Federal contract spending to drop next year, but IT business should rise

The federal government will spend $36 billion less on contracting in fiscal 2011 compared with fiscal 2010, but the information technology market will continue to grow, according to a report released on Wednesday.

President Obama's proposed fiscal 2011 budget includes $720 billion worth of contract work that agencies will hire companies to provide -- a nearly 5 percent decrease from fiscal 2010, according to FedSources, a federal market consulting firm in McLean, Va. Spending on professional services, which includes IT consulting, is estimated to fall more than 15 percent to $109.8 billion, the company concluded.

"The government is going to be spending substantially less money on contract services for most companies, so that's a pretty big take-away," said Ray Bjorklund, senior vice president and chief knowledge officer at FedSources and the report's author. "A lot of near-term effect is going to be more on companies that deliver services to government -- IT, management services, back-office operations and agents in the field, like Border Patrol and [Transportation Security Administration] agents."

The drop in contract spending likely is due to rising energy and health care costs, a shift in the administration's focus toward national security and economic stimulus spending, and Obama's discretionary spending freeze, the report noted. In addition, agencies are bringing more work in-house rather than hiring contractors, a policy the administration outlined in a proposed memo concerning inherently governmental functions.

The federal IT market, however, will grow -- albeit slowly -- through fiscal 2014, according to the report. The nearly $78 billion in fiscal 2011 technology spending represents a 2.9 percent increase from fiscal 2010 and includes 32 new programs. Contractors could find a large amount of IT work in TRICARE Management Activity's $302 billion request to develop electronic health records and the Agriculture Department's $83 million initiative to consolidate its technology systems.

IT vendors also can assist agencies in building tools to meet their performance management goals, developing everything from dashboards to information collection systems to computing and analysis programs, Bjorklund said.

"It's hard to write goals in the government, but when you write those kinds of goals or write them in ways that are more like industry they are probably more measurable," he said. "Industry knows how to pull together tools, whether it's software systems or pencil-and-paper properties."

When it comes to the decrease in overall spending, Bjorklund said some companies are in denial, but others are considering cutting costs and asking for help to define future strategies.

"To really reflect on a reduction in spending is kind of scary," he said. "[We recommend] companies think about where you are and recognize where this administration is taking you. There are subtle shifts going on, and you have to look for where the shifts are occurring or you'll be left standing out in the cold without a contract at all."