With so much talk of failed IT projects and waste in federal spending, it’s occasionally nice to celebrate federal IT success stories, such as the IRS Customer Account Data Engine 2 (CADE 2) initiative. 

The CADE project was meant to convert taxpayer data from the old Individual Master File (IMF), which was based on 1960s era software, to a modernized relational database.  However by 2008 the CADE 1 project was years behind schedule and tens of millions of dollars over budget.  That year, IRS’ new commission Doug Shulman brought in Terry Mulholland, with IT experience from Boeing and Visa, as CIO to get the project back on track. 

Some experts might say that converting a flat file to a relational database was possible one to two decades ago.  But the complexity and size of the IRS’ databases presented challenges, as well as the difficulty of working within federal government parameters. 

According to a 2004 GAO report, CADE 1 was 30 months behind schedule and $37 million over budget.  GAO cited a number of problems, such as inadequate definitions of systems requirements, project scope creep, and inaccurate cost and schedule projects.  CADE 1 was an instrumental part of the overall IRS Business Systems Modernization (BSM) program.

When Shulman became commission, he and his team decided to scale back the BSM program and focus on the CADE portion, and to bring management of the program in-house.   Milholland believed IRS had become too dependent on outside contractors.  They needed to be accountable for their own technology and processes.

GAO listed CADE 2 on its 2011 listing of successful major IT acquisitions across government.  GAO attributes the turn-around to strong management and oversight, and executive-level attention and leadership.

Since the implementation of CADE 2, the IRS has increased electronic filing and processing to 78% which improves accuracy and speeds up the time it takes for taxpayers to receive their refunds, while also saving the IRS money. 

The IT Dashboard shows a CIO project rating of five for CADE 2 from October 2012 to date, up from a score of four in August of that year.  CADE 2’s Exhibit 300 indicates that in 2013 the project will deliver a database feed to the Integrated Data Retrieval Systems (IDRS) which will allow online updates to taxpayer account data by customer service representatives, more current and timely account balance information and improved opportunities for compliance.  The IRS is requesting funds to design and develop a number of applications that expand the capabilities of the CADE 2 relational database in 2014.

With appropriate leadership and oversight, the correct balance of in-house vs. outsourced management and development, adequate performance measures and business metrics, along with stakeholder involvement, other struggling federal IT projects have a chance at success.

OMB may have found a way to bring $5 billion of the $85 billion sequestration price tag, back into play.  The recalculations would free up $4 billion from the Pentagon and $1 billion from other agencies such as NASA and DHS.

When Congress moved money around among various accounts in the Continuing Resolution which took effect in March, it restored $5 billion of the sequestration cuts due to accounting rules that govern the different accounts.  According to a quote from a government official in a recent Government Executive article, “Under the law, if [lawmakers] cut those accounts below their post –sequester level, there is a provision that credits back some of the funds.”  A 1985 budget law prescribes that funds be restored to accounts that had been deeply cut via sequestration.

Much of the specific calculations and data behind the restoration of funds is still hush hush.  According to Associated Press article that broke the story, the process is ongoing and public officials they contacted spoke under the guise of anonymity. 

Although much of the dire consequences of sequestration are yet to be felt by most American citizens, public pressure is mounting to decrease the impact of sequestration cuts.   Agency budget officials have been working with Congress to permit the transfer of funds between accounts to lessen the blow of the cuts.  Some agencies have been able to avoid or shorten furloughs due to this process, such as Department of State, Department of Justice, and Department of Homeland Security.  Department of Defense will benefit the most from the new calculations by being able to avoid $4 billion cuts.  

Although two months late in delivery, the president’s FY2014 Budget Request continues promotion of administrative priorities while proposing cuts and savings to trim the deficit.  Deltek's newly released report, FY 2014 Federal Budget Request:  Challenges and Opportunities, analyzes the spending priorities, policy plans and information technology trends and initiatives in the FY2014 budget request.  

The Obama Administration is requesting $3.8 trillion for FY2014. The budget focuses on jobs creation and economic growth to strengthen the American middle class.  Deltek’s report examines patterns in the $1.2 trillion discretionary budget, as well as the $82 billion information technology budget, including market trends, drivers, and contractor-addressable spending. 

Using a well-honed methodology for gleaning the contractor-addressable portion of federal spending, Deltek calculates projected expenditures for FY2014 for ten different federal product/services market segments.

The chart above shows the contractor-addressable portion of funding across federal agencies, as well as compound annual growth rate for each from FY2012 to FY2014.  Nearly all of GSA's budget authority is under "Spending Authority from Offsetting Collections, Discretionary" to provide GSA the authority to fund its operations using funds collected from sources other than appropriations, primarily service fees.

Should the budget pass as written, Deltek estimates the contractor-addressable portion of IT spending for FY2014 to be $106 billion, which includes traditional IT spending captured in the Exhibit 53, as well as IT spending not typically captured in Exhibit 53 reporting, such as in embedded weapons systems.

Additionally, Deltek predicts contractor-addressable federal spending on architecture, engineering, and construction services will reach $27.7 billion in FY2014.  Aerospace and defense spending will reach $149 billion.  And operations and maintenance spending will reach $80.6 billion.

The budget request and Deltek’s research reveals the following in regards to the different market segments:

• Information Technology: IT priorities are largely the same as the past 2 years, including shifting from an asset to a service mindset, infrastructure and data center consolidation, and continued transition to cloud computing.
• Architecture, Engineering & Construction:  Expect a continued shift in funding from major to minor construction, including deferred maintenance, especially in civilian agencies.
• Aerospace & Defense:  Despite budget constraints, DoD is focused on protecting investments that support the new defense strategy, and the war drawdown continues to impact spending on ground systems and mission support equipment.

As the federal government strives to reduce the deficit and decrease spending, finding contracting areas of opportunity becomes increasingly difficult.  The request provides insight into the administration’s priorities, however the eventual enacted budget is somewhat of a wildcard.  Don’t expect appropriations to conclude prior to Oct. 1, continuing resolutions are likely to prevail.

For more information on Deltek’s report FY 2014 Federal Budget Request: Challenges and Opportunities  see the GovWin IQ website at www.govwin.com.

 

Now the budget is in the hands of Congress, which has historically appropriated more for IT than what the President requests. With fiscal priorities clashing and sequestration impacts now being felt across the market, federal IT could weather the current fiscal storm in relatively good shape.

Today President Obama delivered a $3.8 trillion spending plan to Congress which includes a $1.2 trillion request in discretionary funding levels and nearly $82 billion for information technology for FY2014.  The budget focuses on jobs creation, economic growth and to strengthen the American middle class.

The budget proposal also includes $1.8 trillion in additional deficit reduction measures over 10 years to reach a total deficit reduction of $4.3 trillion.   The proposed deficit actions would reduce the deficit to 2.8%of GDP by 2016.

Additionally, the budget proposes $400 billion in cuts to health programs including Medicare.  Savings and cuts would come from negotiating better prescription drug prices, fighting waste and fraud, and requiring the wealthiest seniors to pay more.

The table below shows the FY2013 enacted budget levels and the proposed FY2014 levels.

Other budget highlights:

• Includes $50 billion for upfront infrastructure investments to invest in repairs to highways, bridges, airports, transit systems, and to encourage innovative infrastructure projects 
• Invests in in education reforms and training with a commitment to early childhood education
• Simplifies the tax code and raises $580 billion for deficit reduction by limiting tax benefits, but not raising tax rates
• Creates new “ladders of opportunity” to ensure that hard work leads to a decent living by developing pathways to jobs and partnering with communities to rebuild after the recession 
• Includes $200 billion in savings from other mandatory programs, such as reductions to farm subsidies and reforms to retirement benefits 
• Proposes $200 billion in discretionary savings from both defense and non-defense programs 
• Offers $230 billion in savings from changes in the way the government calculates inflation for annual cost-of-living adjustments for benefits programs

Information Technology

The president’s budget proposes nearly $82 billion in IT funding, a 1.8% increase from the FY 2013 CR and a 2.1% increase over FY 2012 estimated level.

IT-related budget highlights:

• $575 million in savings is anticipated from DoD Data Center Closures. 
• $324 million is being cut from the DoD’s Global Hawk UAV program. 
• $22 million is being cut from Computer and Information Science and Engineering Research Programs at the National Science Foundation; CISE is the organization responsible for promoting R&D on big data.  NSF’s budget takes big hits for its small size, which will affect grant spending on technology R&D.  
• $81 million is being cut from the DoD’s Precision Tracking and Space System, which is part of Ballistic Missile Defense at the Missile Defense Agency. 
• $38 million in savings related to the Joint Polar Satellite System is anticipated at the Department of Commerce. 
• $29 million in savings is anticipated from IRS Business Systems Modernization at the Treasury. 

All told, the president’s budget request includes 215 cuts, consolidations, and savings proposals, which according to the administration, are projected to save more than $25 billion in FY2014.  The budget proposal outlines the administration’s priorities and proposed methods for generating more revenue, cutting costs, and reducing the deficit.  However, it joins competing budget plans in the House and Senate.  Serious Capitol Hill budget negotiations are not likely to take place until this summer.

 

If this simple analysis holds even close to reality the potential remaining total contract obligations across all federal departments and agencies could be over $300 billion in Q3 and Q4, or 70% of total FY 2013 contract obligations. The second half of fiscal 2013 could potentially see federal contract dollars really flow.

Although most of us didn’t believe it would actually be allowed to happen, sequestration has become a reality.  Contractors are now being forced to operate in this new environment which will require $1.2t in cuts over 10 years if Congress and the President can’t agree on equivalent savings elsewhere.  That translates into $85 billion in cuts for FY2013.

What does this mean for the contracting community?  Deltek estimates that for FY2013 federal contract spending could be cut as much as $35 billion, $30 billion in the Defense Department.  Cost cutting implementation will depend on the agency.  Some agencies, such as Energy, HHS and NASA are fairly dependent on contracting, making contract dollars a bigger target for those agencies, while agencies such as EPA and HUD are at the opposite end of the spectrum. 

Although these cuts seem daunting, they only represent a 7% cut of total federal spending for FY2013, and also pale in comparison to other recent major economic events, such as the 54% loss in stock market value from 2007 to 2009 and the 33% loss in the housing market from 2006 to 2009.  Additionally, starting in 2014 and for next 7 years, discretionary limits increase 1-2% per year even with sequester in place.  Lastly, there are still billions of contract dollars that will be flowing.

So, what can federal contractors do to weather this storm?  To survive the initial potential sting, contractors should know the termination provisions and option expirations for their contracts and subcontracts.  Contractors should talk with their customers to understand what accounts are funding their contracts and how they will be cut, if at all.  Don’t give the government an excuse to cancel for cause.  Address any performance deficiencies immediately.  Take preemptive measures to protect contracts from cancellation by working with clients on proactive approaches to reduce scope/cost of contracts.  Finally, inventory contracts based on their importance to fulfilling federal customers’ missions to assess areas most at risk for cuts.

We’re not able to see the effects of sequestration in contract spending data yet, but federal budgets have been tight for the last few years.  Despite this challenge, some federal contractors have managed to thrive and grow contract revenue.   According to Deltek’s research, 62% of companies with $10-$100m in revenue were able to grow federal prime contract revenue between FY2011 and FY2012, 55% of those with $100m-$1b in revenue, 38% with over $1b in revenue, and 27% of those with less than $10m in revenue.

So, how are companies finding growth in a flat market?  Diversification is the key.

To find organic growth contractors should expand current areas of expertise.  For example, develop new contract channels for products and services already being offered.  Expand presence on task order vehicles, if your company doesn’t already have a wide presence on those types of contracts.  Subcontract more, if your company tends to prime on most contracts.  Build operational excellence so that your contract past performance speaks for itself and gives you a leg up for new opportunities.  Enter higher growth and somewhat protected business areas like cybersecurity, cloud computing, health IT, analytics/big data, or data center consolidation initiatives.

Port your offerings vertically to another agency or bureau within the same department and/or move horizontally to another department with similar business needs and requirements.  Use available information resources to identify opportunities, gather information on agency buying behavior and preferred contracts, to identify potential teaming partners, and gather competitive intelligence.

Consider the state and local government as an adjacent market.  Only one-fifth of grants to state and local government are impacted by sequestration.  The state and local government market is in a good recovery and most governors’ agendas are changing to “improving” rather than “slashing.”  While there are some segments in which all funding is subject to sequestration, such as employment/training and education, there are others in which the impact is a percentage of a small percentage, such as in health and transportation.

Finally, building work in commercial and international markets is aiding some contractors, especially defense contractors.  According to a recent story in the Washington Post, Lockheed Martin has just received a patent for a material that filters water to make it potable and is in the process of increasing production and looking for commercialization partners.  General Dynamics is expanding its commercial business and announced a partnership with Samsung earlier this year.   BAE Systems bought Atlantic Marine in 2010 to help it expand into commercial shipbuilding.

Sequestration, budget negotiations, and deficit reduction efforts will continue to stifle federal budgets for the foreseeable future, requiring contractors to venture out of their comfort zones and, in some cases, make difficult business decisions.  However, companies who tighten operations, and creatively diversify offerings, contract channels, and their client base can and will survive.