The Sequester and IT Spending: Slow Growth, Not Cuts

By TechZone360 Special Guest
Tim Larkins, Consultant with immixGroup's Market Intelligence Organization
May 31, 2013

What’s the outlook for federal spending in the remainder of FY13?

To answer that, we need to take a closer look at sequestration and what it actually means. Remember that the actual "sequester" is really only impacting FY13 spend, and even then, the impact is minimal.

Here’s an easy way to think about it. Imagine that a year ago you had $10,000 in your checking account and I told you that in 12 months, I was going to take nine percent of whatever was left in that account. What would be the first thing you would do? Chances are you’d move your money to another account or spend it all, right? That way when I came back to you a year later, there would only be $100 left for me to draw from, so I could only take about $9. 

That's essentially what happened with the Department of Defense (DOD) this year – it spent or moved around money so they wouldn't feel much of a hit. Ultimately, the impact was minimal. 

Agency heads and politicians have been busy touting the negative long term effects of all of cuts, but what people typically fail to realize is that the sequester slows growth but it does not cut spending – agency spending year over year will continue to grow. Spending without sequestration over the next 10 years would be around $46 trillion, whereas spending after sequestration will still be $44.8 trillion (in the grand scheme of things, over 10 years, not much of a difference).

Stability and growth have to be considered on an agency-by-agency basis, because each agency has a different mission, and different priorities. Some agencies will start to ramp up purchases in July, August, and September as they begin burning through the money they were holding back in preparation for sequestration.

 Will sequestration affect IT purchases through the end of the year? Not likely. It’s true thattechnologies related to weapons systems and business systems may take a hit, but technology as a whole is unlikely to feel as big a pinch as other areas like research, development, test and evaluation (RDT&E). The federal government spent some $80 billion on technology in FY12, and requested $82 billion for technology in FY14. To justify such a request, the spending levels in FY13 will need to be commensurate. 

Military intelligence is one specific area that will maintain stability or growth. Intelligence, surveillance and reconnaissance (ISR) operations in Iraq and Afghanistan run by the service branches of DOD will be supported through the reprogramming of money at the end of this year. Additionally, we'll see some reprogrammed money benefit the National Security Agency (NSA) and the National Geospatial Intelligence Agency (NGA). I have no doubt that HHS and DHS will release more funds over the next few months as well. Perhaps the government's FY14 Q4 won't be as large as in years past, but the industry can certainly expect to see the usual year-end splurge.  

One area in particular to keep an eye on is data management – especially in the area of health services. For example, The Armed Forces Health Longitudinal Technology Application (AHLTA) is the DOD’s electronic health record system. As it is modernized, we'll start to see an increased need for records management. 

That push into records management is sure to cut across military and civilian agencies. Both civilian and DOD agencies have enormous amounts of information (health information, personal information, satellite information, and more) that they need to collect, store, sort, and access. All of this requires big data solutions, and will drive federal investment in cloud and big data technologies, both to save on costs and to ensure efficient access to data.

What does this all mean for companies looking to sell into federal agencies?

It may sound cliché, but the importance of asking questions and listening to your customers cannot be overestimated. Agencies are looking for ways to fulfill their missions; they don’t need new solutions for problems they don’t even know they have. That’s a crucial bit of knowledge. If you don't understand your customer’s pain points, it will be impossible to determine the solutions they need. And if you can't determine the solutions they need, then you're just swinging in the dark at a target you most likely will never hit.

Additionally, it's important to remember that the federal sales cycle averages about 18 months for enterprise software procurements. It's essential to receive executive sponsorship at the beginning, when your customers are developing their vision and needs. Once executive sponsorship is secured, work hard to establish a strong relationship with the program management office, and lean on them to introduce you to the end-users - because those are the people writing the requirements. Without receiving buy-in from all three of those levels (executive, program manager, and end-user), you'll be in for a surprise (and not a good one) come solicitation time. 

Edited by Jamie Epstein

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