US government agencies will have tight IT budgets over the next 12 to 18 months, but opportunities for small IT vendors exist as many agencies divide contracts into small chunks, IT and financial services representatives have said.
The next year to year and a half looks "pretty tough" for US government IT spending as lawmakers try to reign in the federal budget, said Bill Loomis, a managing director focused government IT markets at investment banking firm Stifel Nicolaus. IT firms serving that government are seeing their "bid pipelines continue to pile up" as many projects are delayed, he said at a TechAmerica event focused on government contracting.
"There's going to continue to be a lot of budget uncertainty, and that creates delays out there," Loomis said.
The federal government faces so-called budget sequestration -- large cuts in defense and other spending -- if Congress and President Barack Obama's administration do not agree on spending cuts by the end of the year. Loomis predicted that the two sides will agree to an interim budget that puts off tougher choices until November's elections, but government contractors should plan for the large cuts, he said.
In February, Obama released a 2013 federal IT budget of $78.9 billion, a decrease of 0.7 percent from the government's 2012 budget. The priorities in the 2013 federal IT budget will be improving cybersecurity and pumping up e-government efforts aimed at citizen and business interaction with agencies, administration officials said then.
In the longer term, Loomis and other speakers at Wednesday's event see growth in the federal IT budget. Over the next two to five years, federal agencies will look to consolidate databases, expand their IT analytics capabilities and growth their use of mobile devices, Loomis said. In addition, federal cybersecurity efforts will be an ongoing priority, as will using IT to become more efficient, he said.
The US government will continue to be a major buyer of IT and related services despite near-term "doom and gloom," added Tim Young, senior manager in the federal services practice at Deloitte Consulting. Federal IT contractors should expect more short-term contracts, instead of five- or 10-year deals, as agencies hesitate to commit to large projects, he said.
Loomis asked the panelists if they see government agencies looking to launch IT projects that will help them save money in the long run. Agencies have considered many small money-saving projects, but some don't have the budget to invest US$10 million now to save $100 million later, said Tim Hoechst, CTO at Agilex Technologies, an IT services firm.
Despite the budget concerns, it's a good time to be a small business focused on government IT contracts, said Hoechst, whose company is five years old. Many agencies are splitting up contracts so that they can zero in on the expertise they need "for a particular problem," he said.
"We've tried to ride that wave," he said. "We'll take problems in smaller bites, and prove our value until they give us another bite."
In many cases, the contracts lead to short-term work, instead of long-term deals, he said. "You have six-month engagements rather than six-year engagements, and that means a lot more work to keep the flow of business going. But we think it's part of the new reality."