The federal government may be a less promising customer in coming years for information technology (IT) companies seeking contracts, a report from market research firm Datamonitor suggests.
Datamonitor projects that the compound annual growth rate for federal IT spending will slow to 4% over the next five years. The slowdown comes after massive increases in recent years. According to TheWashington Post, Uncle Sam's outlays for IT rose 10% in 2004 after a 50% jump in 2003 and a 100% surge in 2002.
While the change may seem to be cause for serious concern, the effect of this leveling off is not likely to be disastrous. Sure, firms such as Accenture (NYSE:ACN), Bearingpoint (NYSE:BE), Electronic Data Systems (NYSE:EDS), and IBM (NYSE:IBM) benefited from the government's largesse when economic times were tough, and so they could experience some bumpiness from the deceleration.
But larger federal contracts often run for several years, and since revenue is generally recognized as work is completed, sales from certain older deals are still showing up in earnings statements. Of course, since spending growth plunged this year, some fallout is no doubt already being felt. Even so, the private sector is reviving, so presumably these IT firms and other outfits can build backlog elsewhere to pick up the slack.
Indeed, most would probably prefer private-sector clients to the government anyway. Electronic Data Systems has run into headaches with its U.S. Navy contract, while Accenture's incorporation in Bermuda threatened its $10 billion Homeland Security deal. Given these kind of snags, IT outfits are no doubt grateful that they have other places to turn besides Washington, D.C.
Fool contributor Brian Gorman is a freelance writer in Chicago. He does not own shares of any companies mentioned in this article.
