Contractors Put Region On a Roll
Federal Spending Boosts Job Growth
By Neil Irwin
Washington Post Staff Writer
Sunday, October 26, 2003; Page A01
Federal spending in the region is on the rise, and for Sudhakar V. Shenoy, that means it's time to buy more white shirts.
During the dot-com bust, Shenoy's company, Information Management Consultants Inc. in McLean, laid off 150 people as its technology start-up clients stopped paying their bills. Now, it is hiring and expanding once again -- thanks to federal government work -- and Shenoy recently bought eight white dress shirts to suit the more formal expectations of the firm's government clients.
When the nation slid into recession in 2001, economists and local businesspeople predicted that the federal government and its billions of contracting dollars would keep the Washington area's economy growing rapidly.
At first, it didn't. But now, according to economists and analysts, a boom in federal spending has begun driving strong hiring by government contractors, rippling out to other kinds of businesses, and generally switching places with the region's commercial sector, which spearheaded local growth through the 1990s.
The region gained 38,100 jobs in 2002 because of hiring by the federal government and its contractors, according to Alexandria-based research firm Delta Associates. Washington-area employers in all other sectors cut 29,100 jobs last year.
Federal procurement in the region rose 15 percent in 2002, pumping an extra $4.7 billion through the regional economy, according to a Brookings Institution study. That is more than double the increase in 2001. Researchers forecast similar growth this year.
Part of the reason is spending on war and homeland security since the terrorist attacks of Sept. 11, 2001. But more significant, say analysts and contracting executives, is a push by the Bush administration to use technology to make government more efficient. Much of that kind of work is done in the Washington region.
Just as commercial technology companies used venture capital money to help fuel the region's growth in the late 1990s, contractors are using the federal money to hire more people, lease more office space and rent more hotel ballrooms for special events.
Virginia collected 7.2 percent more in taxes in the past three months than it did during the comparable period last year. In the District, tax collections for the first eight months of this year were up 4.9 percent. In Maryland, corporate and personal income taxes in August and September were up 4.3 percent.
How long federal contracting will remain the region's main source of growth is unknown. The federal government is poised to run record deficits in the next several years, which could crimp spending. And, say local businesspeople, the commercial sector will rise again. Already many say they are seeing an uptick. But for now, contractors are enjoying the good times, and, in the process, driving one of the strongest regional economies in the nation..
"It's a whole different world from a few years ago," said Shenoy, who is also chairman of the Northern Virginia Technology Council. "A totally different world."
Federal Money Flows
For years after it was founded in 1981, Shenoy's company sold computer programming services to both government and commercial clients. But in the late 1990s, its business became heavily weighted toward commercial work. It particularly targeted Internet start-ups.
In 2000, as investors soured on money-losing Internet firms, IMC started having so much trouble collecting money it was owed that the company's president camped out in one client's office until he collected a seven-figure check. IMC laid off about 40 percent of its staff.
Since then, though, it has restored about 60 jobs, for projects such helping the State Department electronically manage Freedom of Information Act requests, a system that must juggle digital copies of millions of documents. Contracting work like that -- large technology projects that require lots of programmers -- is behind the large flow of federal money to local contractors.
Federal Sources Inc., a research firm in McLean, estimates that federal spending on technology will be $58.7 billion in fiscal 2003, up 18 percent from 2002. "The federal government really needed information technology to implement ideas at the core of the Bush administration's agenda," said James A. Kane, chief executive of Federal Sources.
The companies that are winning that business are disproportionately in the Washington area, Kane said, an alphabet soup of corporate names -- SAIC, CACI, CSC, AMS, and so on.
The region added 5,000 computer-system design jobs in the year ended in August, according to the Labor Department. The number of such jobs fell nationwide.
After the terrorist attacks of Sept. 11, 2001, local companies expected a flood of federal money from military, intelligence and domestic security agencies. "There were about three months where I thought every CEO was standing in line at the grocery store on Saturday, saw the headline that the government was going to spend billions on security, and decided on Monday that he'd set up a homeland security division of the company," Kane said. He got many calls seeking advice on how to launch such businesses, he said.
Two years later, homeland security has created no huge windfall for government contractors. A Brookings study found that in 2002 in the Washington region, there was $548 million in new procurement spending by the Transportation Department, probably tied to the Transportation Security Administration, and gains of $330 million in defense research and development spending and $184 million for security services, communications and detection equipment.
Such spending is likely to grow as more projects are launched. "Homeland security is going to have more impact in '05 than in '03 or '04," said Christopher F. Penny, an analyst who tracks government-technology companies for Friedman, Billings, Ramsey & Co. "It's not lived up to the expectations people had."
Thus the impact of homeland-security spending can be seen in the Washington area, but only in small ways, such as in the creation of Claraview LLC, a Falls Church-based firm headed by Sid Banerjee. A decade ago, Banerjee was one of the first 15 employees at MicroStrategy Inc., which was one of the leading lights in the rise of Washington's commercially-oriented tech economy. By 2000, Banerjee supervised a 600-employee division of MicroStrategy, which sells software that lets companies analyze large volumes of data.
That was before corporate spending on technology dried up and MicroStrategy was forced to restate its financial results. Banerjee left MicroStrategy in the summer of 2001, and was searching for his next project when the hijacked airliners flew into the World Trade Center and the Pentagon.
"I thought, doing customer analysis is the same thing, technologically speaking, as telling the good guys from the bad guys," Banerjee said. "Profiling for marketing purposes is not so different from profiling people who get on an airplane."
So Banerjee founded Claraview to apply the technical know-how he developed at MicroStrategy to government and some commercial work. He said the company got work from two large government clients, which he said he is not allowed to name. The company had 20 employees at the beginning of the year, 60 now, and Banerjee said he plans to add 15 more by the end of the year. Most of his employees are working 75 or 80 hours a week on government jobs with tight deadlines, he said.
"Everyone in the company has worked in the commercial sector, and we're redeploying that energy to government," Banerjee said.
The Ripple Effect
Redeployment has even helped companies in the region that would seem to have nothing to do with the government. Integic Corp., a Chantilly-based technology consulting firm, shows how increased federal spending ripples through the region.
Three years ago, Integic got about 60 percent of its revenue from the federal government and the rest from the private sector. Since then, its revenue has risen from $120 million annually to a projected $165 million this year, and 90 percent of its work is for the government.
Its biggest project is developing an electronic data network for making patients' medical records easily accessible at military hospitals around the world.
Much of that money goes to employees. The company is adding about 100 full-time jobs a year. It has even hired back some employees who were lured away by the Internet boom.
In 2000, Jane Shen left her job at Integic to join an Internet software company. It was a blast, until a year later when one day she came into work and her electronic ID card wouldn't let her into the office.
"I joked that if your badge isn't working, you're laid off," Shen said. As it turned out, it was not a joke.
Integic hired her back in 2001, for the same salary she made at the dot-com. Her pay churns through retailers and other local businesses.
With all that growth in staff, Integic needs more office space. To accommodate it, Trammell Crow Co. plans to start construction in the first quarter of 2004 on a new, $20 million office building in Integic's Chantilly office park.
"Government contractors have kept the boat afloat in the Northern Virginia office market," said Robert J. Murphy, senior managing director of Trammell Crow.
Integic's spending is also felt in other ways. The company has run radio ads on WTOP, seeking to make its name well-known among government officials who make procurement decisions. "We've pretty aggressively sold ads to contractors," said Joel Oxley, the general manager of WTOP. "When the dot-coms went away this helped a lot."
Integic has also given its employees hats, T-shirts and various other items bearing the Integic logo, all of them bought from local companies. And this year it launched Integic Charitable Foundation, which has given more than $50,000 to local and national charities.
Last December, Integic threw a holiday party for almost 1,300 employees, business partners and their dates at the Marriott Wardman Park hotel in the District, 30 percent bigger than previous year's party. It spent more than $100,000 and plans an event of similar scale this year.
Ed Rudzinski, general manager of the hotel, said that events held by government contractors such as Integic have helped keep business going strong since tourism and business travel fell off in 2001. He estimated that a party such as Integic's employs 300 people for a day, factoring in the people who launder the linens, cook the food, park the cars, and do other things that make parties go smoothly.
"If you don't book an event like this, the hotels go empty, people stay home, the cabdrivers don't drive," Rudzinski said. "The ripple effect is alive and well."
Some contracting experts warn that federal information-technology spending, which is behind the current ripple effect in the Washington economy, may be peaking. Federal Sources projects that the information-technology budget will rise only 3 percent in 2005, compared with 18 percent this year.
That is why, even now, some executives say they are repositioning themselves for a tech rebound and a leveling off in the steep rise of government spending. "You always want to maintain diversity," Banerjee said. "Just like you buy both stocks and bonds, you want to be able to grow whether it's federal or commercial."