State & Local special report | Helping hands

Tough times lie ahead, but top integrators aim to bring efficiency to struggling state and local customers

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As budgets shrink, the top companies in the state and local market
are bracing for a tougher, more competitive 2008. State
coffers have run full in the past few years, but the bleak outlook
today is reminiscent of earlier this decade, when state
budgets hit rock bottom.

"The heyday seems to have disappeared in a nanosecond,"
said Caroline Rapking, vice president of U.S. State
and Local Government at CGI Group Inc.

Companies are holding talks with prospective state
and local clients to see how they can help their customers
increase productivity, reduce costs and produce
additional revenue, she said. "Because of the economic
slowdown, we don't just see this as a 2008 thing.
This could linger for a few more years."

The seasoned players on Washington
Technology's 2008 Who's Who in the State
and Local Market have weathered such storms before. They know that the key to
strong sales lies in having the right mix of large-scale business processing and information
technology outsourcing projects coupled with domain-specific projects fueled
by federal dollars.

For those reasons, the industry executives interviewed for this year's report are
confident they can hold on to existing clients and even grow their businesses despite
odds that seem stacked against them.

"We have a great backlog," said Dave Zolet, president of Northrop Grumman
Information Technology's Commercial, State and Local Group. The McLean, Va.,
division of the defense giant has been on a winning streak the past several years,
snapping up long-term IT outsourcing jobs in Virginia and San Diego County along with a large wireless project for first responders
in New York City. Zolet conceded that
the market is on the verge of a downturn,
but he said he remains confident that the
company's state and local business will continue
to thrive.

"In the markets where we have won, we
are well-positioned and protected," he said.

Thirteen integrators with state and local
revenues ranging from $100 million to more
than $1 billion made this year's list. Heading
the list are Affiliated Computer Services
(ACS) Inc., EDS Corp. and IBM Corp. ? all
with annual sales exceeding $1 billion.

Northrop Grumman, which is steadily
climbing the Who's Who chart, is one of five
companies in the $500 million to $1 billion
category, along with other brand names such
as Accenture Ltd. and Unisys Corp.
The list was compiled for Washington
Technology by FedSources Inc., a McLean,
Va., market research firm.

STORM CLOUDS AHEAD

The looming state budget crisis is overtaking
the market more quickly than the one that
occurred six years ago, said Lisa Mattivi, vice
president of state and local government at
IBM Global Business Services. Despite the fiscal
crunch, she said, IBM and the other top
contractors will see opportunities this year to
shore up IT infrastructure, overhaul systems
and deploy governmentwide financial systems.

"We're doing a lot to help customers
address budget problems," she said. "They
are going to have to make investments to
save, but they seem to know that and are
making those kinds of smart investments."

Growing their business in hard times and
helping states generate revenue rather than
deplete existing funds are integral parts of the
go-to-market strategies for the Who's Who.

For example, ACS offers a variety of business
process outsourcing strategies designed
to generate revenue for clients, said Skipp
Stitt, ACS' chief administrative officer.

"While we're well-positioned when people
are growing and adopting new technologies, in tough times we also are well-positioned to
[help clients] take in new efficiencies and
become more productive," he said.

KEEP FOCUSED

Success in the state and local market centers
on the ability to build solid past performance
and stick to core competencies, said Ray
Bjorklund, senior vice president and chief
knowledge officer at FedSources.

Companies with a stake in the market
should work this year to gauge the extent of
the downturn and adjust expectations
accordingly, he said. "Companies that are
publicly traded and those with similar levels
of shareholder interest [should] reduce sales
targets to realistic levels that will enable the
company to meet performance expectations,"
Bjorklund said.

State and local IT spending is expected to
increase at an average annual growth rate of
4 percent, from $51.1 billion in 2008 to
$57.6 billion in 2011, according to the market
research and consulting firm Gartner
Inc. But the window of
opportunity for discretionary
projects is closing
faster than the gradual slowdown
that was expected 18 months ago, said Rishi
Sood, a research vice president at Gartner.

The top companies in the market continue
to derive revenue from proven lines of business
and by positioning themselves for
changes driven by external factors, such as
the federal push for electronic health records
or biometric and database opportunities that
have resulted from the 2005 Real ID Act.

EDS Corp. positioned itself for human
resources opportunities and Real ID work
with state motor vehicle departments
(DMVs) when it bought Saber Corp. for
$420 million in November 2007, Sood said.

Saber, of Portland, Ore., provides EDS
"with an entry into agency modernization for
human services that EDS has really never
been able to penetrate before," Sood said.
"It's a big benefit for them."

The Saber purchase could be the icing on
the cake for EDS' already
blockbuster sales in the state
and local market. The Plano,
Texas-based systems integrator has
Medicaid system fiscal services or modernization
work in 22 states, said Barbara
Anderson, vice president of EDS
Government Health and Human Services.

The company also provides technology-related
health care services to another 16 states,
she added.

READY TO BATTLE

EDS' chief competitor for Medicaid-related
work is ACS. The Dallas-based company provides
Medicaid fiscal agent services in 13
states and the District of Columbia, Stitt said.

Last year, it won a 10-year, $130 million contract
to build and run Alaska's new Medicaid
system; a three-year, $67 million contract to
continue operating Colorado's system; and a
seven-year, $111 million contract for similar
work in Washington, D.C.

EDS will compete this year against other companies, such as BearingPoint Inc., that are
angling for DMV work. Last year,
BearingPoint won a five-year, $50 million
contract to build a new DMV system for
Missouri and a two-year, $14.1 million project
to build a Web portal through which
Californians can perform DMV-related transactions.

IBM has staked out its state and local
ground as one of the top IT outsourcing companies.
In the fourth quarter of 2006, the
company landed a 10-year, $1.1 billion project
to modernize Indiana's aging welfare eligibility
system. It also won a data center outsourcing
deal with Texas worth $863 million over 10
years.

One of IBM's flagship projects in the human
services sector is an $80 million contract to
modernize Pennsylvania's unemployment
insurance system using service-oriented architecture,
Mattivi said. "We're very focused on the
social services market, where there are a
tremendous [number] of legacy systems for
child welfare, child support and unemployment
insurance."

One sure way for states to improve workflow
and drive savings is a large-scale enterprise
resource planning implementation, industry
executives say. Accenture has ERP projects
with New York City, Connecticut, Ohio and
Washington state. And the savings can be considerable.

When Ohio implemented its initiative,
state officials said they anticipated saving
$251 million through improved efficiencies
over the course of the five-year project.

Other top state and local contractors, such as
Ciber Inc., CGI, Deloitte and Touche USA LLP
and IBM, also have significant public-sector
ERP portfolios. CGI announced in May 2007
that it had won a six-year, $84 million project
to implement its Advantage human resources
system for Los Angeles County. The company
also has key ERP projects with Kentucky,
Wyoming and New York City.

Ciber has ERP projects with the Delaware
Transportation Department and the
Pennsylvania Turnpike Commission, and
Deloitte has a major implementation with the
Miami-Dade County public school system.

Accenture is seeing a number of public-sector
organizations doing strategic planning and
business case justifications to prepare for ERP
projects, said David Moskovitz, managing
director at Accenture's State and Local
Government Client Group. ERP functions,
such as human resources, payroll and finance,
lend themselves to a shared-services model.

Several states, including Illinois, North
Carolina and Minnesota, launched such models
in 2007.

"When states are considering large ERP
investments, it can be a catalyst for shared-services
implementations as well," Moskovitz
said.

The health care and human services sectors
in particular will provide growth opportunities
for integrators in 2008, Bjorklund said. In
addition to the impetus for electronic health
records, integrators also will find digital
records and other electronic platforms for
entitlement management becoming increasingly
important in the human services area, he
added.

ON THE HORIZON

Beyond that, companies also can expect continuing
investment in infrastructure modernization
and consolidation, "where jurisdictions
can spend money now to save in the
future," Bjorklund said.

One of the largest infrastructure modernization
opportunities on the horizon is
Georgia's initiative to outsource its technology
infrastructure operation to the private sector. IBM, Northrop Grumman and others are
planning to bid on the project, which could
be worth as much as $1.4 billion over seven
years, according to market research reports.

Surpassing the Georgia project is a massive
12-year, $1.6 billion ERP project in California
cleverly named Fi$cal. Although the solicitation
will not be released until 2009, the
opportunity has created substantial buzz
among the top players in the state and local
market.

Meanwhile, companies are scrambling to
chase the last major growth opportunities in
state and local government before the economic
downturn becomes a firm reality,
Sood said. Once the downturn is in full
swing, he added, state and local customers
will be checking to see if project proposals
address the need to contain costs and generate
revenue.

"Those tend to be the projects that get a
much faster green light than other projects
when we get into this belt-tightening type of
a world," he said.

William Welsh (wwelsh@1105govinfo.com) is deputy
editor at Washington Technology.

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