Cuts in federal spending will force Northern Virginia IT companies to find new clientsSeptember 29, 2011 6:00 AM
by Tim Loughran
Northern Virginia’s IT industry is bracing for hard times. Firms that sailed smoothly along for many years with six-, seven- and eight-figure contracts from the federal government must now scramble for new clients in new business lines to survive a slowdown that some industry insiders say the region hasn’t seen since the late 1980s.
It’s all because of the austerity measures announced by the White House and Congress during the past 10 months. Perhaps most devastating was the $2.1 trillion in budget cuts through 2021 ordered by lawmakers this past summer as part of the debt ceiling negotiations.
The first set of cuts will total $917 billion, and at least $1.2 trillion in additional cuts are expected when Congress’ so-called “super committee” releases its package of cutbacks by Nov. 23. In exchange for their votes, congressional Democrats insisted that roughly half of these future budget cuts — $600 million — be absorbed by the Department of Defense rather than the government’s civilian agencies.
“We used to be called ‘recession proof’ because of all our contracts from the federal government,” says Bobbie Kilberg, president and CEO of the 1,000-member Northern Virginia Technology Council (NVTC). “Then, in 2008-2009, they were saying we were ‘recession resistant.’ But I think you can say now that the current crisis has made us ‘debt-ceiling vulnerable.’”
Yet, while a black cloud of federal cuts hangs over NOVA’s IT community, many of its counterpart companies across the rest of Virginia are optimistic about the future. Firms that have built their businesses with non-government clients expect the double-digit annual growth rates they’ve enjoyed throughout the recession to continue. In fact, Virginia’s highly qualified digital work force, its growing network of high-speed data centers and multiple state tax incentives for new IT investment are creating technology hubs far beyond the D.C suburbs.
Most troubling for NOVA’s IT industry is the budget cuts expected at the Pentagon. In 2009, the Defense Department accounted for $35 billion of the federal government’s $80 billion information technology budget. Of that $35 billion, 55 percent was spent among Northern Virginia’s IT companies, according to Stephen Fuller, director of George Mason University’s Center for Regional Analysis, which studies the regional economy of metropolitan Washington, D.C.
Local companies, according to Kilberg, had begun to adjust to the Obama administration’s previously announced plan to cut $400 billion in defense spending by 2021, but the sudden prospect that the Pentagon will trim an additional $600 billion in the next decade “was quite a jolt,” she says.
Kilberg and a host of other industry veterans agree that tighter federal spending for the foreseeable future will force historic changes in the way many Northern Virginia IT firms do business. With less federal money driving IT prices higher every year, companies that used to chase pieces of big-ticket Pentagon projects may now have to settle for slices of smaller contracts from other federal departments and agencies. Those who feasted for years on a steady diet of federal work may have to work for less money from private-sector clients to remain solvent. Finally, other companies, unable to compete as independents in what industry veterans are predicting will become a much more competitive marketplace, may be forced to sell out.
“More IT companies who have not done so already will turn to commercial [clients] and international markets,” says Andrew Robinson, senior vice president at Fairfax-based ICF International. “[Mergers and acquisitions] will become much more important to fill the gaps on the revenue side … The trick is to fill the pipeline … So a lot of people are going to have to get on the plane at Dulles for the first time and look for some new cheese in places they haven’t looked before.”
To lessen its dependence on federal contracts, ICF has turned to advising commercial clients in a number of industries, especially alternative energy, health care and transportation. “What worked to make a company successful in the last 10 years will not work for the next 10,” Robinson says.
Brad Antle, CEO of Salient Federal Solutions, also based in Fairfax, takes issue with such dire predictions. “Everyone will feel the pressure, but, clearly, government operations cannot stop. The government has to continue to provide for the common defense, so we’ll continue to have the Pentagon ... The government can’t maintain their services without IT. ”
Overhaul of federal IT spending
Even before the debt ceiling hammer fell, IT companies across Northern Virginia were on alert that their salad days were over. Since the early 1980s, many of them profited handsomely from the federal government’s spending. As departments and agencies fought for every available budget dollar, each contracted with different companies to build and maintain their own computer systems.
When the Obama administration took office in early 2009, it named New Delhi-born Vivek Kundra — an assistant secretary of commerce and technology in Virginia under then-Gov. Tim Kaine — as the White House’s first chief information officer. He was asked to overhaul the way federal departments and agencies purchased IT services and trim as much waste as possible from the IT budget. His first notable move was to launch the website http://www.data.gov, which provides oceans of government information to the public. His second was the creation of the so-called IT Dashboard (http://www.itdashboard.gov), which permits anyone with an Internet connection to see the progress of federal spending on information technology projects.
But perhaps his most ambitious effort came last December. Kundra, who has since resigned to work as a research fellow at Harvard University, released a 35-page, 25-point plan with blunt criticism of the culture of waste that characterized innumerable federal IT projects, putting the nation’s IT community on alert that its job performance would be scrutinized like never before.
In its very first paragraph, the Kundra report said that the federal government, in spite of spending $600 billion on IT services during the previous decade, “has achieved little of the productivity that private industry has realized from IT. Too often, federal IT projects run over budget, behind schedule or fail to deliver promised functionality … In addition, the federal government too often relies on large, custom, proprietary systems when ‘light technologies’ or shared services exist.”
At the end of the report, Kundra wrote: “Federal IT projects will no longer last multiple years without delivering meaningful functionality. Poorly performing projects will be identified early and put under a spotlight for turnaround — those that continue to flounder will be terminated. No longer will large IT contracts be negotiated by individuals without IT expertise. No longer will one agency build expensive new data centers when other agencies have excess capacity.”
The White House plan is ambitious, and Kundra’s successor, former Microsoft executive Steven VanRoekel, has said on repeated occasions that he plans no delays or changes in its full implementation. Using a timeline denominated by 6-, 12- and 18-month targets, the Obama administration has already begun to close 800 of the 2,100 data centers the government owned or leased in 2009 and has shifted multiple intranets, email systems and consumer-information websites to the less expensive “cloud,” or shared Internet networks.
Another change: Delivery times for IT projects will be cut to about eight months from more than 24. The White House also plans to hire experienced procurement experts trained in the private sector to negotiate lower prices and higher performance standards for all federal IT contracts. In another important shift, government agencies were ordered to adopt the same systems already purchased by other federal departments and utilize excess storage capacity in existing government data centers — before ordering anything new from private contractors.
The Kundra plan calls for stricter scrutiny by Congress over federal IT purchases, much like what it has done in recent decades to rein in wasteful, politically motivated pork barrel spending by the Pentagon. Democratic Sen. Thomas R. Carper of Delaware, chairman of the Senate Homeland Security and Governmental Affairs Committee, has proposed legislation that would do just that.
“We’re looking at a real redefinition in the procurement of government services,” says the NVTC’s Kilberg. “It will be broad and across the board. There will be real changes in the way all agencies purchase and use IT … A lot of teamwork will be necessary, among large, medium and small companies. Contracts will take a lot longer to be awarded. Everyone in the federal government will be looking at every cent that’s spent and every efficiency that’s possible.”
Defense spending cutbacks
GMU’s Fuller sums up the new environment this way. “The important thing to remember is that we’re looking not at cutbacks to current spending, but cuts in future growth rates.” In the next 18 to 24 months, IT executives in the region are hoping that full-time federal workers will be the first to lose their jobs as government agencies look to trim the usual HR expenses (like health care and employee retirement costs). They expect IT consultants and subcontractors based in Northern Virginia will take over duties full-time government employees used to perform. “Northern Virginia is not that dependent on federal payrolls, not the way southern Maryland is,” says Fuller. “Contractors will do the work smarter and quicker than federal employees … Innovation seems to double-up in times of economic uncertainty.”
Fuller is among those who believe that the most significant cuts to Pentagon spending won’t be software systems and other advanced IT applications but rather the most expensive weapons systems in the Defense Department’s product pipeline, from the Army to the Coast Guard, as the wars in Iraq and Afghanistan wind down.
“Military equipment sales will be scaled back drastically,” predicts Fuller. “Fewer ships mean Hampton Roads will suffer more than Northern Virginia. Fewer airplanes means California and Texas will suffer more than all of Northern Virginia in terms of defense spending … Fewer soldiers and sailors and airmen will have a much bigger negative impact in other parts of Virginia than it will have in Northern Virginia.”
However, Kilberg suggests that Northern Virginia IT companies won’t escape unscathed. “We don’t build tanks here, we don’t build planes here, but we do build the components that go into them,” she notes.
Some industry insiders, including Robinson from ICF International, say the coming slowdown in federal spending may rival “the dot bomb” meltdown of a decade ago. Fuller and Kilberg agree that the IT business environment will more resemble that which followed the fall of the Soviet Union and the Berlin Wall in the late 1980s and early 1990s. “Overall, we should be prepared for less growth,” Fuller says.
As the growth rate of Pentagon spending slows, a number of companies operating in the national security marketplace hope increased outlays from the Department of Homeland Security (DHS), especially in the intelligence arena, will be able to fill some of their future revenue shortfalls. A skeptical Fuller argues that may be wishful thinking.
He reports that the DHS flooded Northern Virginia with contracts after the 9/11 attacks on the World Trade Center in New York and the Pentagon in Arlington. The department’s overall anti-terrorism budget jumped from $900 million annually before the attacks to $9 billion in 2009. Northern Virginia’s IT firms “got really fat after 9/11,” says Fuller. “Homeland Security spending was growing at 20 percent a year, but it stopped accelerating in 2007. Now it’s holding its own. It’s still generating jobs, but fewer of them … It’s like going on a diet. I’m not eating as much, but I’m still eating.”
Preparing for the future
Now, with smaller federal IT budgets set to take effect, Northern Virginia’s IT companies must move quickly to use the skills and expertise the Pentagon and other federal departments paid them to develop. By most accounts, the most-profitable business lines for both government and commercial sector clients will be cyber security, health care, renewable energy and mobile communications. “I think it’s a mixed bag, a mixed picture,” says Kilberg. “It will be hard, but there are plenty of opportunities … there will be a laser focus on anything that is new, innovative and necessary.”
As the IT landscape across Northern Virginia evolves, there’s disagreement on how prepared local companies are to survive the changes. Some observers and industry veterans say the real cuts won’t begin for a few more years, in line with the usual federal budget cycle. Others say a new day will dawn as soon as next year.
“In all fairness, it’s still going to be busy” for IT companies who work with the federal government, says Jill Klein, who lectures on information technology issues at American University’s Kogod School of Business. “Change is not going to happen right away as either projects are slowed or delayed.”
The 2012 elections also could delay changes for some time. “There are ups and downs in IT, and these companies know it,” continues Klein. “These businesses are sustainable over the long haul because they have leadership teams that have made them valuable … You can’t run around and be ‘Chicken Little’ ... You have to bring in new talent, talent from other industries, do whatever is necessary to make things work.”
On the other hand, Andrew Robinson of ICF International says change will be painful and immediate for a number of companies, especially the larger defense behemoths that have grown bigger and bigger over time, based on a business model that the Obama administration has determined is obsolete and a waste of tax dollars. “I think anyone who thinks 2012 is not going to be a tough year has got to be a little crazy,” he says. “I’d say 50 percent of companies in this area are not diversified enough. They don’t dance real well. They don’t do the agile stuff, the nimble stuff, the small stuff.”
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