End of Federal Tech Boom May Send Contractors Elsewhere for Work

AUVSI's Unmanned Systems North America 2011 Event

Models of Northrop Grumman's unmanned aerial vehicles are seen above their display area during a conference in Washington, D.C.

Photographer: Brendan Smialowski/Bloomberg
  • Obama budget seeks 1.3 percent increase in technology spending
  • Lockheed Martin, CSC among those who've shed some IT divisions

The end of a federal government technology boom may push more U.S. contractors like Northrop Grumman Corp. to spin off units focused on certain IT work and refocus on areas like cybersecurity where agencies are boosting spending.

President Barack Obama’s new 2017 budget makes clear that the sector’s high-flying days are over. Information technology spending by the federal government has increased about 1.8 percent annually from 2009 to 2017, compared with the 7.1 percent annual growth between 2001 to 2009, when President George W. Bush was in office.

"The pressure on the IT budget is forcing companies to look elsewhere in the federal budget for growth," said Nick Taborek, a federal spending analyst at Bloomberg Intelligence. "We’ve seen a number of deals where contractors are clearly getting out of the IT business to focus on areas where the government is expanding." 

Obama is requesting $89.9 billion for information technology needs across the federal government in fiscal 2017, an increase of about 1.3 percent over the $88.7 billion being spent in the fiscal year that began Oct. 1.

While Republicans in Congress quickly rejected most of the high-profile elements of Obama’s budget, the IT spending goals aren’t likely to meet the same opposition.

‘Modern Technologies’

The slowed spending isn’t a "bad sign" because there has been an increase in cloud computing and other areas, Tony Scott, the federal government’s chief information officer, said during a conference call with reporters Tuesday. "It provides efficiency and economies that we all love."

"The more we adopt modern technologies, it tends to help flatten out the spending," Scott said.

Amid stagnant funding for information technology work, Lockheed Martin Corp., based in Bethesda, Maryland, announced last month it would spin off its information systems division, which includes federal health IT, commercial cybersecurity and help-desk work, and combine it with Leidos Holdings Inc. in a tax-free, $5 billion transaction.

That move will "enable Lockheed Martin to focus on and grow its core aerospace and defense business," Bill Phelps, a Lockheed spokesman, said in an e-mail.

Next Shoe

Such industry consolidation may continue, said Chris Higgins, an equity analyst with Morningstar in Chicago.

"It’s just not price-competitive -- that’s why you see Lockheed divesting," Higgins said in a phone interview. "Northrop may be the next to shoe to drop."

Northrop Grumman announced in October that it would reorganize its business by consolidating four of its divisions into three units. The Falls Church, Virginia-based company has seen the value of its U.S. government information-technology services contracts slip over the past few years -- such contracting awards dropped from $5.4 billion in 2011 to $4.8 billion in 2014, according to data compiled by Bloomberg.

"From 2001 to 2009, you had a big growth in the government’s budget -- in defense in particular, which is a large part of what’s driving IT expenditures," Higgins said. "And then that reversed. There are a lot of things going on, but IT services businesses have pricing pressure and it doesn’t make sense for them to keep everything under the same roof anymore."

Randy Belote, a Northrop Grumman spokesman, declined to comment on the government’s spending patterns and whether the company would consider spinning off any IT units.

Broader Shift

Even firms known for information technology are consolidating. One such example is Computer Sciences Corp., which spun off its U.S. public sector unit last year. 

That division announced in November it was a new public company -- CSRA Inc. -- and had combined with SRA International Inc. CSRA focuses on federal government information technology areas like cybersecurity and cloud computing, which the Obama administration has made a priority.

Obama’s budget request this year includes a $19 billion plan to protect against and respond to cybersecurity attacks, a 35 percent boost over this year’s spending levels.

Some of the contractors that are well-positioned to benefit from the cybersecurity initiative include General Dynamics Corp., Northrop Grumman and Booz Allen Hamilton Holding Corp., according to a Bloomberg Government ranking based on unclassified cybersecurity spending.

Northrop Grumman led federal contractors with $556 million in unclassified prime cybersecurity contracts -- or 5.1 percent of total U.S. orders -- in the fiscal year that ended Sept. 30, followed by General Dynamics with $297 million, or 2.2 percent of total orders, according to an analysis by Bloomberg’s Taborek.

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