Growth in the Federal Cloud Market. A First Look at Fiscal 2019 Spending

On September 30, the U.S. federal government closed the books on fiscal year 2019. Given that the Department of Defense does not report all of its contract spending (i.e., obligations) for another 90 days after that date it is still too early to determine what total government spending on cloud will look like. The available figures for the total value of cloud computing contracts awarded in FY 2019 (also known as TCV) are also not yet fully available as agencies continue to announce awards they made in the 4th quarter. Deltek can at least project, however, what total obligations for cloud in FY 2019 might look like based on spending trends it has identified in cloud spending over the last several years. This week’s post takes a look at those trends and provides an informed estimate of what federal agencies spent on cloud in FY 2019.

Five Year Trends

The data in this chart shows annual totals for awarded cloud contract value (TCV) and spending (obligations).

As we can see, both measures of the market grow at different rates in straight dollar terms. Cloud spending tends to grow at a more predictable rate than TCV, which can swing significantly given factors shaping the cloud market in a given year. For example, the TCV of cloud contracts slumped going into 2016, thanks to the election, a trend that the Federal Market Analysis team noticed in general in the IT market that year. Yet spending on cloud tended to be one of the areas where growth occurred despite the uncertainty surrounding the pending change of administrations.

Growth in TCV vs. Obligations

Growth in cloud TCV is often more volatile than growth in cloud spending. This is attributable to the fact that a small number of high value contract awards can decisively move the needle, whereas a large number of small spending actions will not. Cloud TCV totaled $1.9B in FY 2016, for instance, and $5.8B the year afterward. Averaging the totals from FY 2014 to FY 2019 (including the available numbers for the latter year so far) leads to the conclusion that federal cloud TCV grows by an average of 38.5% annually.

Curiously, the same percentage is visible in annual federal cloud spending, which grows at 39%. The tight correlation between TCV and spending took me by surprise because I had always assumed that TCV could be thought of as a forward-looking indicator of future spending. To explain further, if TCV spiked in a given year I expected that spending would rise at a higher rate the following year due to work commencing on the contracted programs. However, instead of a steepening curve in the spending line similar to TCV, we see spending progressing at a regular and steady pace.

What About FY 2019?

The relative predictability of spending growth suggests that based on the nearly $9.5B in TCV reported by agencies so far for FY 2019, cloud spending will total around $5.1B. If it pans out, this figure will make 2019 the first fiscal year that the federal cloud market has topped $5B in total spending, a significant development that signals the market is final growing at rates industry expected several years ago.