Federal IT Spending Will Remain Robust in FFY25 Amid AI Prioritization

Federal IT in 2025: Sustained growth amid modest budget increases and strategic modernization

Since coming into office, the Biden administration has fueled an unprecedented federal IT bull market. While the White House’s proposed federal civilian technology budget of $75.1 billion for federal fiscal year 2025 (FFY25) is the smallest increase in several years (up less than 1% compared to $74.5 billion in FFY24), it is still an increase of more than 14% from $65.8 billion in FFY23, and up 25% from $60.1 billion in FFY21, the last year of the prior administration.

 

FFY25 has started with a continuing resolution (CR), as have most of the last several fiscal year. The impact of the latest CR on the largest federal systems integrators may be limited to shorter-cycle programs in their order books, but some disruptions to larger, longer-term engagements are not out of the question.

 

Despite uncertainties as a new administration comes into power, overall federal IT spending priorities will remain intact. Digital modernization across civilian, defense and intelligence IT infrastructures must continue. Services provided by civilian agencies must be digitized to enhance citizen engagement and operational efficiency. And IT investment by defense and intelligence agencies must continue expanding in response to global geopolitical instability and the ever-rising challenges from U.S. nation-state rivals.

 

In the civil space, IT decision makers are coming under greater scrutiny to demonstrate how effectively they have invested IT budget windfalls from the last several fiscal cycles. This is partially reflected in overall IT spending growth that will slow in FFY25, at least based on the Biden administration’s initial FFY25 budget request.

 

For example, the U.S. Department of Health and Human Services’ budget is expected to decline by $100 million (or 1%) in FFY25 compared to FFY24. IT budgets at some agencies, such as the Department of Education will be flat in FFY25 but will expand at a handful of agencies like the Department of Homeland Security in FFY25.

 

The Defense Appropriations Act for FFY25 provides $852.2 billion in total funding, a 3.3% increase compared to FFY24. The Biden administration ceased providing greater detail on Department of Defense (DOD) IT outlays early in its term, but TBR assumes defense IT spending will increase in concert with the growth in overall defense outlays and will continue centering on using data to enhance warfighting and intelligence operations, modernizing the Pentagon’s underlying IT infrastructure, and achieving interoperability across service branches and with the defense agencies of U.S. allies.

 

Defense agencies will also ramp up investment on solutions that push data capture and analysis ever further out to the tactical edge. National security will continue to be a bipartisan matter as the global threat environment remains elevated. The total addressable market for federal systems integrators (FSIs) with a presence in the defense and intelligence sectors could be worth at least $200 billion, and potentially $300 billion or more, with a large and growing portion of the market opportunity tied to AI.

 

Technologies like quantum computing and space-based IT architectures have also been deemed critical by the U.S. defense and intelligence communities, and investment is accelerating in these areas. Additionally, AI currently retains a high strategic priority among emerging digital technologies.

 

AI investments across all federal sectors have accelerated as agencies recognize AI’s potential to optimize agency operations and enhance mission-critical agency functions. AI solutions enable DOD and intelligence community (IC) agencies to process high volumes of data, and subsequently generate actionable insights to warfighters and combat commands, as well as to intelligence operators in the field.

 

Federal agencies must also master AI from both a technological and a responsible use standpoint, prior to the inevitable adoption of generative AI (GenAI). The most basic, fundamental distinction between AI and GenAI is that AI is good at analyzing existing content while GenAI generates new content. Much foundational modernization work is still needed across the federal IT environment to accommodate digital technologies like cloud, AI and GenAI, ensuring continued (albeit slower) federal IT growth in FFY25 and beyond.

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GenAI will continue to revolutionize mission-critical functions and day-to-day operators at federal civilian, defense and intelligence agencies

The business case for GenAI streamlining human-resource-intensive, mission-essential operational tasks is indisputable. Even early GenAI use cases have demonstrated the potential of GenAI for federal agencies. Early AI pilots focused on automating repetitive duties to maximize efficiencies in federal agency workflows, but the scope is expanding to focus on the potential for AI to transform more mission-critical activities.

 

In addition to streamlining operations vis-à-vis AI, DOD and IC agencies are also implementing AI technologies to make sense of the enormous volume of data being generated by networks of satellite and C5ISR (Command, Control, Communications, Computers, Cyber, Intelligence, Surveillance and Reconnaissance) systems and provide actionable intelligence to warfighters, military commands and other national security personnel deployed globally.

 

As a result, TBR expects that AI prototyping initiatives will accelerate in FFY25 and that more pilot projects than ever will convert to formal AI implementation initiatives in FFY25.

FSI-operated, AI-focused CoEs and innovation centers will proliferate across federal IT in FFY25

Federal agencies want to see AI in action, but FSIs must clearly demonstrate the potential ROI of AI to risk-averse agency IT decision makers. The FSIs most proactively managing their alliance ecosystems will take their relationships with commercially focused technology peers to the next level.

 

Like its parent company in commercial markets, Accenture Federal Services (AFS) has actively stood up new showcasing centers in federal IT. AFS’ collaboration with Google Public Sector has been particularly prolific as of late. In 4Q24, AFS and Google Public Sector’s Rapid Innovation Team (RIT) launched the Federal AI Solution Factory to accelerate the development and deployment of AI-powered solutions for federal agencies.

 

The new facility comes on the heels of AFS and Google Public Sector launching a new center of excellence (CoE) in 2Q24 to showcase how GenAI technologies can improve citizen services across federal agencies, following AFS and Google Public Sector teaming to stand up a new Cybersecurity CoE in 4Q23.

AI-related budget outlays in civil agencies will surge in 2025

AI is enhancing the citizen experience by automating human-resource-intensive tasks and enabling civilian agencies to respond proactively, not reactively, to security or operational challenges.

 

Civilian agencies are demanding AI technologies that maximize organizational efficiencies, knowledge management and security and that facilitate digital transformation of monolithic IT systems.

 

According to TBR’s 3Q24 CACI report, “The federal government allocated $3.3 billion for artificial intelligence (AI) in the FFY25 budget request, although TBR believes there is a large volume of undisclosed AI-related spending in the FFY25 budget earmarked for the classified arena in the DOD and IC, and federal law enforcement agencies. Beyond the $3.3 billion allocated for AI in the FFY25 budget, Congress is currently considering a proposal to spend over $30 billion on ‘AI innovation projects’ across civilian agencies, the first such effort fund large-scale AI adoption in the civil space. The bipartisan nature of the proposal certainly reflects how AI is increasingly being prioritized across the federal IT market.”

 

Civilian agencies will increasingly leverage AI in FFY25 to improve citizen-facing services, achieve regulatory compliance more efficiently, optimize operational workflows, and enhance workforce recruiting and retraining.