What economic downturn?

September brought surge of fed business in 2001, new priorities for 2002

It started slowly. Very slowly, like a crawl.

Through much of the government's traditional buying season this summer, business in the federal technology market appeared to mirror the economic slowdown in the commercial sector, defying the long-held notion that the government market was recession-proof. But that changed in the last weeks of September as orders finally began pouring in, with some vendors reporting a 20 percent increase in sales for the year, compared to fiscal 2000.

And vendors believe sales will remain strong for fiscal 2002. The primary obstacle to business last year—the change in administrations—is a thing of the past. And the events of Sept. 11 have served only to spur more business and reshape agencies' priorities.

Rush Hour

Even before the Sept. 11 terrorist attacks, Harry Heisler, executive vice president and general manager of MicronPC LLC, saw a rush of late activity, signs that the company would be working overtime to fill orders at the end of the fiscal year.

Many agencies did not have their top managers in place until midyear, "and that put something of a damper on the decision-making process," Heisler said. But with the late rush of business, Micron is more backloaded than in any year since the procurement reforms of 1994, he said.

Other contractors and agencies reported similar booms.

"The phones were ringing off the hook" until just before midnight on Sept. 30, as agencies attempted to squeeze in last-minute purchases, said Terri Allen, senior vice president of sales at GTSI Corp. "Our sense was [that] a fair amount of money became available to certain agencies late on Sunday," Sept. 30.

Rebecca West, director of the Transportation Department's Information Technology Omnibus Procurement (ITOP) program, said activity overall was high throughout the year, and even better as the fiscal year drew to a close.

"This was the best September in the history of ITOP," which was established in 1996, West said. "There was a burst earlier in the month and even in August" on goods and services "all over the board."

The destruction at the Pentagon and of the World Trade Center towers had an immediate impact on the business environment. For a short while, business came to a halt for most agencies, as the government shut down. But several contractors were called in to help the affected agencies rebuild.

Dell Computer Corp. helped customers in both locations. The company's direct manufacturing model sped delivery of replacement equipment because the company did not have to sift through months of back inventory, said Bob Barr, director of government marketing at Dell.

"We're manufacturing on the spot and shipping to them," he said, adding that orders are up for all kinds of technology that need to be replaced because of the terrorist attacks.

Some customers sought ways to help their colleagues. "One customer called who had just gotten a fulfilled order from us and said if it could be used elsewhere to please take it back and fulfill it [again] later," GTSI's Allen said. "That was just one example of the togetherness."

The Army's Small Computer Program, which handles $350 million in sales each year, had a good year and saw a flurry of activity in the wake of the attacks.

"The majority of our business comes in September.... There are still orders coming in from the fiscal year," said Steve Miller, one of the program's product leaders.

And since the terrorist attacks, there has been a rush toward more wireless products, including laptops with wireless capacity, "just in case they have to go and work from a remote location," said Adelia Wardle, another product leader.

A Welcome Boost

The surge of activity was welcome after months of uncertainty, beginning with the drawn-out conclusion to the presidential election.

A change in administration typically involves a period of transition as the new president appoints his top officials, who in turn appoint their management teams. Agencies often put big projects on hold until those teams are in place.

But the Bush administration's transition took even longer because the results of the election were not known until just weeks before the winner was due to take office.

As a result, contracts stalled and buying froze in some agencies. Once in office, the Bush administration promised smarter buying, but not necessarily more money. Adding to the uncertainty were statements by Mark Forman, the administration's top e-government executive, that the government might be spending too much money on information technology.

Even before the transition, industry vendors realized that government officials were taking a different approach to buying technology. Rather than treating technology as a commodity, agencies have been pushing their contractors to provide more integrated solutions that meet specific requirements.

Same Growth, New Targets

With the new administration in place and budgets steady, observers expect the gains made at the end of last month to carry into the new fiscal year.

"When I talk to vendors out there, I hear really positive remarks concerning government practices, and most see that there is a lot of opportunity around outsourcing in the federal space and increased use of consultants," said Chris Ambrose, a research director at Gartner Inc.

Recession-proof and immune to the highs and lows of the stock market, "the government is continuing to be a very strong customer," said Olga Grkavac, executive vice president of the Enterprise Solutions Division at the Information Technology Association of America.

The trend is only going to continue, she added. "The IT industry hasn't taken cuts in terms of government spending. Not only have there been increases, but there have been no decreases."

The terrorist attacks in September, and the Bush administration's subsequent efforts to fight terrorism, also brought about a dramatic shift in the political scene. As the government's reaction to the attacks continues to unfold — and mobilization of the military, intelligence and law enforcement communities moves forward—"obviously, there's going to be some spending specific to our industry," Heisler said.

Federal IT experts say they do not expect a dramatic change in spending levels as much as a change in how the money is spent.

In the wake of the attacks, agencies expressed a need to reprioritize, "and that's a trend moving into quarter four," GTSI's Allen said.

The changing face of government agencies and the creation of the Office of Homeland Security will help dictate what technologies are in demand in the near future, and anything to do with information security is an early front-runner, she added.

In a report released last week, the Government Electronics and Information Technology Association forecast a significant increase in IT expenditures for the next five years—from fiscal 2002 through fiscal 2007, when the federal IT budget is predicted to be $65 billion, up from the current $45 billion. Agencies will spend money to rebuild IT infrastructures, increase critical infrastructure protection and add security, according to the association.

"This is a rapidly evolving scenario, and it will be a while before we understand all of the implications for the discretionary and IT budgets," according to the report. "Industry needs to be prepared for changing program requirements, to be able to respond quickly to these new needs and most importantly to be a partner with government."

Elmer Sembly, communications director of the National Institutes of Health's Information Technology Acquisition and Assessment Center (NITAAC), said business had been good this year, but it came to a standstill for a week after the attacks.

But now NIH's Image World contract, which provides imaging technology including biometrics and other detection systems, and the Chief Information Officer Solutions and Partners II contract, which provides IT services, are expected to grow dramatically.

"It's going to turn around because a number of agencies that had not gotten funding up to their requested levels—[the Immigration and Naturalization Service] and the Justice Department—have gotten word they are going to be getting a lot more funding this year to support their internal operations," Sembly said.