Is Cisco Signaling a Government IT Spending Slowdown?

Is Cisco Signaling a Government IT Spending Slowdown?

Cisco Systems last week disappointed investors with a dismal Q2 sales forecast. Among the factors the company cited: a decline in public sector business. In prepared remarks, Cisco CEO John Chambers said orders from state governments dropped 48 percent from Q4 to Q1. He noted that the challenges associated with public sector spending will “be with us for a couple of quarters.” It’s unclear how many IT firms -- and public sector-focused MSPs -- also experience this public sector downturn. But the environment is certainly difficult.

The Center on Budget and Policy Priorities reported last month that state tax revenue dropped 8.4 percent in fiscal 2009 compared with 2008 and fell by an additional 3.1 percent in 2010.

“As a result, even after making very deep spending cuts over the last two years, states continue to face large budget gaps,” according to the center, which tracks state and federal budget and tax policies.

The center reports that at least 46 states “struggled to close shortfalls” in the FY 2011 budget cycle, which began July 1 in most states.

But Cisco could be encountering another issue in its public sector decline: a huge turnover in state governorships. More than two dozen states will have new leaders in January. The potential for CIO turnover and shifting IT strategies may have caused state IT departments to put new projects on the shelf.

Dan Lohrmann, Michigan’s chief technology officer, cited “a lot of uncertainty” leading up to the November election, adding that states may be holding off on decisions until new administrations take office. Michigan is among the states that elected a new governor. Michigan governor-elect Rick Snyder has yet to announce  a decision on the state’s CIO post.

It remains to be seen whether states with stalled projects will turn them loose next year. Michigan, for its part, has continued to award contracts in the IT space and has initiatives in cloud computing, unified communications systems, and virtualization.

The Big Picture

Overall, state and local demand is expected to grow over the next few years, although not spectacularly. Market watcher Input Inc. forecasts a 3.1 percent annual growth rate for state and local IT spending through 2015. Growth estimates are, in part, based on the notion that governments will continue to invest in IT projects that boost efficiency and posses ROI potential. That’s certainly the argument that advocates of cloud computing like to make.

Input suggests that a number of vertical segments within the state and local sector will outperform the modest 3.1 percent uptick. Those include justice/public safety, transportation, budget/public finance, education, economic development, and healthcare.

The healthcare reform law contributes to the latter market. The Affordable Care Act calls for states to launch insurance exchanges that will let individuals and small businesses review and purchase health plans. Input estimates that state and local spending on health insurance exchanges will reach $595 million by 2015. The caveat is that healthcare reform will face a Congressional challenge next year.

Amanda White, research associate at Input, cited healthcare as the sector where she sees the most activity among state governments. In the case of health insurance exchanges, states may be able to obtain federal dollars to get things rolling. White pointed to the Department of Health and Human Services’ recently announced early innovator grants. The awards, slated for early 2011, will be made to up to five states, or coalitions of states, pursing heath insurance exchanges, according to the department.

States could end up tapping cloud computing and SaaS to speed up implementation. Indeed, the cloud already is finding use in government-related healthcare projects. Health and Human Services in early 2010 selected Acumen Solutions to provide cloud-based customer relationship management and project management.

The takeaway for service providers? States in administrative transition may not generate much sales in the near term. Over the longer haul, state governments can still be source of IT business. But only if the provider mines the right niches and makes a strong business case.

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