In-Depth

How Will Barack Obama Change the Channel?

Barack Obama is set to become the 44th president of the United States. How should partners position themselves for the new administration's IT spending priorities?

On the evening of Nov. 3, 2008, Sudhakar Shenoy was anxiously awaiting the outcome of a closely watched contest.

Shenoy is chairman and CEO of IMC Inc., a Reston, Va.-based solution provider and Gold Certified Partner that works extensively with the federal government. But it wasn't the next day's presidential face-off between Democrat Barack Obama and Republican John McCain that was commanding his attention -- at least, not exactly.

That evening, Shenoy was settling into his seat at FedEx Field in Landover, Md., to watch the hometown Washington Redskins take on the visiting Pittsburgh Steelers. As he well knew, long-standing legend held that this game's outcome could foreshadow the following day's events: In all but one United States presidential race since 1936, a win by the Redskins in their last pre-election home game heralded a victory for the party currently occupying the White House, while a Redskins loss signaled a defeat for the incumbents.

Shenoy has been in the IT industry for 27 years, a period spanning four presidential administrations. So he knew that, regardless of which candidate won on Nov. 4, business conditions were about to change for his company as well. He just didn't know how. For Shenoy and many of his peers in the federal government IT market, the inevitable product of such uncertainty was fear. "Right now, we're all a little worried," he said before the game. "I wouldn't say we're scared stiff, but we're worried, because we don't know what's coming down the pike."

The final score that night? Steelers 23, Redskins 6. And sure enough, some 24 hours later, Barack Obama won a sweeping and historic victory to become the 44th president of the United States. Now, with Obama just weeks away from his inauguration, Shenoy and thousands of Microsoft partners like him are still nervously waiting to learn what that victory might mean for them. Says Shenoy: "The reality will only be known in the first 100 days of the new administration."

Playing the 'What If' Game

Though it was Barack Obama who emerged victorious from November's presidential election, partners that work with the federal government can't help but speculate on what a win by his Republican opponent, Senator John McCain of Arizona, might have meant for them.

Many believe that, as a military veteran, McCain would have cut defense spending less than Obama is expected to do, which would probably translate to more opportunities for IT companies serving the Pentagon. And in light of McCain's well-known aversion to government waste, demand for analytics software and other solutions that can help sniff out ineffective federal programs would probably have grown as well.

Meanwhile, McCain's fervent support for offshore drilling might have meant increased spending by oil and gas companies on exploration technologies and oil field management solutions. And some observers believe IT outsourcers would probably have done better under McCain than they will under Obama.

"It's fair to say that there's a more outsourcing-led bent in a Republican-led administration then there would be in a traditionally Democratic-led administration," says Rishi Sood, of analyst firm Gartner Inc.

On the other hand, McCain vowed late in his campaign to impose an across-the-board federal budget freeze. "[That] would mean maybe less use of cutting-edge programs, or new investments in technology," notes Brian Karlisch, CEO of Gold Certified Partner and solution provider Buchanan & Edwards Inc.

Or maybe not, says analyst Rob Enderle of IT research organization Enderle Group. He notes that both as a small-town mayor and as governor of Alaska, Republican vice presidential nominee Sarah Palin dramatically increased technology outlays. "She tends to be agreeable to the thought that technology can be used to increase the efficiency of government significantly," Enderle says. If McCain had put her in charge of the federal IT budget-an assignment Enderle considers highly possible -- the result might have been major spending increases.

But, of course, the voters' decision on Election Day means that we'll never know for sure.

-- R.F.

Opportunities for the Shrewd
For partners serving the federal market, it's likely to be even longer before they fully feel the new administration's impact. The government is already well into its 2009 fiscal year, following the direction set for it by the outgoing administration some time ago. Though his newly installed department heads are likely to start shifting funding priorities by early summer 2009, Obama won't have a crack at developing his own budget before Ql of the 2010 fiscal year, which begins Oct. 1, 2009.

Exactly how that budget document will affect federal IT spending remains a mystery, but most experts see outlays growing anemically-if at all. "I think overall they'll be leaner," says Thom Rubel, practice director for government programs at Government Insights, a division of analyst firm IDC. After all, Washington has already committed at least $700 billion to bailing out struggling financial institutions, and steering the nation through what's shaping up to be a severe and prolonged recession is sure to consume hundreds of billions more. With some observers predicting annual budget deficits of $1 trillion or higher in coming years, IT funding is likely to be in shorter supply than usual.

Indeed, Rubel expects Obama's first budget to raise overall IT investments by perhaps 1 percent to 2 percent at most. Yet most government-market veterans still believe that there will be plenty of opportunities for shrewd partners to exploit. For instance, with money tight, most federal agencies will be desperately seeking ways to lower costs. That could be good news for companies with virtualization expertise, notes Brian Karlisch, CEO of Buchanan & Edwards Inc., a Gold Certified Partner and infrastructure integration specialist with headquarters in Washington, D.C. By enabling organizations to consolidate applications on fewer and more powerful servers, virtualization can help cut bills for hardware, maintenance and electricity.

The Bush Legacy

As partners look ahead to Barack Obama's presidential administration, they're also reflecting back on President George W. Bush's two terms in office. For those serving the federal government, the memories are mostly fond ones.

"They've been good years," says Brian Karlisch, CEO of Buchanan & Edwards Inc., a Gold Certified Partner and infrastructure integration specialist. Indeed, though federal IT spending has grown modestly in the past year or so, it jumped from $30 billion to $66 billion between 2000 and 2006, according to analysts at Gartner Inc. Karlisch cites the wars in Afghanistan and Iraq, as well as the Bush administration's post-Sept. 11 focus on homeland security, as key reasons for that growth. "Technology has just played an enormous component in all of that, from back-office systems to Web systems to kiosks to bomb-detection equipment," he says.

Many IT companies without government clients, however, take a dimmer view of the Bush years. "It's hard to get excited when the economy just tanked," observes Enderle Group analyst Rob Enderle. In addition, he adds, Bush policymakers showed little interest in helping U.S. technology companies compete more effectively abroad. "They didn't do a lot of harm, but [they] also didn't do a lot of good," Enderle notes. "Generally, the technology industry will be glad to see this administration go away."

-- R.F.

Other partners predict an increased demand for project-management solutions. "The government has been running in circles on many projects," says Jose Marroig, CEO of Vienna, Va.-based Projility Inc., a Certified Partner that provides management and technology consulting services to a client list rich in government agencies. Federal managers are already hungry for high-tech ways to increase efficiency and operational discipline, Marroig notes, and that appetite is sure to increase in coming years.

Look for the nation's battered economy to drive increased spending by some federal agencies, too. For example, Rubel notes, the U.S. Treasury Department is likely to be in the market for financial software and reporting tools that can help it manage all those ailing bank stocks and illiquid mortgage-backed securities that it's buying. Similarly, some partners predict that the U.S. Department of Health and Human Services will be in need of workflow solutions and other technologies that can help its employees more effectively administer Medicare and Medicaid benefits. And don't be surprised if local and regional governments have more money for benefits-related technology as well, adds Rishi Sood, a research vice president at analyst company Gartner Inc. That's because Obama has vowed to help hard-pressed states, counties and cities cope with the impact of plummeting tax revenues and rising demand for social services.

Moreover, though some partners anticipate smaller military and homeland security budgets under Obama, many expect to see additional funds dedicated to shoring up the nation's cybersecurity defenses. Indeed, proof that such spending is overdue came just days after the November election, when news broke that overseas hackers had successfully broken into computers belonging to the White House and both the Obama and McCain campaigns.

"The U.S. has kind of been under siege with regard to hostile attacks, and the [Bush] administration just hasn't seemed all that interested in addressing the problem," says Rob Enderle, principal analyst at Enderle Group, an IT research organization based in San Jose, Calif. Both Enderle and Rubel expect that attitude to change under Obama, who pledged during the campaign to appoint the nation's first chief technology officer.

Geek in Chief

Budget priorities alone don't explain the affinity some in the IT community feel toward the president-elect, who raised untold millions from contributors in California's Silicon Valley during his successful presidential run.

Obama, his tech industry supporters believe, is one of them. From his campaign's innovative use of text messaging, blogs and social networking to the BlackBerry device that he's said to check compulsively, the president-elect appears more comfortable with technology than any of his predecessors. As Enderle Group analyst Rob Enderle puts it: "He seems to get technology from a very personal standpoint."

Then there's the fact that Obama's campaign platform included a pledge to appoint the nation's first-ever chief technology officer, "to ensure that our government and all its agencies have the right infrastructure, policies and services for the 21st century." (The CTO hadn't yet been named as this issue went to press.)

For many in the IT industry, those factors add up to a sense that the nation's new commander in chief has a strong understanding of the ways that technology can help address the nation's problems.

-- R.F.

Meanwhile, some government partners believe that opportunities related to Internet solutions and so-called Web 2.0 tools such as blogs and social-networking sites will spike under the new administration. Obama's campaign made sophisticated use of such technologies, and early signs suggest his White House will do the same: Within 48 hours of Obama's election, his transition team had launched an expansive and elegantly designed Web site, complete with detailed policy statements, a blog, a sign-up tool for receiving updates by e-mail and an online application form for jobs in the new administration. "Web 2.0 is already starting to catch on within [federal] agencies," notes Karlisch. With a tech-savvy administration taking office, that trend is only likely to accelerate.

Regulation and Reform
Of course, the government market isn't the only one that Obama administration policies are likely to affect. IT companies that support financial services companies will probably see demand shifts, too. With capital in short supply despite the government's massive relief program, technology spending by financial institutions will drop 4 percent in 2009, warns Jeanne Capachin, research vice president for global banking in IDC's Financial Insights division. But many financial services partners expect the Obama administration and a heavily Democratic Congress to impose strict new regulatory controls on Wall Street. That should be good news for ISVs and solution providers with compliance expertise. "Increased regulation always means more information and more systems requirements," says Marc Hebert, chief marketing officer at Gold Certified Partner Virtusa Corp., a consulting and outsourcing company in Westborough, Mass., that works heavily with financial-services companies.

Given the emphasis that Obama placed on universal health care during his campaign, many people saw flush times ahead for IT providers that serve doctors, hospitals and insurers. But slumping corporate earnings and mounting unemployment may force the incoming president to put his potentially costly reform plans on hold initially. "Right now, the primary focus is going to have to be on the economy," says Elizabeth Boehm, a principal analyst and health care expert at Forrester Research Inc. Even so, Obama has promised to invest $10 billion over the next five years on driving increased adoption of electronic health-information systems. In addition to electronic medical-record applications, which digitize patient information, those systems could include solutions that help doctors and hospitals lower costs as well as improve care by exchanging clinical data online.

The Obama years could also be good ones for partners that serve the energy sector-eventually, anyway. "In the short term, we think that IT spending in the utilities industry is going to decrease until the market recovers," says Jill Feblowitz, practice director for business technology at IDC's Energy Insights division. Still, Obama has vowed to spend $150 billion over the next 10 years on "climate-friendly" energy ventures such as biofuels and wind power. Feblowitz believes "smart meters" and "smart grids" could be part of that initiative as well. Such systems transmit real-time information on how much power households consume and when they consume it, enabling utilities to promote energy conservation by charging higher prices at peak times. Energy Insights believes that the smart-meter market will rise from roughly $3.4 billion today to $5.5 billion by 2011.

Questions Without Answers
More broadly, many in the IT community think the new president's policies in other areas could prove beneficial to them. For example, Obama has promised to more vigorously protect copyrights and trademarks overseas and to crack down on punitive regulatory and tax barriers that tilt the playing field in foreign markets. Enderle believes that the Obama administration may also ease export restrictions that were designed to keep certain advanced technologies, like encryption, from falling into adversaries' hands. "The reality is, in many cases, the technology overseas is as advanced -- if not more advanced -- than technology here," Enderle notes. In those cases, what government controls ultimately do is put American hardware and software makers at a competitive disadvantage abroad.

Still, some partners fear that the incoming administration's tax policies could end up having a less welcome impact on them. Obama says he will eliminate capital gains taxes for small businesses as well as provide tax credits for employee health care coverage and "investments in innovation." However, Shenoy is one of many in the Microsoft channel who expect their corporate tax bills to rise just the same, putting added pressure on already strained balance sheets. "We'll probably have to watch our cost structure more carefully," Shenoy predicts.

Meanwhile, the tax question isn't the only one causing anxiety throughout the technology industry. Could Obama's pro-labor stance shift power from IT companies to their employees? "Right now, the technology industry is running reasonably well with the existing balance, and you wouldn't want to muck with it," says Enderle. Will the new president's stated intention to end tax breaks for companies that ship jobs overseas hurt service providers with operations in India and other emerging markets? "His populist perspective on job loss does suggest there's some risk to IT outsourcing companies like us," observes Virtusa's Hebert.

It's likely to be many months before we have definitive answers. In the meantime, however, Shenoy finds solace in two convictions: First, that Obama ultimately wants what's best for the country; second, that nothing the new commander in chief does is likely to change the popularity of Microsoft software. He sums up the latter point this way: "I don't care which administration comes in, [businesses] will still have to buy Microsoft products."

About the Author

Rich Freeman is a Seattle, Wash.-based freelance writer specializing in business and technology.

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