Deniece Peterson, Deltek: Federal CIOs Receptive to Transformational Initiatives

November 14, 2011

Amidst expectations for several years of declining federal discretionary spending, the transformation and modernization of Federal IT will ultimately result in an environment where technology is provided as a service with less demand for traditional IT products.

Federal Spending Outlook and Impact on Demand for Technology

After more than 10 years of spending increases, the U.S. government is projected to face a multi-year decline in discretionary spending in order to reduce the growing Federal deficit. The need to reduce spending and increase efficiency dominate the outlook for the Federal government’s demand for technology. “For the first time in their careers, many Federal CIOs are facing the challenge of managing their IT investments with a shrinking budget. This challenge has fostered an environment where government leaders are much more receptive to transformational initiatives and exploring innovative ways to reduce cost and improve efficiency,” says Deniece Peterson, Senior Manager for Deltek’s Federal Industry Analysis program.

Outlook for Federal Software and IT Hardware Spending

Transformational investments in areas such as cloud computing, consolidation and mobility are gaining traction to enable the government to operate more efficiently and reduce costs. Deltek expects this to foster near-term gains in the IT hardware and software markets, as agencies lay the foundation for a more service-oriented infrastructure. However, John Slye, the co-author of Deltek’s Federal IT Software Market, 2011-2016 report, warns that once agencies realize the benefits of this transformation, the growth path for IT hardware and software will diverge. “Agencies will shift the focus that was previously on maintaining outdated infrastructure to software and software services that support more efficient and effective execution of key agency functions,” states John Slye, Senior Principal Research Analyst. “As investments in mission-critical application and infrastructure software increase, coupled with a flat if not declining federal employment projection, demand for IT hardware will decline.”

Impact on Outlook for Federal Software Spending

In the Federal Software Products Market report, Deltek predicts moderate growth from $10.1 billion in FY2011 to $13.7 billion in FY2016 at a compound annual growth rate (CAGR) of 6.3%. In the near term, consolidation will create opportunities for infrastructure software such as virtualization, information security (including continuous monitoring, identity/access management and mobile security), and storage. As cost savings from cloud computing and consolidation are achieved, agencies are expected to shift spending to high priority application software, particularly enterprise applications such as finance, HR, and supply chain, and specialized applications, such as data analytics and other mission-specific applications. “Ultimately, agencies want to free up dollars and IT personnel to focus on the tools and processes that will help address areas that have either been major roadblocks – like financial systems – or have critical gaps, such as information security,” says Peterson.

Impact on Outlook for Federal IT Hardware Spending

Conversely, in the Federal IT Hardware Market report, Deltek predicts a decline in IT hardware spending from $13.5 billion in FY2011 to $10.0 billion in FY2016 at a compound annual growth rate (CAGR) of -5.7%. In the near-term, investments in IT hardware such as servers, storage and communications equipment will be stable. Agencies’ storage needs will grow significantly, driven by data proliferation due to increasing transparency requirements, mobile computing and information-heavy, mission-based needs. Also, mobile computingis taking off as workforce demands and telework increase. However, in the long-term, flat Federal employment levels, consolidation, cloud computing, and the move to less expensive end-user hardware, such as smart phones, tablets and thin clients will put downward pressure on the hardware market. According to co-author Lauren Jones, Senior Principal Research Analyst, a change in demand is not the only reason for the decline. “Strategic sourcing will become even more widely used in an effort to drive down prices by leveraging the government’s buying power,” states Jones.