Editor’s note: President Trump’s blueprint provides clues into the potential future of federal contracting, and don’t forget: The U.S. government is the world’s largest IT buyer. Joey Cresta, Public Sector Analyst at Technology Business Research, takes a look.
HAMPTON, N.H. – President Donald Trump recently unveiled a budget blueprint for how the administration proposes translating campaign promises and Oval Office priorities into financial support for federal agencies in FY18. Although far from final, and facing significant scrutiny, debate and opposition from lawmakers across both chambers of Congress, the blueprint, dubbed the “America First” budget, provides insight into how Trump’s national security, economic and social policies could impact budget flexibility across the federal landscape. The budget also provides the best glimpse yet into how Trump’s agenda will potentially reshape, disrupt and create opportunities in services acquisition across the U.S. federal government, the world’s largest IT buyer.
Given Trump’s national security agenda, it is unsurprising that clear winners in the budget blueprint include the U.S. Department of Defense (DOD) and homeland security agencies. Pockets of growth likely to survive the contentious budget process include those around sustainment and maintenance of defense platforms and systems, enhancement of cybersecurity across government, and IT modernization at the Department of Veterans Affairs (VA). Federally focused contractors and their vertically diversified IT and professional services counterparts will clamor for increased spend on these priorities. However, if they narrow their focus too much, they risk losing out on opportunities that will arise as agencies facing cuts look for outside help to increase efficiency the administration is promoting and overcome significant disruption implied in Trump’s proposed budget.
TBR has identified winners and losers in Trump’s proposal, as well as potential opportunities that may arise from an emphasis on reducing bureaucracy and inefficiency in government. Note that while all referenced figures are overall, rather than IT‐specific, budgets, outlined agency objectives help to guide expectations for IT services opportunities; growth compares the administration’s FY18 proposal with annualized FY17 continuing resolution data; and the blueprint only addresses agencies’ discretionary spending.
Increased DOD spend is the light at the end of the tunnel for defense firms
Trump’s plan for an unprecedented peacetime military buildup generates additional momentum for a defense industry that began showing signs of life in 2016 after years of revenue headwinds associated with sequestration and troop drawdowns in Iraq and Afghanistan. The president proposes repealing sequestration and raising the base defense budget 10% in FY18 to $574 billion, while keeping Overseas Contingency Operations (OCO) funding relatively flat at $65 billion. Although Trump talking points focus on topics such as building up the naval fleet, these initiatives could take decades and require sustained funding as well as the recruitment and training of tens of thousands of workers. In the near term, it is more likely that increased DOD spend will go toward shorter‐cycle programs that improve warfighter readiness and address overdue maintenance and modernization of defense assets, creating a wide range of IT, technical and professional services opportunities ideal for defense‐focused contractors that are still recovering from the challenging market conditions of the past five years.
There is general agreement in Washington that the U.S. military’s traditional technological edge has eroded amid investment by rivals such as China into advanced networked weapons systems that significantly threaten the U.S.’ safe entry into theater. To address this mismatch, the U.S.’ Third Offset Strategy proposes greater utilization of integrated satellite and sensor information to improve cross‐domain coordination and offensive cyber capabilities targeting undermining command, control and communications capabilities of the opposition. Raytheon (NYSE: RTN), a company that bet heavily on such initiatives, is a prime example of a vendor poised to benefit from near‐ term defense budget growth.
A larger DOD budget would also likely help the armed forces address persistent delays in IT modernization. In TBR’s 4Q16 General Dynamics Information Systems and Technology (IS&T) report, we outlined how IS&T is uniquely positioned to address DOD ICT needs through its diverse portfolio spanning networked communications and enterprise IT. IS&T’s portfolio addresses not only the need for force multipliers through communications offerings that extend the capabilities of existing resources but also the long‐overdue modernization of the DOD’s IT infrastructure. DOD agencies are well behind Federal Data Center Consolidation Initiative benchmarks for government IT consolidation.
As the DOD gains greater budget flexibility, opportunity exists for military branches to accelerate their IT transformations, positioning vendors such as General Dynamics IS&T, which has deep relationships across the DOD, as an ideal systems integration partner in areas such as migration to cloud‐based email services. While cultural resistance will continue to challenge DOD IT modernization, we believe that the costs of maintaining legacy stovepiped systems in terms of dollars and cybersecurity risk will compel the armed forces to move forward with initiatives such as cloud migration in earnest.
Next: National security, other categories as White House sets priorities
(C) TBR