States turn to technology in hour of need

Contractors see opportunity in the scramble to help state and local officials cope with the economic tsunami

A sure sign that state and local governments are facing a new kind of disaster is the sharp rise in demand for call center services.

Waves of layoffs have pushed states to ramp up operations to rush benefits to people battered by an economic storm that resembles a natural disaster in its speed and fury.

In the states where Dallas-based Affiliated Computer Services Inc. handles payment processing for unemployment benefits, the company reports that call center volumes have increased by more than 100 percent during the past six months, said Joe Doherty, president of ACS Government Solutions Group.

Who's who among state and local integrators

More than $1 billion
Affiliated Computer Services Inc.
EDS
IBM Corp.

$500 million to $1 billion
Accenture Ltd.
Deloitte and Touche USA LLP

Northrop Grumman Corp.
Maximus Inc.
Unisys Corp.

$300 million to $500 million
CGI Group Inc.

$100 million to $300 million
Bearing Point Inc.
Ciber Inc.
Computer Sciences Corp.
Science Applications International Corp.

What callers once regarded as a benefit that would last a few weeks, until they could find new work, is now a necessity.

“Sometimes the calls are taking as long as 10 to 15 minutes to solve,” Doherty said. “Everything we do [to support state and local customers] is probably double-time compared to what we did before.”

Other contractors in the state and local market report similar customer demands as states seek to operate more efficiently while facing severe budget cuts. The promise of billions in stimulus money also will drive new business for systems integrators, particularly in health information technology and transportation.

“Our job is to get focused and get the subject-matter expertise out into the areas to make sure we are being responsive, because sometimes the state and locals don’t know where to turn,” Doherty said.

Crunch time

ACS, along with IBM Corp. and EDS Corp., tops Washington Technology’s 2009 Who’s Who list with more than $1 billion in state and local annual revenues. Five other state and local IT powerhouses -- Accenture Ltd., Deloitte and Touche USA LLP, Maximus Inc., Northrop Grumman Corp., and Unisys Corp. – are right below them with $500 million to $1 billion in state and local sales. FedSources Inc., a McLean, Va., market research firm, annually compiles the list of 13 contractors for Washington Technology.

One change from last year’s list is worth noting. Struggling contractor BearingPoint Inc. slipped one level to the $100 million to $300 million category. BearingPoint has had well-publicized accounting and financial problems, and in February, the company announced that it had filed for relief under Chapter 11 of the federal bankruptcy law.

The companies on the list can expect to see state and local IT spending grow at an average annual rate of 5.1 percent, from $51.2 billion in 2009 to $59.5 billion in 2012, according to market research firm Gartner Inc.

“The S&L IT market has experienced only limited growth since this time last year, said Ray Bjorklund, senior vice president and chief knowledge officer at FedSources. “Of the several segments of the public sector IT market, state and local is the first to feel the spending pinch.”

The majority of the work in the months ahead likely will involve expansion and rehabilitation of existing IT programs and systems, Bjorklund said. “Newcomer companies will have a role, but incumbents are likely to be in the best position for the added work,” he said.

Industry executives see opportunities on the horizon as states struggle to make systems more efficient and create new revenue from public/private partnerships.

“The budget crunch is coming down a lot faster than states expected, and it is unfortunate,” said Lisa Mattivi, vice president of IBM Global Business Services’ State and Local Government team. “But for us, it actually presents a lot of really strong opportunities.”

David Moskovitz, managing director of Accenture's Public Service State and Local Practice, said he sees states willing to undertake innovative programs to counter budget shortfalls. “There are a number of states that are looking to do some innovative things in terms of becoming more effective given the economic downturn,” he said, noting a strong push for shared services in several states.

The company’s big wins in 2008 included an $87 million deal with the Maryland Board of Public Works to implement a more efficient tax system.

Gino Menchini, vice president of state and local business development at Northrop Grumman, said he sees state agencies putting aside turf battles during such economic times and being more supportive of statewide IT consolidation efforts. The company has large IT consolidation projects in Indianapolis, San Diego County and Virginia.

“We will have an environment that is ripe for the real cost-effective solutions that IT can provide, and the restructuring of state and local government IT organizations to be more effective and efficient,” he said.

Aligned and focused

Some integrators have taken steps in recent months to ensure that their state and local government practices function more effectively so they grow revenue, by modernizing outdated IT systems or tapping into new federally funded projects.

Maximus announced its intention in September 2008 to sell its ancillary businesses in justice, education and asset technologies to Toronto-based Constellation Software Inc. for $40 million. The move was part of a pledge that the company made to its shareholders to focus exclusively on its health and human services business, company officials said at the time. One of the company’s larger wins last year was a contract renewal worth $208.4 million over nearly four years to continue providing enrollment broker services for the California Health Care Services Department.

Northrop Grumman is looking to expand and deepen its offerings in the state and local market by supplementing its business offerings with assets and expertise from other units of the company. “We had many other things that the company was able to do [for the state and local market], but we weren’t structured from a business development and customer focus to be able to bring those capabilities to the marketplace,” Menchini said.

The company announced Jan. 7 that it was launching a realignment and that a key part of the initiative would be to combine its IT and Mission Systems sectors into a new Information Systems sector. The company plans to redouble its efforts to bring capabilities from its federal business to the state and local market, particularly in areas such as enterprise resource planning, application development and security technologies, Menchini said.

IBM is well positioned to focus on financial system modernizations and process improvements related to social services programs, Mattivi said. Big Blue also sees a continuing demand for IT consolidation efforts, she said. “States want to get [unnecessary] costs out of their infrastructure,” she said.

The company’s largest win in the state and local market in 2008 was an eight-year, $873 million outsourcing project to modernize Georgia’s aging IT infrastructure. The company won a project of similar size and scope in Texas the year before to manage and operate the state’s data centers.

“IBM’s outsourcing wins have clearly created new revenue streams for them and have reasserted their footprint in the state and local market overall,” said Rishi Sood, vice president of government industry market strategies at Gartner.

However, IBM hit a rough patch with its Texas outsourcing project in November when the state’s Department of Information Resources (DIR) issued a notice-to-cure, in which it gave the company a short amount of time to correct deficiencies in performance related to data backup. Before the month was over, though, Texas DIR announced that IBM was making noticeable progress on a plan to correct the situation.

EDS also has made substantial gains in the market, Sood said. The company continues to capitalize on its 2007 acquisition of Saber Corp., which gave the company a broader portfolio and allowed it to go head-to-head with other tier one integrators for tax and human services modernizations, he said. EDS landed a $42.8 million project in June 2008 to modernize Ohio’s tax and revenue system by consolidating nearly two-dozen types of tax collections into a single system.

“EDS appears to be building out its state and local business more aggressively than in years past,” Sood said, acknowledging the company’s ability to continue to win large Medicaid-related contracts and push into other market segments such as finance and administration and human services. “These represent a dramatic step forward for the company,” he added.

Federal aid to states

The $787 billion economic stimulus bill signed into law Feb. 17 by President Barack Obama provides tens of billions of dollars for highway construction, health IT, mass transit and water infrastructure modernization, according to the Congressional Budget Office. Although many of those areas are not traditionally associated with IT spending, any large-scale physical infrastructure modernization that would take place as a result of the stimulus is likely to have a technology component attached to it, Sood said.

In the area of transportation, IBM is advocating smart technologies, Mattivi said. The company has designed and implemented pricing systems in large cities worldwide that aim to reduce traffic gridlock by charging drivers a fee to enter downtown areas.

Moskovitz said state and local governments will require assistance tracking stimulus funding expenditures and outcomes as part of the Obama administration’s push for greater transparency in government.

“Speed to market on getting these shovel-ready programs out into the marketplace and getting people to work is critical,” he said. “You need the right infrastructure to track the progress of work, the payments that are made, and where the dollars go, [as well as] the resulting impact on the citizenry.”

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