Gartner: Cloud, Consolidation, FFPs Shaping Public Sector Channel Opportunity

Public sector technology procurement is poised for dramatic change over the next decade, with cloud computing, consolidation and firm-fixed price contract vehicles among the most important trends for integrators to understand.

That was the word this week from Gartner, which in various analyst presentations at Everything Channel's IT ChannelVision Government event offered public sector integrators some predictions on what's to come. With government still the second largest vertical market (behind financial services) and accounting for some $125 billion in IT spending, opportunities abound for the smallest VARs and the largest global integrators alike.

Given all the changes in technology, the ability for the federal government to "change on a dime" is still very difficult, argued Rishi Sood, Gartner vice president and head of public sector programs, in a Sunday presentation to attendees.

"Contract scrutiny is as high as we've ever seen. The firm- fixed price model is the biggest change," he said. "And [these changes] have less to do with glitzy trends like Web 2.0 and more to do with getting projects implemented."

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Firm-fixed price contracts occur when the public sector entity pays the contractor a fixed amount that won't vary, and the burden of accountability is shifted more to the contractor to deliver on what's promised, thus shifting more accountability to the integrator.

The movement to firm-fixed price (FFP) contracts is a new reality, Sood emphasized.

Not only that, but FFP contracts are a reality that will be seen in as many as 30 percent of federal contracts within the next few years.

Sood added that the American Recovery and Reinvestment Act (ARRA) dollars -- earlier this year such a key focus for the technology community -- would still provide opportunities in directing IT spending and aligned IT spending and through ripple effect on projects that weren't directly funded by ARRA dollars.

But he admitted that "expectations were larger," and the net effect of stimulus, he said, would be short term IT acceleration, not broad opportunity.

"A pot of gold? Not in your wildest dreams," Sood said, explaining how only about $22 billion to $32 billion of the $787.2 billion stimulus had an effect on IT spending. About 60 percent of that, Sood added, goes to state and local government projects.

While Web 2.0 and social networking are important trends to observe, Sood said, they're little more than "nice polish on the market." Similarly, cloud computing is more a "when" than a "what." In other words, cloud is still more of a conceptual model for government infrastructure and actionable deployment opportunities for integrators are still emerging.

Sood said that cost optimization, not transformation, would drive public sector IT business in the short term. Business process outsourcing would continue to be a major trend, he added. Thanks to state- and local government-reared tech leaders like federal CIO Vivek Kundra expect interest in taking state-style IT policies and applying them at the federal level.

In addition, there would be continued opportunity for integrators in government health care, climate change and energy, social services, civil security, and, especially, non-Department of Defense supply chain safety in areas like Health and Human Services and agriculture. That last area, Sood said, has more "competitive whitespace" for integrators than almost any other in the federal government right now.

Sood said that IT spending at the federal level would continue to increase, with Gartner projecting $72.1 billion in 2009, $75.1 billion in 2010, $79.6 billion in 2011, and $81.1 billion in 2012. It remains to be seen, Sood said, whether the next half decade will see a contraction in that spending. Among individual departments, the most substantial growth will be in Homeland Security, Veterans' Administration, Department of State and Health and Human Services.

Integrators should focus on understanding the FFP contract model and opportunities around cloud computing in the short-term, Sood urged. Civil growth, cybersecurity, BPO and extended IT opportunities around services are all trends to keep an eye on.

Next: How Integrators Should Monetize And Sell Their Strengths

In a Monday session, Tiffani Bova, a Gartner vice president and channel researcher, predicted that the next 10 years would see cloud adoption as primarily a hybrid model: on-premise and off-premise.

"You need to be thinking about the skill sets you require to be successful in alternative delivery models," Bova said. "This is something that's going to be a significant change in your business. But this is also an area in our public sector system where some agencies are better than others at leveraging the cloud."

Bova named alternative delivery models, a focus on SMB, consolidation of channel companies, the first wave of green IT and the movement of integrators up the value chain as key business trends in the public sector channel. She urged integrators to look to their strengths and come up with new ways to deliver value-added services.

"It can't just be, 'I have this contract, I have this status,'" she said. "If you do something really well, and you've done it 50 times, think about how you can make that something you can package and resell. Think tactically in 2010 about where you should be putting your investments. What's on your Web site. What does my marketing audience see. Is my messaging the way it should be, and does it show I look at public sector trends specifically?"

Bova reiterated Sood's points that government contracts would continue to move from cost-plus to firm-fixed price models, and that procurement vehicles would continue to consolidate.

"That means less available space for prime contractors and more focus on partnering," she explained, but also that there would be increased oversight on contractor pricing and partnerships.

Bova urged integrators not to "boil the ocean" in how they approach government and public sector opportunities.

"You guys are being pulled in a lot of directions -- energy and climate change, tech compliance, civil security, cybersecurity. Each of these has varying layers of complexity. Don't try to do all of these simultaneously," she said. "Pick one, understand how it'll impact business and what types of resources you need and how to market yourself. Get the best. There is a very high unemployment rate, but there's still a drought in technical talent."

What concerned her most, Bova said, is that a "new normal" for the channel is emerging where lower standards are accepted and there's less risk tasking among solution providers. That's thanks to competitive pressures, customer pressures, economic pressures and business pressures.

Remember your audience, Bova urged.

"When do I stop selling a tech conversation and start to have a business conversation," she asked. "Innovation doesn't always mean an expense."

Heading in 2010, she said that Gartner predicts cloud computing will be among the most important growth areas in public sector channel opportunity, followed by advanced analytics, client computing, green IT and the data center. A year ago, Gartner's top areas were virtualization, business intelligence, cloud computing, green IT and unified communications.

Among the "new normal" for solution providers are that virtualization fundamentally changes data centers, provisioning choices have expanded, use of cloud-based applications has increased, device and operating system options matter less to customers, major Microsoft upgrade decisions loom around Windows 7, and non-enterprise owned devices are becoming safer and more desirable.

Developing a services practice, Bova said, is still the fastest way to grow a solution provider practice.

"How do you build a business that's sustainable? Recurring revenue," she explained. "If you entered 2009 with no recurring revenue streams, you had a hard year."

According to a Gartner survey of solution providers, 40 percent of partners leverage vendor cloud services, 51 percent have invested in their own network operations centers (NOC), and 56 percent have developed intellectual property that gives them a competitive advantage.

"Fifty eight percent of those surveyed are still willing to resell hardware with no services attached. That's surprising to me," Bova said. "To get into the habit of selling products with no value services? I didn't think it was going to be that high, let me put it to you that way."

Bova urged VARs to prepare to become more consultative then ever, develop the right skill sets that focus on domain expertise, and do away altogether with one-size-fits-all approaches.

"Don't give it away for free," Bova said. "Figure out how you can monetize the consulting aspect of your business. How you can monetize the compliance aspect of your business. Look at all those hot buttons."