Surveying the federal IT marketplace, one overall conclusion is inevitable.

"We've just come off of 10 years of marching up discretionary spending. Now we're heading into a period of who-knows-how-long of marching down discretionary spending," Kevin Plexico, Deltek Senior Vice President of Research and Analysis, told a gathering of IT industry leaders at Deltek's FedFocus conference.

"But we don't want to just present the bad news. There is certainly no shortage of that from a funding standpoint, but there is also good news, and there are opportunities."

Some Areas of Growth

For one thing, Plexico noted, government contracting may be a tough market, but it's one of the calmest sectors of a rapidly changing economy. "While we are facing cuts, put in commercial terms, compared to stock market fluctuation and such, it's still much more stable than the fluctuations you see in commercial markets."

Considering the 2012 budget proposals put forth by the House of Representatives, he noted, "The defense base budget is increasing about three percent, which is a healthy increase, especially when you consider the size of that budget." That number, he cautioned, does not include the budget for overseas contingency operations (OCO), the primary funding source for the wars in Iraq and Afghanistan. OCO spending, he said, "is set to decrease by a third."

He also noted that contractors targeting the Department of Veterans Affairs (VA) may see growth opportunities. "The VA is packaged with military construction by Congress," he said -- a budget item that appears to be declining. "But if you separate out VA, it's actually growing a bit."

Three Strategic Opportunities

Deltek analysts, Plexico said, see several "strategic growth opportunities for federal contractors" in 2012. They include:

Health IT – "The federal government is both the largest provider and buyer of healthcare in the world," he noted. "When you look at discretionary spending on healthcare, VA spending is going up, Department of Defense (DOD) spending is going up, and Department of Health and Human Services (HHS) spending is going up." Analysts see a particularly strong opportunity for companies, he said, "that can help agencies save money on health care."

Energy Research and Development – "I'm a little less excited about this than I was maybe a year ago," Plexico cautioned, "but we do still see investments in buildings." He urged contractors to look outside the Washington, D.C., region to find new spending. "Federal agencies are doing more spending in certain regions," he said, "so one thing you might consider is how to grow regionally."

Cybersecurity -- Regardless of attempts to save elsewhere, Plexico noted, evolving threats and the need to secure information used by an increasingly mobile workforce mean that cybersecurity spending will rise in 2012.

Not how Much, but How

Plexico suggested that changes in how the government spends money may affect the contracting industry as much as the funding decrease.

"The government is moving from cost-based contracting to fixed-price contracting," he explained.

There may also be new pressure to meet small business set-aside goals. "Fundamentally," he said, "the agencies are typically falling short."

Deltek expects a trend toward large task-order-based contracts to pick up speed in 2012. "It's not just a trend in IT," Plexico said. The Department of Homeland Security, he noted, has set up a task-order-based contract vehicle for professional services -- a tactic other agencies are likely to adopt.

This significantly alters the strategy companies will need to follow to be successful.

Winning a place on an agency's preferred spending vehicle will be more critical than ever. "If you're not on the right vehicle," he said, "your opportunity to do business with an agency is effectively reduced."

"The change this requires in your business processes in terms of your proposal processes," Plexico said, is significant. "You've probably felt the pain, if you're on one of these, of the faster cycle. In a task-order environment, If your business development people aren't deeply embedded in an agency, then task orders are probably coming out with little warning."

Increased Competition

Fundamentally, Plexico said, the changing IT contracting environment will mean a more competitive field for contractors.

"We'll have fewer dollars being spent and the same number of companies competing to win that spending. It's making companies look in each other's pockets to find growth."

Smart companies, he said, may also look for ways to benefit from one another's successes. "This is also forcing companies to rethink their relationships in terms of priming and subbing. Companies will have to work through prime contractors who have access to these vehicles," he said.

Sean Tucker covers the federal government and the contracting industry for GovWin.com, the network that helps government contractors win new business every day. He can be reached at seantucker@govwin.com.