A Call for Change: Moderate Federal IT Spending Growth Masks the Ongoing Burden of Legacy Systems

Identify the ongoing expenses U.S. federal civilian agencies are experiencing due to existing legacy systems.
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Unlike a few years ago, U.S. federal civilian agencies are not seeing double-digit annual growth in information technology spending. But moderate growth is still underway. Some of these spending increases are happening because agencies face significant ongoing expenses related to maintaining legacy systems.

This week IDC issues a new civilian agency IT spending forecast, which predicts that annual civilian agency spending will reach $52.0 billion by the time the 2018 fiscal year ends on September 30. Surprisingly, we expect just 21.1% of those funds will go into new systems development, while 78.9% will go toward improving and maintaining legacy systems. (Maintenance and Operations.)

The full civilian agency IT spending forecast can be found here.

Five years ago, new systems development was closer to 34% of a typical annual IT budget. So, it’s clear the cost of maintaining older systems is becoming more of a burden for federal agencies. That issue is top-of-mind for many federal CIOs.

The legacy systems conundrum  is one of the reasons the Office of Management and Budget helped launch the Data Center Optimization Initiative (DCOI) in 2016. It requires various quarterly and annual checkpoints for agencies as they work to consolidate both systems and full data centers.

Hardware, Software and IT Services

Here are some related data points from our new civilian agency forecast:Hardware will see a slight increase for 2019. But we expect an overall decline, from $3.6 billion in 2017 to $3.4 billion in 2022. That’s a CAGR of -1.5%.IT services, which is the largest bucket of spending for agencies, also traditionally has been the fastest-growing segment.

But now we expect to see only a slight increase, from $20.1 billion in 2017 to $21.4 billion in 2022. That’s a CAGR of 1.2%.Software will see the most obvious growth, from $5.2 billion in 2017 to $7.1 billion in 2022 at a CAGR of 6.4%. In part, this growth is driven by software upgrades as agencies work to move to new platforms and to purchase some of their software solutions from the cloud.

The Spending Tells the Story

As we gathered the data for this forecast, it became apparent that federal agencies are making progress when it comes to reigning in their costs related to new systems development, including hardware and IT services costs. One of the reasons we are seeing a spike in software spending is that agencies are applying a bit of money up front in order to move their solutions to the cloud, where they anticipate long-term savings.

But agencies are not doing as good a job when it comes to migrating away from their older, more expensive systems. This isn’t a surprise, given that the cost of migration (changing code, changing how systems interconnect, upgrading databases, and boosting network connectivity when a system is moved) can overshadow potential cost savings that might be gained through the move.

However, these older systems can’t remain in place forever. Sticking with the current a year-by-year approach, which sometimes focuses on urgent maintenance and operations vs. long-term cost cutting, is counter-productive in the long run. It’s time for Agencies to start looking at longer time horizons — maybe with as much as 10 year ROI cycles in some cases.

This length of time for a positive ROI is almost unheard of for a system investment. But when we are talking about government IT systems that have been in place for over 20 years, committing to a longer-term payback may be the only way that real digital transformation can occur. And it could be a way to further leverage a (potentially) expanded Technology Modernization Fund (TMF), which is a key part of the of the White House’s IT agenda. (It already committed $100 million for 2018.)

The DCOI, plus the carrot and stick approach of the TMF and agency IT portfolio management efforts, is meant to prod agencies into making tough choices. Clearly, the burgeoning cost of legacy systems indicates that some of those choices are long overdue.

Research Director, IDC Government Insights