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

by Tim Larkins, Senior Manager, Market Intelligence & Chris Wiedemann, Senior 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.