Challenges forecast in federal IT

Without drivers such as the Year 2000 rollover and the implementation of the Internet fueling information technology purchases, the federal market is likely to pose a challenge to government contractors, according to Federal Sources Inc. projections.

The fiscal 2002 budget request includes only a 1 percent growth in federal IT spending vs. the 7 percent growth in fiscal 2001.

But contractors have opportunities to help agencies use their IT investments more efficiently and effectively, said James Kane, president and chief executive officer of Federal Sources. Kane outlined the fiscal 2002 IT budget and the outlook for federal IT contractors Thursday at the Federal Outlook 2002 conference in McLean, Va.

"This is going to be a tough year going forward in 2002 from the standpoint of the budget," Kane said. "To be successful in this marketplace, one really needs to bring a much broader perspective."

However, federal IT spending is likely to be higher than the $44.5 billion requested if the trend follows the pattern of past years, said Daniel Chenok, branch chief for information policy and technology in the Office of Management and Budget's Office of Information and Regulatory Affairs.

"Those numbers have risen during the year," he said, as the government understands more about where IT spending is taking place and as agencies re-allocate funds.

The most significant opportunities for growth are in outsourcing, and large global technology services integrators and professional services firms are best positioned to garner that work, Kane said.

But the middle-tier firms whose revenues are between $100 million and $1 billion are likely to have a tough time unless they partner with other firms or grow through acquisitions, he said.

Although speakers focused on the risks to middle-tier integrators, firms such as Anteon Corp. and CACI International Inc., have fared well even in poor economic times.

"Mid-tier integrators seem to be doing pretty well," said William Loomis, an analyst at Legg Mason Wood Walker Inc. "The outlook of the market is better than it's ever been."

In addition, there are no new, large, sweeping legislative reforms that would increase IT spending as there have been in the past with the Federal Acquisition Streamlining Act and the Clinger-Cohen Act, Kane said.

"Policy is going to be a much stronger market driver than legislation this year," Kane said. But there is possible legislation that could severely limit outsourcing, such as the Truth, Responsibility and Accountability in Congress (TRAC) Act.

Even though TRAC has 125 co-sponsors, Rep. Tom Davis (R-Va.), chairman of the House Government Reform Committee's Technology and Procurement Policy Subcommittee, said the bill is unlikely to pass.

In fact, the Bush administration is in favor of more outsourcing than the government has typically done, and Davis said he plans to ask agencies to comment on draft legislation that would promote share-in-savings contracts.

Kane's advice to government contractors for the upcoming fiscal year: "Buckle up. Instead of champagne, try the Dramamine."