Federal IT outsourcing market weathers budget crunch

Virginia, USA: Despite the expected decline in overall IT services at a CAGR of -4 per cent, federal spending on IT outsourcing shows relative stability as agencies face new budget realities.

A new report by Deltek forecasts an increase in the federal outsourcing market from $26.0 billion in FY 2013 to $26.7 billion in FY 2018.

This is promising compared to several other segments, such as IT professional services, IT hardware, and software, that will face slightly steeper declines. Pockets of opportunity exist within each of these market segments, though capturing them will be more challenging in this current environment.

The increase in agencies' interest in outsourcing is driven by both budget and workforce issues, as agencies grapple with declining budgets and gaps in expertise. Agencies must find strategies to continue to meet mission and operational objectives, which often means a reliance on contractor support.

IT professional services will also be impacted by budget and workforce issues. The ongoing scrutiny of services contracting will drive agencies to continue to streamline management support and advisory services.

However, the market will be buoyed by services to support mission-critical capabilities, such as cyber and ISR, as well as more efficient operational capabilities, such as cloud, data center consolidation/optimization, and automation.

The picture for IT hardware and software is more challenging and will require contractors to have robust strategies for teaming and pricing to win business. Deltek expects the use of strategic sourcing, enterprise licensing agreements, and reverse auctions to grow.

These policies, along with elimination of excess IT inventory, drive the five-year CAGRs for IT hardware and software of -4.9 per cent and -2.0 per cent respectively. Contractors should educate themselves about agencies' preferred vehicles and pricing sensitivities to capture this still significant level of spending.

Increasing demand for bandwidth, wireless, and unified communications serve as opportunity drivers for communications and network services. Deltek expects overall spending to remain flat at $17.6 billion, with opportunities embedded in targeted areas.

Agencies are seeking ways to optimize bandwidth, integrate communications capabilities, and standardize communications infrastructure and services.

Given the budget environment, positioning will be critical. Contractors should be prepared with the information and tools necessary to respond effectively to changing acquisition strategies, consider new teaming partners, and reexamine internal processes to ensure their competitive advantage.