US Tech Firms Hit by Government 'Slim-Down'

By Carol Kopp  OCT 18, 2013 8:45 AM

Dell, Hewlett Packard, and IBM are some of the familiar names among the top-100 government contractors. A new survey by Cisco says austerity measures have slowed business for IT companies.

 


At the risk of opening a can of political worms, numbers don’t lie. The federal government’s austerity measures of the past three years have cut into the earnings of America’s information technology industries. The additional cuts forced by sequestration from the start of this year hurt more. And the two-week government shutdown that just ended really put the lid on it.
 
Although the reopening of the federal government seems to have resolved nothing, the future looks marginally better for federal spending on information technology, according to a new forecast from the TechAmerica Foundation, the non-profit arm of an industry group.
 
After several years of steep reductions in federal spending on information technology, the foundation projects that spending will increase 2.3% a year from now through 2019. That will bring total spending from $70 billion next year to $78.5 billion.
 
That projection for 2019 is a bit less than the peak spending of $78.9 billion in 2010, when government-wide budget cuts began, notes Wyatt Kash, editor of InformationWeek Government.
 
Kash notes that the months of sequestration cuts led federal agencies to postpone long-term projects.
 
The automatic spending cuts known as sequestration were originally intended to be so unpalatable as to force Congress to agree on a budget to avoid it.
 
Its real impact, though, appears to be mixed. A nonpartisan report by the Congressional Budget Office estimates that canceling the austerity measures would have added .7% to economic growth, and added 900,000 jobs, through fiscal year 2014. However, it also found that the eventual impact would have been a further burden to the national debt and a reduction in economic growth.
 
This month’s budget crisis, of course, stopped decision-making entirely.
 
Meanwhile, technology companies looking for new business are eyeballing state and local governments, which have made a surprising recovery from their near-death experience in 2008. Some governors of states are even talking “growth agenda,” according to InformationWeek.
 
There must be some happy hunting out there—about 90,000 governments operate within the US at the municipal, county, and state levels.
 
Dell, Hewlett Packard, IBM Among To Government Contractors

Nevertheless, a survey funded by Cisco (NASDAQ:CSCO) of government decision-makers showed that budget constraints continue to be the biggest threat to state and local information technology organizations. (Federal officials cited cyber-attacks as the greatest threat.)
 
Government work for technology companies is, in fact, dwarfed by defense-related contracts. The “Top 100” list of government contractors for 2013 is headed by Lockheed Martin (NYSE:LMT), Northrop Grumman (NYSE:NOC) and Boeing (NYSE:BA), though that spending, too, may decline with the end of the conflicts in Iraq and Afghanistan.

Familiar information technology names are few and farther down the list, including Hewlett-Packard (NYSE:HPQ), in seventh place; Dell (NASDAQ:DELL), in 19th place, and IBM (NYSE:IBM) at number 21.
 
Of course, the reputation of government contractors has not been improved by the performance of Healthcare.gov, the key piece of government health-care reform that notoriously malfunctioned the moment it went live on Oct. 1.  The cost of the site’s construction, budgeted at a maximum of $93.7 million, ballooned to $292 million over the past six months as frantic officials threw money at a project that was clearly in trouble.
 
No doubt we will hear much more about that now that Congress is turning its attention from the shutdown to other matters. Congressional committees are already shooting out requests for information to general contractor CGI Federal (NYSE:GIB).
 
In the meantime, there’s this brilliant assessment by a smaller government contractor, in the Washington Post, on just what might have gone wrong with the massive project to build Healthcare.gov: "If it had been a $4 million website, it would've had higher likelihood of being a success. It's not just CGI Federal. It's any collection of government contractors, if you put them together, will find a way to put together something complex enough to justify $400 million."
 
The Post also points out that CGI Federal’s stock has not suffered in the least from the bad press over Healthcare.gov, although it was the primary contractor on the project.
 
Just how lucrative government work can be may be illustrated by the lawsuit brought by BP (NYSE:BP) against the Environmental Protection Agency, for suspending the oil company from federal contracts after the disastrous Gulf Coast oil spill, citing its “lack of business integrity.”
 
The latest hearing in that suit, in a federal district court, was postponed this week, according to TheHill.com.
 
Ironically, the EPA, along with the entire federal government, was temporarily out of business.

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