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Outsourcing will be one of the fastest-growing segments of the federal IT budget over the next five years, according to a December 2004 study by INPUT, a research agency. Its "Federal Outsourcing MarketView" forecasts federal IT outsourcing will grow 55 percent from $11.7 billion in fiscal year 2004 to $17.4 billion in fiscal year 2009. That's a compound annual growth rate (CAGR) of nearly 8.3 percent.

"Agencies are responding to increasing pressure from the administration and taking cues from successful practices in the commercial sector," says Chris Campbell, Senior Analyst, Federal Market Analysis at INPUT. "An organization will be most effective when it focuses on things that it does best. In other words, the Department of Defense is best at fighting military actions, not administering data centers. The Federal Bureau of Investigation is best at investigating crimes, not developing software," he continues. Cost savings are a further plus, the feds have figured out.

Who's Outsourcing?

INPUT says much of that growth will come from the Department of Defense; its two big initiatives are the Navy's Navy Marine Corps Intranet (NMCI), which includes everything necessary to ensure the transmission of voice, video, and data. EDS is the supplier for this $6.9 billion project. The Army's IT-Enabled Services-2 program is another major effort.

The report predicts the intelligence community will be responsible for the greatest amount of spending, which should grow from $1.1 billion in fiscal year 2004 to $2.1 billion in fiscal year 2009. That's a CAGR of 8.6 percent.

But the Judicial Branch will see the largest compound annual growth rate, nearly 11 percent.

Much like the corporate market, most government agencies make IT outsourcing their first venture into outsourcing. After they become comfortable with the process, they begin to outsource non-core business processes. INPUT expects BPO to increase the most, growing at a CAGR of 10.9 percent for the forecast period.

Application services now account for the largest portion of the federal outsourcing budget, representing 37 percent of the federal outsourcing market, according to the report. This segment includes the government's Internet and applications environment. INPUT expects this area to grow at a CAGR of 8.1 percent over the next five years, reaching $6.4 billion by fiscal year 2009.

Why the Increase?

The report cites two major factors. They are:

• A shrinking federal technology workforce. The report labeled this the most important factor in the projected growth. According to INPUT, a "significant" portion of the government's technology workforce is entering retirement age. In addition, agencies have trouble attracting young technology workers because they can't compete with the pay, benefits, and faster pace of corporate America. The report states that the federal government may have no choice but to pursue outsourcing as a means to address the workforce shortage.
• Administration management priorities. Competitive sourcing is one of the five major goals of President Bush's management agenda.

Given these pressures, the future seems bright for federal government outsourcing possibilities. Campbell adds, "Despite on-going battles between Congress and the Bush administration, the federal government simply cannot afford not to outsource from a financial perspective, and more importantly, from a human capital perspective."

Publish Date: May 2005

Copyright © 2005 - Everest Partners, L.P.

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