformed procurement regulations, including implementation of the Services Acquisition Reform Act and the Office of Federal Procurement Policy directive to increase competition could—and probably will—slow contract awards. The good news is that immigration reform and the implications for homeland and border security could lead impacted agencies to seek IT solutions to support efforts, as could the growing demand for information sharing and data protection.

For the channel, the best strategy is to plan business development activities around the rather warped buying schedule. Plan to use the first quarter to network and tap into existing relationships, marketing solutions that solve specific pain points faced by agencies. Expect that sales won't roll in until the second or even the fourth quarter. As for what solutions to bring to the table, learn from the year past: Improve how government does business and lower costs. That translates to services. But in addition to the professional services that commanded a large percentage of funding in 2007, consulting and project management capabilities will grow in demand, Input's Slye said, as Congress looks harder at procurements. The systems integrator model has taken a tongue-lashing in recent years for projects that went over budget or past schedule or didn't meet the requirements of the agency. But with strained internal resources and a lack of IT skills, government might have no other choice but to leave more in the hands of the channel.

"There's been a fundamental shift with Congress to the idea that government needs to take an inherently central role in overall program management of large initiatives," Slye said. "That's fine, but government doesn't have the people to do it nor the expertise." Therefore, he added, Congress must determine whether to do the work at all or, say 'OK, we have to bite our tongue and pass it off, and just include more oversight.'"

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