Breaking down the $118B, ‘healthy’, federal IT marketplace

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By any measure, the federal market for information technology is enormous — close to 8% of the discretionary budget. And while it’s not growing as fast as it did maybe in the 1990s, it’s by no means static. For what’s in the immediate future for this $118 billion industry, Federal Drive with Tom Temin turned to the senior director of research at Deltek, Deniece Peterson.

Interview transcript:

Tom Temin: Miss Peterson, great to have you on.

Deniece Peterson: Thanks for having me.

Tom Temin: So characterize the market in large for us. $118 billion, that’s addressable and that is available to contractors, or how does it all break down?

Deniece Peterson: So we look at what the potential pool of money is for contractor addressable work. And so we start by looking at the agencies that report to the Office of Management and Budget — it’s about 24 agencies — but then we expanded. Now we add in estimates for intel, there’s 50 to 60 small agencies, there’s quasi government organizations like the Postal Service. And then we also look at what we call embedded IT, which is IT that’s embedded in other programs, like IT that’s in ships and aircraft and things like that. We’re trying to get as complete have a view of the IT market is possible. So for analysis this year, looking ahead a year, we’re seeing about $118 billion for the contractor adjustable IT market. So, the growth is definitely slower than we’ve seen if we look back 5 or 10 years, but it’s definitely a very healthy market.

Tom Temin: And the growth, I guess, has slowed because of the shift to services, and away from a huge concentration on hardware spending. Could that be one reason it doesn’t grow as fast?

Deniece Peterson: Yeah, we’re definitely seeing that hardware, and to some degree software, is kind of dragging down the market a bit, because we are seeing that shift from on-premise software to cloud solutions, seeing price pressure on hardware, we throw the umbrella of category management on top of that, just trying to streamline and drive cost savings in IT commodity solutions. So we do see that the impact of some of the policy driving down growth in some of the market segments for sure.

Tom Temin: And what are you expecting as the Biden administration’s management agenda starts to gel?

Deniece Peterson: So, we get some clues for that in the FY ’22 budget request, and it doesn’t look like we’re going to see too many kind of rapid shifts, we see continued focus on things like cloud computing, definitely cybersecurity, artificial intelligence, unmanned systems. So all of those things that have been kind of priorities for several years, will kind of be in play. What we usually see is a new administration comes in, they look at the previous administration’s agenda, figure out which pieces to leave and rebrand, so to speak, and then which areas where they want to introduce new things. So, we’re still in that phase where I think we’re still seeing the same agenda when it comes to IT modernization and things like that, that we saw in the last administration.

Tom Temin: And from the documents, you’re predicting an annual compound growth rate over the next couple of years of about 0.8%, slightly less than 1%. Do you happen to know how that compares with the private sector?

Deniece Peterson: I don’t really look closely at the private sector. I do know that government tends to lag a bit there. So I would imagine it’s definitely higher than that just because of the pace of technology procurement in the commercial sector. They’re a little bit more agile, right? And the process is a lot different for getting funding for things. So, that is a very different picture.

Tom Temin: And is it possible to break down that $118 billion by services, hardware and software?

Deniece Peterson: Yes. So we see actually, the biggest part of the market is IT services. So that’s your professional services, but that’s also your managed services like cloud computing and manage security, outsourcing and things like that. So we see that at about $68 billion in FY ’22, growing a little bit in FY ’23 to about $69 billion. When we look at software, that’s relatively flat. We’re seeing about $14.5 billion for that. And then hardware is slightly bigger but declining a little bit. So, about $16.3 billion in FY ’22. So, we’re definitely seeing services kind of chipping away at hardware and software, and that’s largely because of the migration to cloud. Which it hasn’t been that fast, to be honest with you, but it has been significant enough to where we’re seeing the implications of that.

Tom Temin: We are speaking with Deniece Peterson, senior director of research at GovWin’s Deltek. And remind us who the top spending agencies are by the way, top two or three or four.

Deniece Peterson: Yeah, so it’s always, if we’re looking at four, we’re going to be talking about DoD. We consider Navy, Army, Defense, and Air Force as kind of independent entities. So definitely DoD, just with the scope of their spending. We’re seeing topping that list, ranging from about $14.5 billion, Navy really tops the list there, followed by Army, Defense, and Air Force. On the civilian side, we’re seeing DHS at $7.7 billion, VA is $7.1 billion, and HHS is $6.1 billion. And then our best estimates show intel between $10 and $11 billion. So, what we’ve seen is that we haven’t seen many shifts in the civilian agencies to kind of dominate the IT budget. We will year-over-year kind of see some shuffling around when we look within the Department of Defense to see kind of who’s getting the bigger buckets, right? And and there’s a lot of cyclical nature, there’s long term projects that can kind of dominate, so, we’re seeing the usual suspects.

Tom Temin: Sure, for example, like the Army’s in the midst of developing, long term, over the next 7, 8, 9 years, two new helicopters, and there will be a huge software train kind of behind those. But it’s in, as you say, embedded in a hardware program. It’s a weapons platform. So you got to look deep to find some of the places that are growing. And within that 0.8% growth, some areas are probably growing very fast. But they’re low dollar volumes compared to say, hardware, so that artificial intelligence might be growing faster. And you tell me if I’m right about this, but it’s not a very expensive item.

Deniece Peterson: You’re right. So, we look for different technology solutions within the budget. And you’re absolutely right, we see that artificial intelligence, we do a report on that — this year will be our third year — and it’s not even to the point yet where you can get a handle on the dollar amount, because it is still relatively new in the government and it’s kind of very small incremental growth. So, I would say definitely AI machine learning, certain types of predictive analytics, those things are smaller, but they’re growing faster is kind of the need within agencies, especially around like data management, and using data for decision making as that requirement increases.

Tom Temin: And nobody’s building 100,000 square foot data centers.

Deniece Peterson: Going the opposite direction, actually. Still consolidating data centers. So you’re absolutely right.

Tom Temin: And what’s your advice for contractors? How should they think about approaching this market, which it’s big, but it’s not a static one is, as you’ve pointed out, it changes, what should contractors be doing?

Deniece Peterson: It’s all about positioning. The data shows that agencies have been going in this direction in a while, but it’s even more prevalent right now, where there’s this preference for schedules and IDIQ’s, especially for things like cloud and cyber security, right? And just having access to that pool of agency customers is really important, and it all comes down to access to those contracts. Throw in that we have category management, which has established these best-in-class contracts, and tier two contracts that are well managed and really working to drive spending to those contracts. And so as that funnel starts to narrow a bit in terms of contract vehicles, contractors really need to look at teaming and being positioned to be able to access those funds.

Tom Temin: So miss out on the right IDIQs or GWACs and you could be locked out of a big chunk of the market for five years.

Deniece Peterson: Yes, and it’s changing, it’s a living thing, because we see contracts that were standalone multiple award contracts, when the recompete comes, agencies are deciding to use a schedule or use one of the best-in-class contracts. So, this is something that is just going to be an ongoing thing where those acquisition strategies will be changing as agencies consider what’s the best way to get the breadth of services I need or the type of contractors I need when that recompete comes. So positioning in those contracts is very important.

Tom Temin: And the other thing, I guess, contractors generally need to do is understand what the challenges the agencies have, so they can be there to meet them. What does the research show are the top challenges in IT agencies will be facing?

Deniece Peterson: It’s the usual stuff, it’s not having enough funding for what they want to achieve, right? So, yes, we have a billion dollars kind of sitting in the Technology Modernization Fund, but that’s probably the tip of the iceberg in terms of what agencies actually need. So, the way contractors can support that is really working and talking with customers about, well, two things, how to help them justify their kind of business need for TMF dollars, because a lot of agencies are looking at maybe using those funds now that the repayment structure is different. So supporting there. But also helping agencies understand how to get to their end-goal in a less expensive way. Right? So, coming to the table understanding what’s the end-goal and what the challenges are, and being creative about the solution to get them there in a way that is both effective operationally but also cost wise.

Tom Temin: Deniece Peterson is senior director of research at GovWin’s Deltek, thanks so much for joining me.

Deniece Peterson: Thank you.

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