(Business 2.0) – With the commercial market for technology shrinking, tech companies have turned to the government as a recession-proof source of revenue. Defense and intelligence agencies, along with the new Department of Homeland Security, are seeing budgets expand; even at civilian agencies, tech spending is growing. It's a big opportunity, but don't think your salespeople can just parachute into Pentagon City and return home with a contract. You have to know how to do business with Washington the smart way. --OWEN THOMAS

I. Know the Market

During the next five years, federal IT spending is projected to grow at a 10 percent clip. So who's buying? Defense agencies spend the most, but several civilian agencies have billion-dollar tech budgets. (Homeland Security will join their ranks on March 1, when it pulls together an expected $2.1 billion in spending from the 22 agencies it encompasses.)

The Budget Projected federal IT spending, 2002-2006 (in billions)

FY '02 $45.9 FY '03 $49.7 FY '04 $54.3 FY '05 $59.6 FY '06 $65.9

SOURCE: Input

The Big Buyers

Top 10 IT spenders, 2002

Pentagon (Office of the Secretary of Defense) $6.3 billion Air Force $4.3 billion Army $3.6 billion Navy $3.5 billion Treasury $2.6 billion NASA $2.1 billion Transportation $2.1 billion Justice $1.7 billion Health and Human Services $1.5 billion Agriculture $1.2 billion

The Big Sellers Top 10 IT contractors, 2002

Lockheed Martin $2.8 billion Northrop Grumman (including TRW) $2.0 billion SAIC $1.5 billion General Dynamics $1.3 billion CSC $1.1 billion Raytheon $939 million Boeing $589 million EDS $524 million Unisys $515 million Dell $482 million Booz Allen Hamilton $442 million

What's in Demand Federal IT spending, by category, 2002

Internal IT staffing (not contracted) $10.8 billion 23.5%

Communications $10.8 billion 23.5%

Professional services $7.8 billion 17.0%

Computer systems $7.1 billion 15.5%

Outsourcing services $6.4 billion 14.0%

Software $3 billion 6.5%

The Power Players This year, here are four you want to meet: department CIOs with loose purse strings who hold sway over budgets.

Steven Cooper Department of Homeland Security

Why: He's shopping for software to integrate the IT systems of 22 different agencies.

Proposed 2003 budget: $2.1 billion

Peter Cuviello Department of the Army

Why: There are 1.2 million Army employees and hundreds of bases throughout the world to outfit with software and hardware.

Proposed 2003 budget: $3.9 billion

John Gauss Department of Veterans Affairs

Why: The agency will soon rebuild its mammoth health-care and claims-processing systems; because of Gauss's success in modernizing the VA, other government CIOs look to him for advice.

Proposed 2003 budget: $1.1 billion

Vance Hitch Department of Justice

Why: Brought in to give the FBI a tech overhaul. He's also head of a government committee charged with improving federal cybersecurity.

Proposed 2003 budget: $1.7 billion

II. Get Your Foot in the Door

A large chunk of government business isn't contracted out at all; instead, through the General Services Administration (GSA) and other government bodies, companies sell directly to agencies without having to go through formal bidding.

Place Your Wares in the Government IT Catalog

The GSA runs an online catalog of goods and services for government agencies. About 28 percent of federal IT spending flows through the catalog's Schedule 70, which includes more than 2,000 tech vendors. Getting your business listed in the catalog is a key step in scoring your first government sale. Follow these steps:

Get the application. Download GSA solicitation FCIS-JB-980001B at www.fedbizopps.gov. You'll find four text files--the form itself is in two parts.

Review your sales contracts. The government is looking to get the best price you've offered to other customers. A GSA contracting officer will look more kindly on a discount you gave to an early adopter than on one you gave because a salesman was desperate to meet an end-of-the-quarter quota.

Set prices and terms. Carefully spell out the pricing structure (so you don't discount more than you need to) by preparing a Commercial Sales Practices Format, included in part two of the form. This summarizes your pricing policy for government review. You'll need to mesh the government's terms with your own commercial-contract boilerplate; during negotiations you'll find out which terms are sticking points.

Turn in your homework. Send the form by mail or, in some cases, as an e-mail attachment. (True electronic submission may come later this year.) Then, wait--sometimes as long as 120 days.

Haggle. Once you've been contacted by a GSA contracting officer, prepare your best and final offer. When you receive your award letter, you'll need to complete a Schedule 70 Price List, which you can then publish on your website or hand out to prospects. Congratulations--your goods are officially on sale to Uncle Sam.

Work Your Way In

Government regulations require that portions of large IT contracts be set aside for small businesses and those owned by women or minorities. If you qualify (standards vary by industry), expect to hear from large contractors--they may need you to fulfill small-business set-asides. Here's how to get on their radar.

Make sure contractors can find you. The first step is to get listed on the Small Business Administration's Subcontracting Network (web.sba.gov/subnet). Also, the U.S. Chamber of Commerce has a matchmaking program to help small businesses meet buyers; you can schedule appointments online: www.uschamber.com/events/matchmaking.

Stay on top of key contracts. Even though you may not be in the running for the whole quesadilla, you should study the latest deals to see where your company might grab a slice. Here are three places to look:

Work the angles. Set up meetings with prospective bidders and explain how you'll give them an edge over competitors. Even after a contract is awarded, you can still win some business.

Federal Business Opportunities www.fedbizopps.gov

Department of Defense Business Opportunities www.dodbusopps.com

Federal Acquisition Jumpstation prod.nais.nasa.gov/pub/fedproc/home.html

Where to Schmooze

FOSE 2003 (www.fose.com) Washington Convention Center, DC; April 8-10

The largest government tech trade show: 400 vendors and several sessions on how to sell.

GSA Expo 2003 (www.expo.gsa.gov) Henry B. Gonzalez Convention Center, San Antonio, TX; May 6-8

Great chance for GSA schedule holders to flog their wares to thousands of Defense Department and civilian buyers.

E-Gov (www.e-gov.com) Washington Convention Center, DC; June 9-12

Annual conference dedicated to online government, a hot topic in Washington.

III. Land the Big Deal

When an agency wants to spend more than $100,000, it has to put the contract out to bid, a process ruled by laborious federal regulations and, for the most part, multibillion-dollar companies. But smaller firms can occasionally win some of these larger deals. As you cultivate contacts within agencies and through subcontracting work, chances are you'll eventually be encouraged to bid on a contract. If you feel you haven't been given a fair shot at a contract because you're a small business, you can appeal to the SBA, which can issue a Certificate of Competency, forcing government buyers to reconsider your bid.