Federal IT Market: 2013 Was Tough, But It's A New Year

The past year has left solution providers, vendors and more struggling to get even a shaky foothold in the federal IT marketplace, as contracting dollars have continued to disappear and government agencies have remained hesitant to spend, if they were open to it at all. From the sequestration and shutdown to increased regulations and botched system rollouts, 2013 proved to be a tough year for the public sector.

Each of the events hit home for different businesses in different ways, with companies giving varying accounts of which 2013 federal event had the biggest effect on their bottom lines.

At the start of 2013, the sequester that took effect at the beginning of March slashed around $1 trillion from the federal budget across the board. For contractors, this meant increased competition for dollars and a growing uncertainty in the federal marketplace.

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"There wasn't enough work to go around for many of the current providers. ... They are trying to keep and sustain some of the existing partnerships and organizations. It makes it a lot harder to get into certain areas, which really was a byproduct of the budgeting and impacts to the agencies," Steve Halligan, COO of n2Grate Government Technology Solutions, said.

The sequester forced companies to re-evaluate their portfolios, Dan Hushon, CTO of CSC told CRN. He said it was the biggest hit he saw of the year, but the scary part is that, unlike other federal events this year, it doesn't have a definitive end date and doesn't paint an optimistic future for government spend in years to come.

"It's more the sequestration. I think that's what's happening is that we've had really smart CIOs that realize this year is not a one off. Maybe the worst times haven't happened yet -- as scary as that sounds," Hushon said.

Regulations ramped up for health care as increased HIPAA compliance standards came into effect in September. The new regulations strengthened privacy regulations and security standards on patient medical records, with hefty fines for companies that didn't comply.

The federal market closed out the year in style with the massive government shutdown, which put more than 800,000 federal workers on furlough, froze contracts and blocked access for many of those looking to continue support.

While the sequester hit hard, Halligan said that the government shutdown had the most noteworthy effect on his business. He said that it hurt his business on multiple levels, from on-site staff to human resources processes. While he said he was able to fill in with overhead and other work to keep his employees busy, it wasn't easy.

"The reality is the government contracting community [got it] harder than ... federal employees. While they were all paid, we had overtime and work to makeup in certain windows; there are many people who weren't paid through some of that. There's a whole slew of contracts that really weren't paid and didn't have the opportunity to make that up," Halligan said.

Halligan said that he is starting to see business rebound after being put on hold during the shutdown, but he said he knows that is not the case for everyone.

"That downstream really hurt commerce and business more than it hurt the government employee. We are going to work through that, but I know there are some stories, if you ask around, of people who are still recovering from that," Halligan said.

NEXT: It's Been Tough, But What Can A VAR Do About It?

Although 2013 has been a tough year for the public sector, it isn't anything new for VARs in the federal space.

"The guys that have invested, they've seen this before. A lot of partners understand it; they've been there, done that. They're stable enough; they can ride the storm," Mike Humke, vice president of vertical markets and public sector health care at Ingram Micro, said. "You can't blame. You can point at a lot of different things; there always seems to be an up-and-down cycle inside of government."

Some companies won some big-bucks contracts in 2013, such as Amazon's $600 million cloud contract with the CIA and a $10 billion cloud contract that's on the line for the Department of the Interior.

But that isn't the case for everyone, CSC's Hushon said. He said he sees a lot of these "game-changing" contracts being held back in favor of contract renewals. The good news, for companies already in the federal sphere, is that renewals are still happening. Essentially, the federal pie is staying the same size; it's just being cut in different ways.

"It does look like there seems to be a little more emphasis on the provider that I know rather than the provider that I may want," Hushon said. The concern for the market now, he said, is that in order to solve problems, it helps to think outside the box, which doesn't always happen if contracts are renewed.

Smaller companies have found success branching out to complementary markets, such as health care, or state and local governments, where some growth has been seen in education and other areas, Humke said. For example, he said Ingram Micro is looking more into mobility to gain a stronger foothold with the creation of a 21st-generation workforce and increased productivity.

It's about constantly updating business portfolios in order to stay relevant, CSC's Hushon said, comparing it to stock piling food for an emergency, only to find that when you need the food, it has expired.

"I think a healthy business looks at its portfolio and begins to reprioritize," Hushon said.

Halligan said he has also seen a "lack of net-new projects," but he said that he sees an opportunity there for partners that are able to distinguish themselves in a difficult market. He compared the situation to a duck floating on a pond, looking stable on top of the water but paddling really hard underneath to stay afloat.

"When things are challenging for organization, that's when those issues are more apparent, and that's just an opportunity we've had as a growing entity to capitalize on from a competitive standpoint," Halligan said.

Despite the tough situation in the federal market, VARs have to make sure to position themselves as the trusted advisor to the government, Humke said. The government is looking to cut back on costs and innovate, he said, and partners need to be reliably ahead of those trends to grab hold of more shares of the federal pie. Partners that think they can continue to stay relevant with just desktop replacements in the federal marketplace will be the ones struggling the most going forward, he said.

"Everyone will survive, but you're not going to survive by sitting there just taking orders. You're going to have to turn into that trusted advisor and you're going to have to use the resources around you. We have to work together and that's where the focus is," Humke said. "Federal is not a place for people who don't understand the market. There are too many rules; there are too many contacts; there are too many compliance issues you have to wrap your arms around. ... You cannot be a trusted advisor by dabbling," Humke said.

NEXT: What Can We Expect In 2014? Hint: It's Good News.

While the past year was a tough one, there is optimism for the federal IT market in 2014. Already, uncertainty around the possibility of a second government shutdown in January has been quelled as President Barack Obama signed a budget deal on Dec. 26 to stave off another crisis for two more years.

In particular, there are growing opportunities in health care after the passage of the Affordable Care Act, Ingram Micro's Humke said. It can be a "political landmine," he said, but for businesses with the infrastructure and investments lined up to make it work, it can be a huge opportunity. Across the board, indicators such as the economy and unemployment rates are picking up, he said, which is a good sign as 2014 gets on a roll.

"I wish I had a crystal ball, I really do. ... I think we're going to continue to be [hit] hard in '14. We're still coming out of a lot of issues, a ... variety of things that haven't settled out yet," Humke said. "I don't think it's going to be a boomer year, but I do think it's still going to be a struggle. I still think you're going to have budget issues. I think you're going to have to fight for the business you're getting, but I'm hoping dollars will start to loosen up," he said.

Halligan of n2grate said his company has already hired four more people in the last 30 days to prepare for a big year of business. He said the upside of a difficult market means great talent is easier to come by.

"It's a calculated risk we're making from our budget standpoint, but it's an uncertain budget from a customer standpoint," Halligan said. "We will continue to make investments to plan for it. But that uncertainty around government funding, it's in the back of our minds, but we need to press on and carry on in our own investments if we're going to have a stronger 2014 in general," he said.

While it may sometimes be hesitant to hand over the dollars, the government can't back away from technology now because the citizens are demanding more and more technology and Internet connections, CSC's Hushon said.

The bottom line? While government might not necessarily be spending money left and right, there is optimism for more spend going into next year, Humke said.

"I think, 'Will it be as bad?' God I hope not," Humke said.

PUBLISHED JAN. 2, 2014