The Forecast for IT Spending at the Defense Agencies

Published: July 10, 2013

BudgetDEFENSEDISAForecasts and SpendingStrategic Sourcing

Budget uncertainty, an evolving culture of austerity, and technology change is prompting Defense agencies to reduce spending on IT products and services. FIA's forecast for the next 5 years reflects these trends, showing a negative CAGR for IT spending in these agencies.

As it does every summer, Deltek’s Federal Industry Analysis Team publishes its flagship Federal Information Technology Market, 2013-2018 forecast report.  Developing forecast estimates is a complicated process.  Qualitative factors must be balanced against vast amounts of spending and procurement data to arrive at a forecast that makes sense.  Today’s abnormal circumstances make the process even more challenging.  The highly politicized budget environment, shifts in agency policy, White House mandates, and evolving technologies all have an impact that must be weighed.

In no sector of the market was this effort more challenging that in developing the IT forecast for the Department of Defense; specifically for the Defense agencies (i.e., DISA, DLA, DCMA, WHS, US SOCOM, etc.).  FIA is forecasting that overall IT spending at the these agencies will decline from $9.6B in FY 2013 to $9.45B in FY 2018, for a negative Compound Annual Growth Rate (CAGR) of -0.3%.

Readers may wonder how we can arrive at this number when the caps in the Budget Control Act (BCA) project that government-wide discretionary spending will rebound by 2% year-over-year starting in FY 2015.  The answer is simple.  We are convinced that in the last three years the culture at the DoD has changed.  No longer are officials giving lip service to the idea of cutting spending.  They are actually making those cuts and they are looking for more too.  Since 2010 officials across the DoD have said that the severity of the United States’ fiscal crisis is proving to be a powerful tool for changing the spending culture at the department.  Wherever discipline has been lacking, the leverage of spending cuts is being applied.  We are convinced that this culture is unlikely to change over the forecast period.  If anything the pressure may grow more intense as the overall economy continues to sputter.

This change in the culture is having ripple effects across the DoD.  For example:

  • Fiscal austerity is driving the department to increase the use of strategic sourcing for commodity IT products.  This is resulting in the award of contracts like Microsoft’s Joint Enterprise Licensing Agreement.  The JELA is great for Microsoft and for DoD, but in general it contributes to reducing the DoD’s spending on software, precisely as intended.

  • The struggle to reduce spending on IT services is leading to increased executive oversight of services contracts, including the review of service contract portfolios.  These reviews are targeting services contracts for wholesale elimination.  Those contracts that cannot be eliminated are likely to be consolidated into other contracts, or broken into smaller pieces and competed as lower value task orders.  Competing for multiple task orders raises vendor bid and proposal costs and winning a $20 million task order is a lot less profitable than capturing a larger $100 million, longer-term contract.

  • Defense agencies are turning toward enterprise services.  Enhancing the cyber security posture of each agency is a major reason given for incorporating greater use of enterprise IT services, like those provided by the Defense Information Systems Agency (DISA).  However, agencies like the Defense Logistics Agency are also hoping that the use of DISA-provided enterprise services will reduce overall operating costs by $14 billion over the next five years.  This is a lot of money and it will have an impact on the vendor community.

I could provide more examples and reasons, including Sequestration, but that would be beating a dead horse.  The list above offers a few powerful factors affecting IT spending at the Defense agencies.  The news is not all bad, however, as the DoD will continue to have significant technology requirements.  It will also continue to spend billions of dollars fulfilling them.  These requirements are factors we took into account that continue to prop up Defense agency IT spending.  As one of my colleagues likes to say, “flat is the new up” these days.  Everyone might as well get used to it.