Posted on: Tuesday, March 8, 2005

War alters focus of tech spending

By Michelle Kessler
USA Today

SAN FRANCISCO — Federal tech spending is soaring, but military and homeland security projects are still taking up much of the money — bad news for some tech companies.

Projects that can have a short-term impact on anti-terrorism efforts or the war in Iraq are taking precedence over more traditional initiatives, such as e-government and infrastructure upgrades, some tech executives say.

"The spending is focused on bullets and bombs," says Tim Wudi, chief marketing officer for security firm Saflink.

That can hurt companies used to other kinds of government business. No. 1 network-gear-maker Cisco Systems recently reported flat sales in its usually growing government unit. CEO John Chambers said spending was "refocused toward geopolitical and Middle East issues."

President Bush's proposed budget for the 2006 fiscal year starting in October includes $65 billion for tech, researcher Input says. That's a 7 percent increase from this year.

But 56 percent of that money, or $36 billion, is earmarked for the military and Department of Homeland Security. An additional $1.4 billion is for security projects within other agencies, Input says.

That leaves only about 42 percent, or $27.6 billion, for other tech projects, though the Defense and Homeland Security departments likely will use some of their money for traditional upgrades, Input analyst Payton Smith says. There's a need. A recent congressional report card gave federal agencies a D+ for information security.

But companies are worried. Computer security firm Symantec, biometric firm Identix and consulting firm SRA International all said that military costs may divert money from the government agencies they sell to.

Some are trying to adapt. Saflink, which sells fingerprint scanners and other biometric security devices, had expected to build military employee ID systems this year. The project was postponed. But Saflink landed another contract, with the Department of Homeland Security.

Manugistics, which designs back-end business systems, reported an 87 percent drop in its government, aerospace and defense revenue from March to November, the first nine months of its fiscal year. The end of one big contract was one reason. It also blamed a shift in dollars to Iraq. But Executive Vice President Jeff Holmes says new opportunities emerge from the emphasis on war. "Some projects are being reduced ... but others are being enhanced," he says.

Input's Smith says military and homeland security concerns drove big budget increases in recent years. When these concerns become less pressing, the overall federal tech budget probably won't grow as fast, he says.