The Good News and Bad News about the Government Shutdown

tim larkins small pic. 67x84by Tim Larkins, Market Intelligence Manager

The bad news:  The shutdown cut about 0.6% off forecasted 4th quarter GDP growth. An estimated 100,000 jobs were lost across the country (it is unclear how many of those will be recovered), and the shutdown pushed consumer confidence to its lowest point in 8 months.

The good news:  Government spending will continue. The main hit was felt by services contractors, because they can never recoup lost billable hours from those 3 weeks. However, the IT products that agencies needed a month ago will still be needed in a month, so they’ll still be purchased. Albeit forecasts are off… but at the end of the day IT product companies will still realize the revenue.

The most recent legislation suspended the debt ceiling until February 7, and the Continuing Resolution (CR) funds government discretionary budgets at an annualized level of $986 billion until January 15. There is no reason to believe that a budget deal will be reached, so we can expect further last minute CRs to occur throughout the year. Hopefully we’ll see an omnibus that will at least provide appropriations for certain agencies – so that those agencies will no longer have to reference FY12 or FY13 budget numbers and agencies can begin new programs.

But regardless of whether we see more CRs or an omnibus, you can expect agencies to remain hesitant to make large purchases (as they were last year). The $986 billion is $19 billion above the post sequestration Budget Control Act (BCA) caps – so unless Congress amends the BCA, we’ll be going through another round of sequestration again in FY14. I expect we’ll see a flurry of RFP activity in March/April again as agencies will want to hold on to funds and not obligate them until August/September (they know the contracting process takes 5-6 months).

FY14 Exhibit 53s Now Available

photo_Tim-Larkins_65x85by Tim Larkins, Consultant

As we all know, the President’s FY14 budget request of $3.77 trillion was released last week, and thankfully, the targeted spending cuts proposed in this budget would essentially replace the blunt, across the board cuts that would have been caused by sequestration. A small portion of the budget document addressed IT (pages 349-358); with the IT request coming in at $82 billion, up slightly from FY12 spending levels of $80 billion.

The budget request that specifically addresses spending on IT programs (the Exhibit 53) was released yesterday. While the request is 1% above FY13 levels, there are some significant changes. HUD will receive a 36% cut, USAID will receive a 24% cut, National Archives will receive a 13% cut, GSA will receive a 12% cut, and SSA will receive a 6% cut. The largest increase in IT funds will go to the VA with a 19% increase, DHS and EPA will receive a 7% increase, and DOS will receive a 4% increase. The remaining agencies’ IT programs will be largely unchanged.

The Exhibit 53 is a budget request, and as such, can only be considered a guideline for IT spending for the year; but the fact that we are seeing a year-over-year increase in the IT request is outstanding news for the product community. This increase in budget requests, plus the possible elimination of blunt, across the board sequestration cuts, and the potential of an omnibus budget for FY14 could spell a very prosperous year for technology companies after a year full of gloom and doom in 2013.

So What Happened with the Fiscal Cliff?

photo_Tim-Larkins_65x85by Tim Larkins, Consultant

The mix of expired tax breaks and scheduled budget reductions that came to be known as the Fiscal Cliff has – for a moment – been dodged through a just-past-deadline deal.  Congress has been negotiating over $4 trillion in deficit reductions over the next 10 years; and eventually settled with a reduction of $600 billion over that same time period instead.  You may not be clear as to how the American Taxpayer Relief Act of 2012 will play out, so the following is a guide to help you understand:

  • Everyone will pay 5% more in estate taxes on amounts over $5 million
  • Everyone will pay 2% more for Social Security tax (up to $113,700 in income) because the Obama payroll tax break will expire
  • Anyone making under $400,000 (or couples making under $450,000) will see the Bush era tax cuts as permanent fixtures
  • Anyone making over $400,000 (or couples making over $450,000) will see marginal income taxes rise 4.6% because the Bush era tax cuts expire for them
  • Anyone making over $400,000 (or couples making over $450,000) will also see capital gains and dividend taxes increase 5%
  • Anyone making over $250,000 (or couples making over $300,000) will have exemptions and itemized deductions capped
  • Anyone making over $200,000 (or couples making over $250,000) will have investment income tax rates increase 3.8% due to the Affordable Care Act
  • Entitlement programs saw no cuts
  • The required $1.2 trillion in spending reductions over the next 9 years that was scheduled to begin on January 2, 2013 – known as sequestration – has been postponed until March (and if you reference the 2013 DOD Budget Briefing, you’ll note that immixGroup predicted this back in October)

Regardless of how you fared individually from the tax changes, kicking the budget can down the road unfortunately does nothing for federal CIOs, CTOs, and Program Managers except add to their anxiety.  As we predicted, DOD and Civilian agencies went on a spending spree the last months of FY12 and the first months of FY13 in order to obligate as many funds as possible (in hopes of shrinking the available pool of money that sequestration can draw from).  But Congress has now thrust them into a period of uncertainty, and as we all know from prior Federal sales experience – uncertainty leads to inaction.  To make matters worse, the Federal Government is currently funded under a Continuing Resolution (CR) that ends in March.  This means that agencies will see no new projects started in FY13, and most major technology initiatives will enjoy limited funding and progress.

So what does it all mean to you?  Well the good news is that delaying huge budget reductions and avoiding large tax hikes will most likely stop another recession from occurring this year.  However, the economy as a whole will probably continue with only sluggish growth.  For those in the IT industry, we still aren’t entirely sure how sequestration is going to play out.  I would suggest planning for the worst case scenario; meaning expect DOD programs to have roughly 9% less procurement funds than in FY12 (8% less on the Civilian side), and expect operations and maintenance dollars to fluctuate depending on the program’s importance and priority to the agency.

In a perfect world, come the end of March we would have an Omnibus that funds the government for the remainder of FY13, and we would have guidance on how exactly sequestration will play out.  The more likely scenario is that Congress will give us another CR (or a series of them) to keep the government operating for the rest of the year at FY12 levels, and we will be forced to deal with piecemeal legislation addressing budget cuts throughout FY13 and beyond.  For the average sales person, this means that the plans and approach you developed for November and December will largely remain unchanged through March and April.  So while Congress may have narrowly avoided the Fiscal Cliff, we are still very much plagued by the problems that have confronted us for years.

Government Use of Mobile Technology

photo_Tim-Larkins_65x85by Tim Larkins, Consultant

This week the Digital Services Advisory Group (DSAG) released a report, Government Use of Mobile Technology, in collaboration with the Federal CIO Council.  The report identified successes and setbacks in the implementation of Steve Van Roekel’s Digital Government Strategy (DGS), which endorses government adoption of mobile technologies.  DGS officially highlighted mobility as a necessary platform that government and industry must deliver to.  To that end, the government has had open discussions with industry about development of a Mobile strategy since May of 2012.

In its report, the DSAG identified a number of gaps that industry and the government face in embracing mobile technologies; with the primary concerns related to security and infrastructure.  Specifically, the report outlined a lack in:

  • User authentication
  • Data encryption
  • Application security
  • Compatibility and access to legacy applications from mobile platforms
  • Cross platform infrastructures that satisfy security requirements

The report went on to describe other challenges, including:

  • Immaturity of the product space
  • Inability of agencies to react to rapid changes in mobile device management solutions and mobile application stores
  • Unavailability of secure continuous network connections to allow for delivery of web applications and virtualized desktops
  • Lack of legal, privacy, and financial policies
  • Lack of reimbursement policies for government employees’ use of mobile devices
  • Lack of a life cycle cost benefit analysis to justify investment in mobile technologies

Mobility is not just an emerging technology– it is a necessity; and we expect spending on mobile solutions to ramp up over the next several years.  However, before mobile technologies can be fully embraced, helping our customers address these challenges must be our top priority.

Sales Opportunities within MHS

by Tim Larkins, Consultant

The Military Health System (MHS) provides healthcare services to nearly 10 million beneficiaries including active and retired military personnel and their dependents. Providing care from the battlefield to hospitals to domestic clinics is no easy feat.  To support this, the agency is increasingly relying on IT to improve healthcare delivery to its beneficiaries.

The total FY13 Unified Healthcare budget request is down 16% from last year to $48.7 billion. The agency’s IT budget is also slightly down (6%) from prior year levels to $1.87 billion.  Should sequestration occur, veterans’ healthcare will be safe as will basic and retirement pay for DoD personnel, and funding for housing.  TRICARE will not be exempt in sequestration and thus faces significant cuts that will most likely lead to a reduction in personnel.

From an IT perspective, MHS’ CIO will focus on improving infrastructure operations and electronic health records. The agency’s strategic IT plans include:

  • Architecture & Processes – Refine requirements management process to improve product quality and time to market
  •  Electronic Health Records  – Introduce products that enable providers to efficiently enter and retrieve information
  • Governance – Design a new IT governance structure and portfolio management that allow integrated capabilities and promotes better decision making
  • Enterprise Intelligence- Enhance intelligence through enterprise tools and services to make information visible, accessible, understandable, and trustable
  • Personal Health Agenda – Implement a comprehensive MHS wide patient portal and personal health record
  • IT Interoperability – Establish interoperability with private sector healthcare providers and organizations and other business partners
  • Maximize Portfolio Value
  • Innovative Technologies – Identify, research, develop, test, and evaluate new solutions to benefit the MHS enterprise and beneficiaries
  • Human Capital Management
  • Distributed Development

If you want to learn more about MHS’ FY13 budget request and the sales opportunities it offers, take a moment to watch this brief video taken from a recent market intelligence briefing I conducted.

DOD’s Top Priorities in FY13

by Tim Larkins, Consultant

Budget constraints – an ugly term that everyone selling to the government is all too familiar with.  Unfortunately, that ugly term will continue to be tossed around in relation to IT procurement for the next 10 years.  As LPTA and contract consolidation continue to rise in popularity among the acquisition community, technology manufacturers are going to find themselves fighting even harder to compete and win business.  An important part of winning new business is understanding what is driving the purchase of new solutions.  If you’ve listened to immixGroup’s recent Budget Briefings, or if you’ve read our Market Intelligence blogs, you’ll recall a handful of trends that are emerging out of DOD agencies this year.  We are seeing a push to reduce the military force structure and get boots off the ground.  We are seeing efforts towards information sharing and elimination of duplicative applications and systems.  These are all attempts to do one thing:  save money.

But as the old adage goes:  you have to spend money to save money.  If you were to look closely at all the programs where money will be spent across DOD in FY13, you’d notice that every single one of them contribute to one of three major initiatives.

  1. Consolidate infrastructure
  2. Improve interoperability
  3. Improve tactical communications

When we look at programs like Navy’s CANES or the Air Force’s ITS, we can see a clear shift towards the consolidation of systems, applications, and networks, as well as migration to virtual desktops.  As a result we will start seeing some of the other COTS opportunities around that transition surface this year.  Air Force’s AFNET and DOD’s JIE initiative are perfect examples of the move toward improving standardization and interoperability.  We can expect information sharing capabilities to progress, as DISA works from an enterprise level to help the service branches with their efforts.  Finally, military operations are relying more heavily on drone strikes and moving toward more special operations.  Programs like the Army’s WIN-T help DOD to support those efforts.  And in case you missed it, the Army recently awarded its GTACS contract to 20 contractors.  Through this $10 billion ID/IQ, the Army will purchase products and services related to improving tactical communications to support the warfighter.

It’s critical for sales people to not get bogged down by the hysteria caused by budget constraints.  It’s important for sales people to understand the major initiatives that government customers are undertaking.  And it is essential for sales people to keep an eye on these major and funded programs that support infrastructure consolidation, interoperability, and tactical communications – because that’s where the money will be spent this year.

FY13 DoD IT Spending Outlook

by Tim Larkins, Consultant

As I mentioned in my previous post, the threat of sequestration is definitely having an effect on federal IT spending; but it doesn’t mean you can’t grow your federal business in FY13.  But in order to succeed in this environment, its important understand DoD’s key spending drivers such as increasing tactical communication, interoperability, and infrastructure consolidation. For example, DoD plans to reduce data centers from 770 to fewer than 100, and network operations centers from 65 to 25. The Joint Information Environment (JIE) initiative being promoted throughout DoD is expected to improve interoperability, share secure information, and lower costs across the department.

It is true that most service branches are seeing at least nominal reductions in the IT budget requests. The Army’s FY 2013 IT budget request shrunk one percent over last year (still, it remains the largest IT budget of all federal agencies). One notable exception to this overall decrease is the Defense Information Systems Agency (DISA), which is seeing its IT budget rise by approximately two percent up to $5.13 billion. This is partly due to redistribution of funds from the military service branches to DISA as the DoD shifts increasingly toward enterprise and hosted services.

As reduced spending continues to be the norm across both defense and civilian agencies, they will now have to take a hard look at unobligated dollars for potential cuts. Funding for new initiatives may be stalled or fail to get off the ground entirely; and most existing programs will struggle to maintain current funding levels.  Product vendors and solution providers have to consider how their products serve existing programs – and, if possible, whether there’s a cloud-based approach to their offerings.

Keep in mind, DoD’s FY13 IT budget request alone is about $37 billion.  Even though it is smaller than last year’s, it’s still a big chunk of money, and the bottom line is that vendors who can help their government customers do more with less will be well poised in FY13.

The Big “S” Word (and I don’t mean “Sandy”)

by Tim Larkins, Consultant & Chris Wiedemann, Analyst

With government doors open again and Sandy more or less in the rear-view mirror for most of us in the DC area, it’s time to start preparing for the other S-word darkening the federal horizon: sequestration. Despite months of denial from government customers, up to and including President Obama stating that it “would not happen” during a televised debate, agency heads and program managers are planning for the $1.2 trillion, nine-year cuts as though they are a reality – which means that the product community needs to as well.

At first glance, the numbers aren’t pretty. Remember that we’re operating under a continuing resolution for the first six months of this fiscal year, which means that budgets are already flat and there will be no new program starts. On top of that, we now have to account for uniform cuts across all programs, projects and activities. That means that the total discretionary budget for next year will top out at roughly $956 billion – a 26% decrease from FY11. Moreover, the federal IT budget, which has been hovering around $80 billion for the last few years, will drop to something between $73 and $74 billion. If you’ve been following this blog, you’ve seen us talk about the tension between increasing mission demands and flat IT budgets; imagine how much stronger that tension will be now that budgets are actually shrinking.

What does this mean to those of us in federal IT sales? Despite all the negativity, there are definitely some upsides. The first is that obligated funds – that is, money that has already been contracted – are ineligible for sequester. Combine that with the fact that sequestration does not begin until January 3, and you get an uptick in contracting activity in October, November and December. For the next two months, program managers will essentially be competing to spend money, because the more they lock up in obligations, the less of their budget will be eligible for sequester. In other words, this is a good time to start selling. Secondly – and this is a recurring theme – federal IT staff still have missions to achieve and goals to meet. If anything, the fact that they have to do so with less money will mean an increased focus on COTS solutions that allow them to provide the same services at less cost. At recent events, government personnel have said across the board that industry needs to demonstrate value and show them how to be more efficient and cost-effective – exactly the type of thing that COTS manufacturers specialize in.

Finally, a word of caution: although we anticipate an increase in contracting activity before January, the post-sequester world will be different, and procurements are likely to slip past the 30, 60, or 90-day timeframe. LPTA will also become more prevalent as a selection criterion. Opportunities will continue to exist, but now is the time to really focus on value: how your solution can help government operate better, for less money. That’s the number one takeaway from sequestration.

What to Expect for IT Spending in FY13

by Tim Larkins, Consultant

In the wake of immixGroup’s FY13 DOD and Civilian Budget Briefings I’ve had a moment to reflect on the information our team delivered, and what the take home messages should be for the IT product community.  As we said last year, cost savings and operational efficiencies will continue to drive IT procurement across the government in the foreseeable future.  And solutions that will assist the government in this endeavor include those related to cloud and mobile technologies, cybersecurity, big data, and infrastructure consolidation.  Given the impending budget cuts due to the CR and sequestration, a huge question mark looms over the industry – how much money will the government actually spend on IT in FY13?  Well let’s begin by looking at the IT budget request.  The President’s FY13 IT budget request was pretty consistent with prior year levels, at $78.9 billion.  Typically over the past several years, we have seen reported IT spending government wide come in at the levels requested – $80 billion or so.  In reality, total IT spend across the government (including embedded systems) reaches up to about twice the request.  But we can expect considerably less than $160 billion in total IT spending across the government this year (and for the next 9 years for that matter).

When taking the CR and sequestration into account, we’re looking at a total discretionary spend across the government of about $950 to $960 billion (which represents a 26% decrease in discretionary spending since 2011).  The IT specific portion will most likely be cut to about $73 to $74 billion.  Given IT spending out of RDT&E budgets, C4ISR projects, intelligence agencies, and embedded systems, I would estimate about $140 to $150 billion in total IT spending this year.  Some may groan that this is a $30 to $40 billion cut from prior years… but I don’t think that $150 billion is something to shake a stick at.  The key to winning a chunk of this business will be for vendors to show their significant value and provide the lowest cost.  Remember to communicate the key differentiators of your products clearly, as program and contract managers will not have the time (or the patience) in the coming year to make inferences or read between the lines of proposals.  Their focus will be on how to realign programs to fit within new budget constraints, and how to spend money appropriately in a tumultuous environment – so by making their lives easier, you’ll be doing yourself a favor as well.

What does the Joint Information Environment Mean for COTS Vendors?

by Tim Larkins, Consultant

It seems every conference or event I turn to lately, Department of Defense officials are touting the Joint Information Environment (JIE).  You can’t show up at an AFCEA luncheon without overhearing someone talking about Rear Admiral Simpson and the policies he’s setting at DISA to ensure a common operating environment across the military.  At the Defense Systems Cybersecurity Summit this week, General Bowman from the J-6 reiterated the importance of building a standards-based architecture that allows each service branch to securely utilize each others’ data centers. The good news is (or at least the news we want to hear is) that in order to realize the JIE, investment in COTS software will be a requirement.  But the bad news? We’ve heard this same rhetoric over and over through the past 10 years, and have seen little progress toward the stated end goal.  It is important to bear in mind that the JIE is not a network.  It is not a system.  Rather, it is a framework, or a construct that will (or at least should) allow DOD components to share enterprise services and infrastructures to increase efficiency.  Also, the JIE is not a program of record, so it does not receive any funding directly from any component of DOD.  Thus, I wonder:  How are we to expect any more progress from the JIE initiative than from 2004’s System of Systems Interoperability project?  How are we to believe that the problems all of the COCOMs have been complaining about for a decade will disappear in the near future because of some guidance and policy coming from DISA, the J-6, and USCYBERCOM?  General  Alexander himself has recognized that USCYBERCOM still lacks a clear picture on its role in defending networks nation-wide.  True, General Alexander has begun the process of establishing cyber support elements within each of the six geographic COCOMs, but this progress is not a definitive sign that service men and women will be able to plug and play regardless of the COCOM environment they’re operating in.  I will admit that I feel some excitement when I consider the potential solutions and cost savings that the JIE will offer (not to mention the business opportunities for our clients).  But the realist in me says not to get caught up in the hype, and to steer our efforts toward a more tangible path… towards the programs of record that continue to receive funding.  As sales people, we need to remain cautiously optimistic about the potential that the JIE holds, and jump on it when the time is right.  But at present, we really need to stick with what works.

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