The State of DOD Funding

Lloyd McCoy Jr.StateofDODFunding_052416By Lloyd McCoy Jr., DOD Manager

As always, my Market Intelligence colleagues and I are keeping close tabs on federal funding for upcoming fiscal years. And some recent action on a Defense bill caught our eye.

The House approved 277-147 the 2017 National Defense Authorization Act, a $610 billion policy bill that’s $27 billion more than what President Obama had requested and more than the Pentagon even said it needed.

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A Look at the Next Two Weeks…And Beyond

Steve Charles_headshot _7-23-2013_65x85by Steve Charles, Co-founder and Executive Vice President

With the Washington Nationals now eliminated for sure from this season’s baseball playoffs, Washington the city and the market can focus fully on handicapping the possibility of a government shutdown next week.

Just in case, the White House issued a memo this month on agency operations during a “potential lapse in appropriations,” the proper word for shutdown. It’s two pages, followed by a 12-page attachment on details of contracting, grants administration, and payment processing during a lapse. In essence, for the government to spend anything, it would have to be for “excepted” activities, mainly essential and emergency requirements, lest an agency fall out of compliance with the Antideficiency Act.

But let’s presume Congress will find some way of avoiding a shutdown. For sales planning purposes, how else can you think? A shutdown wouldn’t likely last more than a few days anyhow. Less clear is how much spending authority your federal customers will actually have in terms of both dollars and the authority itself.

If you have a scholarly bent, the Government Accountability Office has long tomes (GAO Red Book) online covering appropriation law, dating back to the Civil War era. But for more immediate practical purposes, pay attention to the term of a continuing resolution. In theory they could do it a couple of days at a time. In practice, the term will revolve around the Obamacare defunding gambit and the debt ceiling deadline around October 17.

Regardless, agencies only have spending authority at the yearly rate, prorated for the months approved. So an agency with an annual budget of $1 million in an account would have authority to spend only $250,000 during a three-month CR.

But like your Swiss wind-up watch, this year has complications. Namely, sequestration, which at this writing is still in effect. Will the CR live within the 2014 Budget Caps of the Budget Control Act (Sequestration levels) or will it ignore them and apply the sequestration holdbacks later in the year?  Expect some agencies to remain cautious, others will try and spend what they can early and worry about holdbacks later.

When approaching government customers, remember any spending under a continuing resolution, aggressive or conservative, must be mappable back to an authorized program funded by appropriated dollars in the previous year. Agencies can’t initiate new programs under a CR, but they can engage better ways to do what is already under way. That’s the smartest way to position your offerings now.

Beyond the current budget vicissitudes, here are a few of the long-term trends we’ll be staying on top of in the next year:

  • How  to sell products in a services-oriented environment. Infrastructure as a Service, utility-based computing, application sharing ⎯ these are all changing how the government looks at IT. Perhaps this by-the-month mode of buying is at some level driven by unpredictable spending authority.
  • Extreme price sensitivity, seen in the growing use of lowest-cost, technically acceptable procurements, shared services, and in the growing practice of analyzing competing contract vehicle prices. Keep an eye open for the “prices paid database” promised by OFPP.
  • Development of rules and practices to fill out the policies designed to ensure a safe electronics supply chain. Our big concern is whether the government is prepared to pay what it costs for tested, certified parts through bonafide channels.
  • Expect  more pressure to participate in strategic sourcing programs. The government wants to pay less and we need to show them how we’re lowering our costs of sales.

Hoyer Pessimistic about FY14 Budget Compromise

photo_Rick_65x85by Rick Antonucci, Analyst

In a press interview, Minority Whip Steny Hoyer, representative from Maryland, stated that he did not believe there was any chance Congress would pass a budget before October. The budgets passed by the Republican led House and the Democrat led Senate have a $91 Billion disparity and Hoyer says that the Republicans are unwilling to go to conference until the Senate reduces their budget to match that of the House. He feels certain that the ongoing stalemate will lead to the next fiscal year starting with a continuing resolution (CR). Additionally, this will keep the current funding levels unchanged from FY13 which mean sequestered levels will likely remain intact for the time being. This setback reflects the longstanding impasse within Congress over the federal budget as Congress hasn’t passed a formal budget since 2008, instead relying on series of continuing resolutions and appropriations bills to keep the government operating. The President’s budget attempts to remedy this disparity with a plan that reduces the deficit while still fully funding each new initiative.

So what does this mean for you as we head into FY14? Since a continuing resolution’s sole purpose is to keep the government from shutting down, budget levels do not change and there are no new starts. Most agencies under the current CR are operating under FY12 levels. Agencies in this situation are usually more hesitant to pursue major initiatives or make strategic purchases, instead focusing on day to day operations. There are exceptions, however, DOD, DOJ, USDA, NASA, DHS, and DOC will have some more flexibility in creating new programs as they have been granted appropriations bills to provide funding beyond the CR.

Is there an end in sight? Not until there can be some kind of compromise between the House and Senate proposed budgets. However, just because there have been severe cuts due to sequestration does not mean that there is not money out there. While new program starts are scarce during continuing resolutions, opportunities exist within operations and maintenance budgets, particularly in the area of refreshes and license renewals. Also, expect some agencies to seek Congressional approval to shift money around to pursue their high priority initiatives.

Shielding Yourself from Sequestration

photo_Chris Wiedemann_65X85- one postby Chris Wiedemann, Senior Analyst

If you had a chance to view immixGroup’s Market Intelligence briefing on sequestration yesterday, you hopefully have a better understanding of what the proposed cuts mean to IT companies.  Tim Larkins summarized the history of this situation – what sequestration is, when it became law, and just how those cuts (which weren’t really supposed to happen) actually arrived. He also covered some of the projected long-term impacts of sequestration on federal spending. This information is all vital – it will help you understand your customers’ pain and better equip you to discuss the cuts they’re experiencing.

Today, though, I want to take a minute to reemphasize some of the key components of Tim’s presentation: what does this mean for federal sales? The “snowquester” is actually a pretty good metaphor for the impact of these spending cuts on the federal IT market: some segments will stay pretty dry, while others may well get buried. So what should we be doing to shield ourselves from sequestration?

First and foremost, when you’re finalizing a deal with your customer, make sure the money is there. That means asking your customers two questions: what activity account is funding the purchase, and is the right amount of money in that account? Remember, while program people are creating demand, they have to request that money be transferred from Treasury into the right activity account before they can actually buy anything. This is the step where the sequestration cuts are actually taking place – think of them as a leak in the cash pipe. That leak could mean that money intended to purchase your products is actually getting lost before it ever lands in the right activity account. Don’t forget: unless you and your customer both know 1) which account is funding a purchase, and 2) whether that account contains the right amount of money, you’re subjecting yourself to potential delays and hang-ups down the road. You might even not get paid.

A few more points that I want to emphasize:

  • Although the long-term impacts of these deficit cuts will probably be minimal, we are going to feel the pinch in the short term. Federal IT spending will decrease overall this year, particularly in DOD, where they have been spending as though the sequester would not be implemented.
  • Most of the cuts to IT spending will probably be felt by systems integrators and services contractors, both large and small. All the language coming out of OMB and other government sources indicates that there are many duplicative or otherwise unnecessary IT services contracts that will probably be descoped (or cancelled outright). This is bad news for small business subs on large contracts, but is actually good news for the COTS community, since government will need to buy more tools to perform the tasks that they used to outsource.
  • Keep your audience in mind. At the executive level, demonstrating cost savings and value is going to be more critical than ever – if you can’t demonstrate real ROI within two years of purchase, your customer likely won’t be interested.
  • At the end of the day, there is still a mission that has to be met, and government customers won’t be able to use sequestration as an excuse not to do their jobs. If you or your clients can help them meet that mission, you will still find a willing audience.

As always, if you have more specific questions, I urge you to reach out to the Market Intelligence team. Good luck and happy hunting.

Reloading Your Federal Marketing Toolbox

photo_Allan-Rubin_65x85by Allan Rubin, Vice President, Marketing

My mother likes to complain that my father takes tools from the toolbox and doesn’t replace them, leaving her with a handful of nails and no hammer to drive them. Frustrating, right?

Marketers trying to attract the attention of government buyers face a similar dilemma: tools are getting taken from our tool kits and not replaced. Since my last posting about government event cancellations, we’ve heard of at least two more: the Department of Homeland Security’s 6th Annual Industry Day and DIA’s Defense Intelligence Worldwide will not take place.

Traditional media sources continue to struggle, with editors and reporters being downsized and print magazines continuing to consolidate. The impact of Sequestration cuts on major contractors and systems integrators is unlikely to help this trend as marketing budgets will surely be hit.

Those of us who are active in lead generation (via phone campaigns, email blasts, and events) will surely see conversion rates take a hit as furloughs kick in. What’s the best day or time to call or email someone if they’re not working that day? Will ongoing furloughs, downsizing, and political fights over giving a meager 0.5 percent pay raise break their spirits and drive them out?

Today’s blog post in FedConnects raised a few interesting questions. Among them:

How will government address the need for civil servants and military and intelligence workers to stay abreast of new technologies, innovate and collaborate in order to increase efficiencies and ensure productivity?  As part of President Obama’s Open Government Initiative, we are supposed to be operating under an open government mandate that encourages less siloing, more sharing of services and innovations.

How can true transparency and efficiency be achieved if government is restricting collaboration and opportunities for government leaders and industry to share ideas and work on problems?

If your organization relies on you to create demand in the public sector, it’s time focus on finding new tools to supplement the old ones. Will virtual events play a role as live conferences drop like flies? What role will associations play in educating our customers? How about social media driven information sources like GovLoop and Federal Technology Insider? I think it’s time to work some of these into your public sector marketing budgets, in addition to the targeted, local, and low-key events that were highlighted in Market Connections’ recent study.

Speaking of tools, we have a few that can help you make sense of Sequestration and the ongoing budget mess. Our Sequestration Resource Guide provides our take on how to deal with the pending cuts and also points you to market intelligence resources that can help. In addition, we’ve already had hundreds of IT sales and marketing professionals register for our upcoming webinar on Sequestration and the Federal Budget.

With so many tools vanishing these days, make sure you re-evaluate and take advantage of the ones that are left.

Sequestration. It’s Here, So Now What?

photo_Steve-Charles_65x85by Steve Charles, Co-founder and Executive Vice President

Like so many of our clients and partners, I’m scanning the news almost hourly to see what will happen with sequestration. As I’ve advised earlier, it’s important to filter out the politics ⎯ admittedly that are getting more heated and unreal-sounding ⎯ from the underlying reality.

That reality centers on two points worth repeating.

First, the math. For the civilian side of the government, cuts of $42.5 billion represent 6 percent or so of overall spending, but the effect is magnified by the fact that the fiscal year is nearly half over. The cuts aren’t horrible, but they are real. On the Defense side, it’s more like 9 percent, and this on top of budget limitations worth hundreds of billions over 10 years agreed to last year.

Remember, Sequestration is a “hold-back” of a specified percentage on all accounts of a similar type. For instance, the hold-back percentage on Discretionary accounts is higher than Mandatory accounts, and some accounts are exempt. But all “sequesterable” accounts of the same type have the same hold-back percentage applied, so an agency can’t completely cut a program, rather, all programs, theoretically, are subject to equal pain and suffering. The Sequester Order expected March 1 should include all these details.

This requires a careful, tactical approach by your sales teams to focus on the real opportunities, analyzing each by understanding which budget line item is potentially funding each individual opportunity. February 27 guidance to agencies from Comptroller’s office (M-13-05) emphasizes use of furloughs, hiring freezes, travel bans and so on to meet the hold-back percentages on sequesterable accounts without damaging mission performance. The memo does not mention freezing planned expenditures on technology purchases.

So opportunities to continually improve government performance and cybersecurity are still out there. Understandably, program managers are being very careful about allocating funds until there is more certainty that the fund-certifying official can sign off on the disbursement–all of which must happen before Contracts can work on the procurement.

Second, go back and review those areas most likely to keep going during the sequester. These are spelled out in guidance from the Congressional Research Service issued in January. It’s called Budget Sequestration and Selected Exemptions and Special Rules. Note that word: exemptions.

Among the areas the White House has the discretion to exempt:

  • Military payroll accounts for uniformed members, which of course pulls along all of the support products and services related to troops.
  • Veterans medical benefits, which also pull through supplies and services.

These two have already been “rescued” by the administration. Other possible exemptions that relate to the sales of products and services:

  • Unobligated balances carried over from prior years from nondefense programs.
  • A dozen direct benefits programs. Normally the administrative expenses related to these programs would be subject to sequester. But here’s a crucial point. CRS reports that OMB has decided that discretionary administrative expenses for exempt programs would not be sequestered. The reasoning is convoluted, but that exemption from the sequester could be your ticket to continued sales.

Bottom line? It’s no longer enough to ask whether the customer has money. Now we need to get into the details at the budget line item level and find out how sequestration applies to that account. This is a big job. There are many thousands of accounts.

And don’t forget, there’s a continuing resolution behind the sequester. It expires March 27. So far no plan has emerged from Congress on how to avoid a government shutdown. In their caution, your customers are thinking about how to avoid stumbling into an Antideficiency Act violation. Will the CR simply be extended, or will Congress us it kill some programs and plus-up others? Anything could happen as Congress and the President wrangle over finalizing the way the amounts cut by the sequester actually happen over the longer term.

Sequestration Looming; Take Cover, Keep Antennae Up

photo_Steve-Charles_65x85by Steve Charles, Co-founder and Executive Vice President

Like a distant tornado, the federal budget sequestration seems to have been looming on the horizon, but never quite comes into sharp focus.

Well, don’t wander too far from the storm shelter. In recent days, the likelihood of the sequester actually occurring has increased markedly. This remarkable development, the outgrowth of intractable political polarization, presumably means budgets will cut across the board.

OMB has been quite public in disseminating its preparation guidance to agencies. Its program-by-program impact analysis from last year simply drew a line of reduction of 7.6 percent to civilian spending and 10 percent for defense across the board. That now applies only to dollars unspent for fiscal 2013 ⎯ which is running under a continuing resolution at slightly below 2012 levels.

But, so many statutory exemptions to sequestration exist, and there is so much discretion given the White House, that the real effect of sequestration will be totally uneven across of the board. A new Congressional Research Service summary explains this phenomenon.

The law lets most entitlement programs off the hook. But the White House has a lot of leeway over administrative expenses related to these programs, so pay close attention to them. That’s where services and other contracting activities may exist.

In some ways, sequestration is preferable to Congress than actually doing the hard work of choosing which programs to kill, if it comes down to that. This way, everything continues, even if at temporarily reduced contract spending levels. But in this short term, sharpen your communications and sales calls focuses on the assumption your customers will be distracted by the simultaneous work of sequester planning and work — two months delayed — on the 2014 budget submission.

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