No Slack in Government IT Demand - TheStreet

The federal government will give IT an unexpected, but very welcome, $1 billion-plus infusion later this year, and a much bigger lift in 2004.

This comes as Uncle Sam is moving to tighten and modernize information security and rationalize the country's ragtag mix of health care-related computer technologies.

The Comprehensive Homeland Security Act of 2003, now pending in Congress, creates a $1 billion fund to improve the government's information security system and enable federal agencies to take better advantage of data-sharing technologies. It's a legislative add-on to the 2003 federal information technology budget that means at least $1 billion in unforeseen spending, a total that may grow.

Longer term, President's Bush's proposed budget for fiscal 2004 contains $59.1 billion for IT projects, an increase of 12% over this year's requests.

Probable Beneficiaries

Who's likely to win contracts? Sophisticated database providers, such as

Oracle

(ORCL) - Get Report

and

IBM

(IBM) - Get Report

, capable of meeting high security standards; and security providers such as

RSA

(RSAS)

or

Symantec

(SYMC) - Get Report

.

Also expected to benefit are companies that can deliver the Web services and integration technologies needed to link disparate silos of information, such as

Sun Microsystems

(SUNW) - Get Report

or

BEA Systems

(BEAS)

. Other candidates may be integrators and software companies with a strong vertical presence in health care.

Mark Forman, the Office of Management and Budget's associate director for IT and e-government, said last month that the increase in the 2004 budget -- about $6.4 billion -- would come in the areas of homeland defense, cyber-security and enterprise architecture.

"This is a significant increase from the 2003 request," Forman said. There "is more money for modernization efforts for homeland security and the war on terrorism. There will be only a several hundred million dollar increase for nondefense related areas."

While somewhat larger than analysts expected, the jump in IT spending has largely been factored into the stock price of Oracle and other companies likely to win government contracts.

"It's not much of an upside surprise, but it supports the little optimism we had," said analyst Eric Brethenoux, of Lazard Freres. Brethenoux expects overall IT spending to increase 2% to 3% this calendar year, and it will take that 12% from the Bush budget to reach that target, he said.

There are hundreds of millions, perhaps billions, of dollars earmarked for IT spending in the next nine months tucked away in the dozens of continuing resolutions pending before Congress. Continuing resolutions appropriate money for the current fiscal year, even though Congress has not yet passed the fiscal 2003 budget.

For example:

One pending resolution authorizes $133.1 million to acquire a Common Computing Environment for the Natural Resources Conservation Service, the Farm and Foreign Agricultural Service.

The Global Internet Freedom Act would allocate $50 million this year to help defeat Internet jamming.

The $59 Billion Pie

It's too early to know exactly how the government will spend the $59.1 billion expected to be allocated for next year, but it's likely that a significant chunk will be allocated to database development and maintenance.

Oracle, which generally generates 20% to 25% of its revenue from government spending, and IBM are likely to be top contenders. Although Oracle has a dominant share of existing relational databases (which allow data to be looked at multidimensionally), approximately 80% of the government's data is stored in legacy databases (left over from old applications) and will be up for grabs during modernization, says Kevin Fitzgerald, Oracle's senior vice president for government, education and health care.

"At the end of the day, homeland security will be the ability to combine data from federal, state and local sources," he said at an investors conference hosted by Thomas Weisel Partners on Tuesday.

And given that

Microsoft

(MSFT) - Get Report

SQL (structured query language) databases have a history of well-publicized security failures, the world's largest independent software company may well have a difficult time winning share in a security-conscious market.

Fitzgerald also said that Congress is pushing various agencies, including the Department of Veterans Affairs, to move patient data now stored in proprietary formats to standard formats. That would allow, for example, a patient's health care data to be linked with his or her financial data and be a lot more useful. This will create opportunities for database and security providers, and even for companies that develop Web services used to automate e-business transactions.

Similarly, health care providers are struggling to comply with the Health Information Protection and Portability Act. The act not only forces providers to add new layers of security to patient records, it mandates that patients have electronic access to that data, which also creates opportunities for IT providers to generate new business.