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Forecast Decodes IT Market Hot Spots

Austerity may be the new norm for federal spending, but both sides of the government IT contracting table are still looking for a big payoff.

The Federal Industry Analysis Team’s flagship forecast report, Federal Information Technology Market, 2014–2019, predicts a decline in the federal IT market from $101 billion in FY 2014 to $94 billion by FY 2019, reflecting a -1.6% Compound Annual Growth Rate (CAGR). The report analysis examines the diverse influences shaping individual market segments and federal agency buying patterns, calling out the primary drivers and inhibitors affecting the IT investment decisions of federal agencies.

Declining IT budgets have ushered in an era in which agencies are tasked to “do more with less.” The realities of more limited funding resources are spurring cost saving initiatives across the government. Commodity information technology purchases are one area especially worth noting. Increased use of strategic sourcing contracts and enterprise license agreements are just two ways that agencies are approaching commodity IT cost reduction. The intention of driving down commodity costs can be found behind the shift away from reliance on desktop computers and toward greater use of thin clients, mobile devices, and laptops. Another tactic to save money comes in the form of delays to technology refresh cycles and efforts to scavenge existing commodity IT resources. These cost reduction initiatives are expected to facilitate operating on a new, lower budget baseline.

A lower baseline typically tracks to lower levels of contracted spending. In many cases, however, agencies intend to reinvest the savings that these changes produce. These reinvestment goals stand to provide contractors with a chance to provide additional products and services. Unlike in the past when agencies might have used recovered funds to pursue ‘nice to have’ capabilities, they are now in the position of stretching to make ends meet.

Facing federal technology mandates and expanding mission requirements, agencies are hard-pressed to prioritize investments to achieve the biggest impact and deliver the greatest value to government organizations. For many agencies, this focus will draw support for investments in hot spots like cybersecurity, cloud computing, virtualization, and big data solutions (e.g. data mining). As budget pressure continues, agencies will be particularly adverse to cuts in security spending. In order to facilitate expansion in cloud computing, big data, cybersecurity, program management and other critical areas, agencies will have ongoing requirements for support services.

Deltek’s Federal Industry Analysis (FIA) Team foresees the recent downward spending trend continuing in coming years but not entirely uniformly. The team’s forecast draws on a whole host of primary and secondary research. Looking beyond the funding reported through the Office of Management and Budget (OMB), the FIA team’s market sizing includes spending from the judicial and legislative branches, the intelligence community, federal organizations that are not subject to federal IT budget reporting requirements, and IT embedded in large defense systems. This off book spending helps to offer a more complete view of government buying. 

These market trends are influencing the future of information technology contracting and creating an environment full of both challenges and opportunities. The trick for vendors is positioning for those opportunities while avoiding pitfalls and keeping an eye on the shifting landscape. The first order of business is getting the lay of the land. Then, the next step is determining which moves will get your business ahead and which ones could be dead ends. For more analysis of contractor-addressable budgets across the federal Hardware, Software, IT Services, and Communications and Network Services markets, see our new GovWin IQ report “Federal Information Technology Market, 2014-2019.”

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Originally published in the GovWin FIA Analysts Perspectives Blog. Follow me on Twitter @FIAGovWin.

 

Recapping the National Association of State Technology Directors (NASTD) Conference

As the 2013 National Association of State Technology Directors (NASTD) Conference wrapped up, both vendors and state IT officials may have left Charleston, S.C., with one message pounding in their heads: Watch out for storm clouds on the horizon.
Concerns over cybersecurity, employee retention and the pending roll out of FirstNet – the national public safety broadband initiative – dominated this year’s conversation as NASTD officials packed sessions with multiple speakers on each topic. Each subject has been more or less driven by a combination of current events and long-term trends.
The long-awaited wave of retiring baby boomers is finally underway and wreaking havoc on the ability of federal and state agencies to replace experienced personnel and retain institutional memory. After four years of planning and design, federal officials are getting ready to tally the number of states that will opt in to the federal FirstNet broadband plan and those that will build their own network. States received a wakeup call in October 2012 when nearly 4 million social security numbers and credit card data were hacked from South Carolina’s state government. The cyberattack brought to life the warnings that cybersecurity officials in the public and private sector have been quietly raising for years.
Most of the speakers opted to take an awareness approach and attempted to lay out the dire problems and statistics as plainly as possible; not because they were dodging the issues, but often because there are no obvious solutions to these problems. Besides, that wasn’t necessarily their job. Ultimately, these challenges are going to have to be addressed by the people who were sitting in the audience.
The dominant themes among these kinds of conferences for the past few years has been the recession, budget cuts and figuring out how to maintain service levels with fewer resources. The conversation has begun to shift, but the major themes of NASTD 2013 demonstrated that the end of one crisis often provides state IT officials with just enough breathing room to prepare for the next.
Cybersecurity in the age of cloud adoption and the mobile workforce will be one of the preeminent issues state and local governments deal with over the next 3-5 years. The volume and sophistication of attacks directed at state governments is rising at an alarming pace every year, which means that more state CIOs are going to be expected to pursue aggressive security strategies over the next few budget cycles. More attacks similar to the South Carolina hack will ensure that funding and budgets for these areas are robust. Dedicated network penetration and training for staff to help identify common phishing techniques and personnel security measures were two methods that most security officials stressed at the conference.
In the public safety realm, vendors should be on the lookout for another handful of RFIs dealing with FirstNet development and implementation. Whether a state opts in or out of the federal plan, the NTIA foresees a considerable amount of private sector involvement for this project over the next few years, which is good news for vendors nationwide.
For the full version of the National Association of State Technology Director's Conference Recap, click here (subscription required)

Federal CIO Council Restructures

The federal Chief Information Officer (CIO) council is reorganizing to support federal IT priorities: Innovate, Deliver, and Protect. Specific projects will be managed by committees aligned to technology focus areas like program governance, technology adoption, and security.
 
 

 
 
Each of the three committees targets a priority area for federal information technology.
 
 
·            The Information Security and Identity Management Committee (ISIMC) provides a collaborative forum for agency CIOs and Chief Information Security Officers (CISOs) to identify and develop policy recommendations for high-priority security and identity management initiatives.  This committee will be led by Rob Carey, the deputy CIO for the Defense Department, and Luke McCormack, the Justice Department CIO.
 
·            The Innovation Committee will work to enable a 21st century government through the use of new technologies for delivering digital services, deploying mobile technology, exploring modular IT development strategies, and leveraging federal data as a strategic resource. Reportedly, this group will support open data initiatives. This committee will be led by Casey Coleman, the General Services Administration's CIO, and Margie Graves, the Homeland Security Department's acting CIO.
 
·            The Portfolio Management Committee will focus on agency-wide best practices for governance and management processes, optimization of commodity IT resources, adoption of shared services platforms, and enterprise architecture. This committee will be led by Interior Department CIO Bernie Mazer and Bob Brese, the Energy Department's CIO.
 
Along with these committees, the council will work with task forces for data center consolidation and shared services. These task forces will support the sharing and disseminating of best practices and lessons learned across agencies from the two government-wide initiatives. Comprised of data center program managers, facilities managers, and sustainability officers, the Data Center Consolidation Task Force will work to progress towards the government’s consolidation goals. To support these goals, the task force will be working on data center metrics to incorporate into PortfolioStat conversations. The Shared Services Task Force will bring together agency shared service representatives to promote the use of inter-agency shared services for commodity IT, support and mission services.
 
This restructuring is the first of this extent in several years. And the move comes as the council is positioning itself to be more engaged with other CXO councils and across the federal community.
 
Originally published for Federal Idustry Analysis: Analysts Perspectives Blog. Stay ahead of the competition by discovering more about GovWinIQ. Follow me on twitter @FIAGovWin.

The five council committees will consolidate into three main ones, which will work with two task forces and support information exchange activities for several self-organizing communities of practice.

Contractor Survival Tactics: General Dynamics Making Acquisitions To Offset Tightening Budgets

Over the past few weeks, we have been highlighting how various vendors are dealing with today’s challenging federal market, and outlining some of the steps these contractor’s are taking to achieve success going forward.
In this edition, we would like to turn the spotlight on defense giant General Dynamics Corp., which has been among the most active participants in the M&A arena since early May, acquiring five companies to expand its list of capabilities and addressable markets.
FIA Perspective:
General Dynamics expanding capabilities in several growing markets via recent acquisition spree. Below we highlight the recent acquisitions GD has made, and detail how these purchases may help the company going forward.
  • In early May, GD acquired IPWireless Inc. for an undisclosed sum. Based in San Francisco, IPWireless provides 3G and 4G LTE wireless broadband network equipment and solutions for first-responder and military customers. The acquisition will allow GD to expand its commercial networking solutions to better serve the needs of its customers, including municipalities who are moving to broadband public safety networks such as the FirstNet nationwide interoperable broadband network.
  • In late June, General Dynamics bought Earl Industries ship repair and coatings division to enhance its ability to compete for Naval contracting opportunities. The ship repair and coatings division of Earl Industries is a prime contractor for nuclear aircraft carrier programs, and provides maintenance and repairs for other Naval ships. Financial terms for the transaction weren’t disclosed.
  • In mid-August, GD said it would acquire Fidelis Security Systems, a provider of network security tools that provide real-time network visibility, analysis and control. Based in Waltham, Mass., Fidelis' solutions help customers stop advanced threats and prevent data breaches by providing visibility into the complex layers of a network, exposing malicious content in real-time. This acquisition will allow GD to expand its capabilities in the growing cybersecurity market, with a particular focus on incident response and situational awareness. Earlier this year, GD opened its Cyber Intelligence and Solutions Center located in Annapolis Junction, which houses experts working on cyber threat detection and mitigation solutions.
  • In late August, General Dynamics acquired the defense operations of Gayston Corp., which supplies precision metal components used in several munitions programs. Gayston's defense unit makes rocket motor tubes for the U.S. Army's Hydra-70 air-to-ground rocket program. It also provides liners and cartridges for 40mm ammunition rounds and components for 60-120mm mortar rounds, among other things.
  • Earlier this month, GD also acquired virtualization security software start-up Open Kernel Labs Inc. for an undisclosed amount. OK Labs provides virtualization software for securing wireless communications in the corporate and government sector. In addition, Open Labs creates apps and content for mobile devices and in-vehicle 'infotainment' systems. This acquisition will expand GD’s capabilities as a provider of secure mobile devices for public safety, civilian, military and commercial customers.
In 2011, General Dynamics spent $1.6 billion on six acquisitions, compared with three purchases in 2010 for $233 million.
Our Take:
Overall, we believe that General Dynamics will continue to be aggressive in making moves to remain competitive, while expanding its capabilities in growing markets such as cybersecurity and wireless.  
Over the next few years, companies which will succeed in this challenging environment will need to be flexible and make strategic adjustments where needed. We believe General Dynamics is taking these necessary steps, and that the company’s M&A strategy will expand its addressable markets and list of customers moving forward, while enhancing its ability to pursue future opportunities in growing markets.
At the end of last quarter, GD had about $2.54 billion in cash and cash equivalents in its war chest to put towards future acquisitions.

 

Federal Software Market Forecast Indicates a Contraction is Ahead

Last week, we released a new report, Federal Software Products Market, 2012-2017, where we delve into the driving trends and challenges that will shape the size and direction of the federal software marketplace for the next few years and beyond. What strikes us about this particular segment is the combination of market forces at play that are transforming the landscape and strongly impacting what, how much and how federal agencies will purchase and manage their software portfolios now and in the future. 
In the report, we discuss several near-term trends that we see in the federal technology market coalesce around several key areas:
  • Agencies are looking for was to shift to managing data versus infrastructure.
  • Drive to maximize efficiency is accelerating the move toward automation and analytics.
  • Increase of mobile computing progresses in tandem with 24/7 demand for information access.
  • Operational models are shifting towards services, placing greater emphasis on acquiring and expanding capabilities through managed services (SaaS, communications, security).
  • Push to accelerate innovation and technology adoption, like automation and analytics.
  • Agency strategies of moving towards common operating environment and standard enterprise architecture will leverage economy of scale, and require consolidation of acquisition avenues (contract vehicles/BPA).
Given these and other trends, there are several positive market drivers helping to sustain the federal software segment and numerous negative inhibitors that will suppress federal spending, and therefore growth. Here are just a few we recognize.
Market Drivers
  • Pockets of sustained spending on custom software developments, particularly in the sciences and high performance computing.
  • Business system modernization and standardization will insulate certain software investments.
  • Software is at the core of priority systems for defense spending. Similarly, VA and HHS are driven by iEHR and other major systems heavily reliant on software
  • Continued demand for software will be augmented by a push for COTS and standardized/enterprise solutions.
  • Cyber security is expected to be a growing mission area for agencies. Security software spending and automation will enable personnel to focus on complex security issues.
Market Inhibitors
  • Integration and consolidation efforts will be ongoing in the near term, maintaining software funding. Then (after FY14) savings start to be realized, lower spending levels.
  • Push for standardization is expected to increase implementation of COTS and enterprise solutions, lowering long term costs.
  • Rationalization of Defense applications will contribute downward pressure in Defense software spending.
  • Strategic sourcing initiatives are enabling agencies to leverage cost saving through negotiated prices and economy of scale.  
Deltek’s Federal Software Forecast
As a result of these trends, drivers and inhibiters, Deltek forecasts demand for vendor-furnished software products by the U.S. Government will decline slightly from $13.5 billion in 2012 down to $13.3 billion in 2017 at a compound annual growth rate (CAGR) of -0.2%. (See chart below.)
 
 
 
Implications
  • Agencies will be pressured to make “controlled cuts” to “near-sequestration” levels regardless of whether or not sequestration actually occurs.
  • Agencies are moving toward cloud computing and mobile computing in a drive to maximize efficiency and adopt innovative technologies while also reducing costs.
  • Enterprise licensing and strategic sourcing will reset software expenditure levels to new baselines as agencies fully implement new policies and rationalize their software portfolios.
  • Standardization and modernization of both infrastructure and enterprise software will consolidate acquisitions, but drive growth in key areas such as mobility and cybersecurity.

 

VMware Making Moves To Win Market Share In Virtualization/Cloud Markets

The cloud computing and virtualization markets seem to be hot topics in the technology sector days, which places small- and mid-tier firms providing these technologies at the forefront of exciting changes taking place within the marketplace. Within the federal group at Deltek, we are always keeping tabs on these hot sectors, and I personally have an interest in what’s going on in the Mergers and Acquisitions (M&A) arena surrounding these hot markets.
Within these sectors, one company which has been making noticeable moves over the past few months is virtualization software juggernaut VMware, which has been among the most active participants in the M&A market, snapping up small- and mid-tier players to add “breadth and depth” to its product lines.
Last week, VMware agreed to acquire software-defined networking form Nicira for $1.26 billion, as it continues its efforts to virtualize all aspects of the data center. Nicira, which is VMware’s largest acquisition to date in terms of price, provides software that creates an abstraction layer between servers and networking gear, allowing organizations to decouple the network topology from the equipment, creating virtualized pools of networking capability. The deal is expected to close by the end of the year.
FIA Perspective:
VMware continues to make acquisitions in virtualization and cloud markets. Over the past several years, acquisitions have been an integral part of VMware’s growth strategy, and the company has been focusing on smaller firms which can be easily integrated into its existing product portfolio, thereby expanding its product lines in the areas of virtualization and cloud management.
Besides the Nicira purchase, VMware has been making other recent moves in the M&A arena, and we highlight each of these acquisitions below:
  • Last month, VMware acquired cloud computing provider DynamicOps Inc. for an undisclosed sum. Burlington, Mass.-based DynamicOps develops solutions that help in running virtual workloads (hypervisor) across diverse cloud platforms. Hypervisor software (also known as virtual machine manager) allows several operating systems to share a single hardware host.
  • In May 2012, VMware also acquired Wanova Inc., a cloud-based desktop virtualization solutions provider, for an undisclosed amount. The Wanova technology makes thick or thin Windows devices manageable in a very flexible and centralized way, and complements VMware’s View product line and emerging horizon portfolio of multi-device end-user solutions.
  • In late April, VMware purchased Cetas, a big data startup that provides analytics atop the Hadoop platform, for an undisclosed amount. This acquisition is expected to strengthen VMware’s Cloud Applications Platform moving forward.
In 2011, VMware completed 7 acquisitions to expand its portfolio in the areas of virtualization and cloud computing, including Digital Fuel, Neo Accel, Packet Motion, Shavlik, SlideRocket, Socialcast and WaveMaker. It also acquired certain assets from EMC's Mozy cloud-based data storage and data services.
Overall, we believe VMware will continue to look to acquisitions to drive its long-term growth strategy, and allow it to better compete with top-tier rivals (like Microsoft and Citrix Systems) in the high-growth virtualization and cloud computing markets. At the end of the latest quarter, VMware had about $5.35 billion in cash and cash equivalents in its arsenal to put towards further acquisitions.
VMware posts solid results in 2Q. In the latest second quarter, VMware saw its revenues rise 22% to $1.12 billion compared with last year’s second quarter. At the same time, the company said its per-share profit minus items rose 24% to 68 cents from 55 cents in the year-earlier quarter. On its earnings call, VMware noted that its “deal pipeline remains very strong,” and that it “expects to have a solid second half of 2012.”
Looking ahead, VMware anticipates revenue in the range of $4.54 billion to $4.64 billion for fiscal 2012, an increase of 20.5% to 23% from fiscal 2011, primarily driven by strong license revenue growth. It also expects operating margins in the range of 30.25% to 31.25% for 2012, the company said.
Management shuffle should benefit both VMware and EMC.  A few weeks ago, VMware and its majority owner, storage giant EMC Corp. (which owns 80% of VMware), announced a management reshuffle that will give the CEO position at VMware to Pat Gelsinger, an EMC executive. He will be replacing Paul Maritz, a former Microsoft executive, who will be taking the Chief Strategist position at EMC. Gelsinger plans to take over the reins at VMware in September.
With the executive swap, Maritz may be in line to become the new vice-chairman at EMC, and looking towards replacing current EMC Chief Executive Joe Tucci at some point in the not-so-distant future. Tucci, who had recently planned to retire in 2012 (but has now backed off), is 65 years old, and probably relatively close to the end of his tenure as CEO.
Overall, this will likely be a smart and smooth transition for both companies, with the executive swap potentially enhancing both VMware's and EMC’s CEO positions moving forward. The executive moves are also likely to allow VMware and EMC to better-align their product portfolios, while boosting the potential for new software-based, higher-margin revenue streams at EMC.
Around the time the executive change was announced, it was also rumored that VMware and EMC may be planning to spin-off some of their cloud assets into a separate company, according to a report by GigaOm. The article noted that the new company would include VMware’s Cloud Foundry platform-as-a-service division and EMC’s Greenplum business, as well as an EMC/VMware joint venture in the infrastructure-as-a-service segment called Project Rubicon. GigaOm noted that the spin-off would be put together to build a cloud computing services firm that could complete with top rivals Google, Microsoft and Amazon.com.
Conclusion:
Any way you slice it, VMware is positioning itself to be a top-tier performer in the virtualization and cloud computing markets. With the recent management changes, acquisitions, and potential spin-off of its cloud assets, the company is making noticeable moves to establish a market leading position in these high-growth sectors, while enhancing its product portfolio to pursue growth within the virtualization and cloud markets over the next several years.