Across the Digital Nation: The perfect storm -- A midyear review

Rishi Sood

Last year, Gartner Dataquest identified the problems and challenges that, taken together, are creating the "perfect storm" among state and local governments. These problems -- such as growing budget deficits, a graying work force, the decline of chief information officer leadership and a host of new expenditures such as homeland security -- are threatening to overwhelm state and local officials.

Over the past six months, state and local governments have looked to navigate the storm in a variety of ways. From a budget perspective, most states have increased sin taxes and user fees, cut services, laid off employees, borrowed against anticipated tobacco settlements and raided rainy-day funds.

The majority of states have told agencies to find ways to increase revenue, cut costs and avoid new expenditures.

Six months into 2003, states have developed differing approaches to dealing with the effects of the storm. Georgia, Wyoming and New Mexico, for instance, either have lessened the impact of the budget deficit through active management or insulated state coffers from the boom-and-bust cycle of the past three years. But some states -- California is one -- have a worsening fiscal picture and have not been able to stop the budgetary slide.

Given that most states begin a new fiscal year in July, the differences among states likely will increase as some continue to struggle with the magnitude of the problems while others aggressively continue the path of reform.

From a technology perspective, there have been a number of significant changes among state enterprises. For example, Virginia and Florida have taken bold initiatives to transform the organizational structure of state technology operations and the delivery of technology services to agency end users. These initiatives underscore the importance of creating the most effective and efficient way to manage resources as well as deploy services that best impact the core functions of the agency.

Other states will watch closely the progress of these initiatives to see if true cost savings, service improvements or technology innovation can be brought to the forefront.

In particular, information technology outsourcing and business process outsourcing continue to emerge as viable alternatives to traditional services delivery. Although state and local officials historically have resisted outsourcing, a number of governments are moving forward with new initiatives. As more of these public-sector organizations look to consolidate and centralize parts of the technology enterprise, IT outsourcing initiatives undoubtedly will rise.

Similarly, business process outsourcing will expand and evolve from discrete agency processes, such as Medicaid and electronic benefits transfer, to horizontal functions, such as human resources and logistics.

The very nature of the challenges in the state and local market underscores a significant opportunity for vendors to differentiate themselves and seed new business opportunities. There never has been a more opportune time for providers to educate key decision-makers and create a new mark by which procurement decisions are made. Vendors that invest this time in the marketplace will reap significant benefits over the next three years.

Although there has been a slight contraction in IT spending in 2003 -- $41.4 billion, down from $44.5 billion in 2002 -- the state and local market remains large and should be a relatively strategic industry for many vendors.

Client loyalty, opportunity to replicate solutions and traditionally stable growth rates are just some of the hallmarks of this market. Moreover, combined with the growth in technology spending at the federal level, the government market represents the second largest vertical market in the United States.

Rishi Sood is a principal analyst with Gartner Dataquest in Mountain View, Calif. His e-mail address is rishi.sood@gartner.com.

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