Federal IT spending to increase modestly thanks to cloud computing

Federal spending on information technology will increase steadily during the next five years, driven by the Obama administration's emphasis on cloud computing, according to a market research firm.

INPUT, which follows the federal IT market, predicted spending will grow at a compound annual growth rate of 3.3 percent during the next five years, driven by increased demand for cloud computing, technology services that are stored and maintained by third-party providers. The firm projects IT spending to reach $100 billion in fiscal 2014 from a base of $85 billion in fiscal 2009.

Cloud services account for a small percentage of federal spending, but senior administration officials have been pushing agencies to adopt the practice. As a result, INPUT projects spending on cloud computing to increase at a compound annual rate of 27 percent during the next five years.

"This is coming from the administration and momentum is building behind the standards," said Deniece Peterson, principal analyst at INPUT during a webinar on Thursday.

Some federal IT managers are reluctant to embrace cloud computing because they fear it is not secure. But she said advancements in cybersecurity will help agencies become more comfortable with the idea of moving applications and services to an outside vendor to manage.

Peterson called Obama's team a "spend to save administration," noting that they are spending a lot on IT infrastructure with the expectation of saving money in the long run.

"It's good for technology that it's such a centerpiece to the core priorities of this administration," she said. "That's why we're still seeing growth during this time."

One goal the administration is unlikely to reach is its plan to hire 600,000 new federal employees during Obama's first term and return the contractor workforce to its pre-2001 levels. But Peterson said despite recent reductions, contractors still outnumber federal workers by nearly 4 to 1, and even if the government hires 200,000 new workers a year for the next three years, the new hires would at best do little more than replace retiring federal employees.

"There's still a significant gap that needs to be filled by contractors, which really makes this plan unlikely as it stands now," she said. "There will still be an increase in the federal workforce, but it won't be as dramatic as companies are worried about."

Peterson also said the Obama administration's recent guidance directing agencies to improve the acquisition process and reduce reliance on cost-plus contracts is unlikely to achieve the results the administration wants. Some contracts would likely be transitioned from cost-plus to fixed-price, resulting in lost revenue for companies, but agencies mostly would be forced to spend more time justifying why they chose the contract type they did, she said.

"Overall, there will be much more scrutiny on cost control and contracts," Peterson said. "We think the stimulus transparency guidelines will find a permanent home in this industry. We know the Government Accountability Office and inspector generals have more access on stimulus spending, so we think we will see some of that stay around."