Thriving in Red Ink: Government IT contractors find success
With state budget shortfalls expected to almost triple from $30 billion this year to $85 billion next year, state and local customers are going to be more willing than ever to outsource their "sacred cows" -- critical functions such as human resources, payroll and child support that many governments traditionally have kept in-house. Such plans weigh heavily in the business prospects for companies in Washington Technology's 2003 Who's Who in the State and Local Market report.
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John Brophy said things have never been better in the state and local market for Affiliated Computer Services Inc.
Brophy, who is president of the Dallas-based company's state and local solutions group, is seeing an explosion of opportunities in business process outsourcing. This comes not despite, but because cash-strapped state governments are searching for ways to sustain and even improve services at lower costs.
With state budget shortfalls expected to almost triple from $30 billion this year to $85 billion next year, state and local customers are going to be more willing than ever to outsource what Brophy called their "sacred cows" -- critical functions such as human resources, payroll and child support that many governments traditionally have kept in-house.
"No government would ever think about outsourcing its human resources function before, [but] Florida has already done that," he said.
That deal wasn't won by ACS, but by Convergys Corp. of Cincinnati, which in August snagged a seven-year, $280 million contract to provide all Florida state employees with human resource services, such as benefits and payroll administration, recruiting and training.
Brophy and other industry executives said budget pressures are ratcheting up the demand for IT solutions that can contain costs and increase revenue, such as delinquent tax or parking fine collection systems. At the same time, many governments are looking to consolidate their IT infrastructure and improve network security.
"There are millions of dollars potentially available, and clearly the savings alone will fund the contract costs and still leave money for the state," said John Engler, regarding opportunities to consolidate IT infrastructure. Engler, former governor of Michigan, is now president of state and local government for Electronic Data Systems Corp. of Plano, Texas.
The best hope for growth, many experts said, is business process outsourcing, IT consolidation and other initiatives that can help states survive the budget crisis.
Integrators should "develop and push solutions that will enable re-engineering of customer service in order for states to make dramatic reductions in current operational budgets," said John Kost, vice president of worldwide public-sector research for Gartner Inc.
MARKET LEADERS
EDS and ACS are joined by IBM Corp. as the top three systems integrators in Washington Technology's 2003 "Who's Who in the state and local market." All three companies, which raked in more than $1 billion in state and local sales, topped last year's list as well.
Northrop Grumman Corp. of Los Angeles, with its acquisition of TRW Inc. of Cleveland, moved up a notch in this year's ranking with revenue between $300 million and $500 million.
Three companies slipped in the rankings. BearingPoint Inc. of McLean, Va. (formerly KPMG Consulting Inc.), dropped to between $300 million to $500 million in state and local sales, while American Management Systems Inc. of Fairfax, Va., and Science Applications International Corp. of San Diego both fell to between $100 million to $300 million.
Ciber Corp. of Denver joins the rankings for the first time with more than $100 million in state and local revenue in 2002.
Federal Sources Inc., a market research and intelligence company in McLean, Va., provided the revenue figures for the Who's Who ranking.
Overall, state and local IT spending is expected to increase at an average annual rate of 4.6 percent, from $41.4 billion in 2003 to $47.4 billion in 2006, according to the research and consulting firm Gartner Dataquest, Stamford, Conn. But spending will be mostly flat this year and next year, with growth picking up sharply after 2004, according to Gartner.
"The market is moving sideways," said Ray Bjorklund, FSI's vice president of consulting services.
Some sectors will do well, and some won't. Many states, for example, cannot afford to begin federally sponsored projects in health care, transportation and welfare, even though 80 percent of the funding comes from matching federal grants, Kost said.
State and local governments also are still holding out hope that federal dollars will flow for first-responder systems and homeland security programs. But integrators are skeptical that funds will be released any time soon.
"Homeland security is vaporware," said Ed Burns, Ciber's head of state and local government. "We're not basing our business plans on it."
BPO BOOM
With many states hoping to cut costs by shifting nonessential operations to the private sector, industry officials said they are taking a fresh look at business process outsourcing.
"[Information technology] consolidation and business process outsourcing are at the top of every governor's list as long-term solutions to mounting budget deficits," said Meredith Luttner, manager of state and local market development services at the market research firm of Input Inc., Chantilly, Va.
Business process outsourcing -- government functions or operations that are taken over by contractors -- are typically back-office processes, such as accounts receivable, billing, claims processing and transaction processing.
In recent years, systems integrators have had considerable success processing transactions and collecting fees for parking and traffic fines, bridge and road tolls, and child support payments and delinquent taxes, according to analysts and company officials. Companies are also seeing emerging opportunities to provide eligibility determination for health and human services programs.
Two opportunities on the horizon are child support enforcement projects with the California Department of Child Support Services and the New Jersey Department of Human Resources, according to Input. The California project is valued at more than $10 million; the estimated value of the New Jersey deal has not been determined.
Although the projects call for operational support and systems implementation, the states likely will award them to contractors that also can handle the outsourcing side, Luttner said.
ACS last year picked up some big wins in this area, including a $234 million contract from Ohio to operate the state's child support collections and disbursement unit. The company is set to sign a similar deal with Illinois, Brophy said.
IBM is another company poised to capitalize on business process outsourcing opportunities. The company's purchase of PWC Consulting last year gives IBM a powerful combination of skills to transform infrastructures and business processes, said Todd Ramsey, general manager for IBM's global government industry.
Covansys, Farmington Hills, Mich., also is moving quickly to position itself in this arena. Last year the company acquired PDA Software Services Inc. of Overland Park, Kan., in a deal designed specifically to strengthen the company's business process outsourcing capabilities in the commercial and government sectors.
Through the PDA acquisition, Covansys now has a division that outsources banking services for women, infant and children programs in a number of states, company officials said.
COST CONSCIOUS
Analysts and industry officials believe growth opportunities for systems integrators this year will occur in the areas of cost containment or avoidance, infrastructure hardening and revenue enhancement.
"The major innovations may generate new business, but only if the promise of business process re-engineering will save money," Kost said.
"There's almost a maniacal focus on understanding customers' issues and what we call 'pain points,' " Ramsey said. Because of this, state and local clients will want to see "quick returns on just about anything they spend money on," he said.
Enterprise resource planning is one of the most effective ways to cut costs, because it standardizes processes across agencies. But ERP is difficult because of the cultural change it requires from government employees and agency leaders, analysts and industry experts said.
In 2002, AMS got two key ERP wins in Iowa and Massachusetts, worth $9.4 million and $25.2 million, respectively. At the local level, Deloitte Consulting is implementing a $30 million ERP project for San Antonio, company officials said.
A routine part of IT outsourcing contracts in the aftermath of the Sept. 11 terrorist attacks is the "hardening" of infrastructure, both by enhancing security of IT systems and by providing disaster recovery services.
For example, Northrop Grumman won a six-year, $33.8 million contract last year from the Texas Department of Criminal Justice to manage the department's data center operations. The deal significantly expanded the company's data center contracts with state agencies. It also marked the crossing of an important threshold, when the department agreed to allow its data to be shared with other state agencies, said Cheryl Janey, vice president of state and local solutions for Northrop Grumman Corp.
Unisys won a three-year, $252 million contract renewal last year from the Pennsylvania Office of Administration for the continued operation and maintenance of the state's data center facility. The company also won a seven-year, $56 million contract from Minneapolis to provide outsourcing services to support the city's IT infrastructure.
REALLOCATING RESOURCES
The top companies are making a variety of changes in their organizations and strategies to take advantage of new state and local opportunities.
BearingPoint, instead of cutting back its state and local efforts, is pulling together resources from within the company to bolster its state and local business, said Ron Salluzzo, senior vice president for state and local services. For example, top executives are pushing for greater collaboration between the company's education and state and local practice groups, he said. These groups, which have worked independent of each other in the past, are now developing joint opportunities.
Unisys has been hiring away key employees from other integrators to help shore up key areas of its public-sector practice, said Kevin Curry, vice president and general manager of Unisys' North America Public Sector. Last June, Unisys hired about 150 employees from the government services unit of now-defunct Arthur Andersen LLP.
The staff transaction brought Unisys business consulting, change management and business process management capabilities, said Greg Baroni, president of Unisys' global public sector. The company also is searching for possible acquisitions in the United States and Canada, he said.
EDS will take a hard look at how it can improve its health-care offerings in contemplation of changes to Medicare and Medicaid programs, Engler said. The company will be looking to improve services associated with pharmacy benefits, mental health and disease management, he said. Engler hopes to blend some of the company's commercial sector financial and accounting strengths with yet untapped state and local business process opportunities.
At AMS, officials are choosing carefully which opportunities they pursue, and will continue to concentrate on finance and administrative solutions from which it derives more than half of its state and local revenue, said Ed Nadworny, head of AMS' public-sector services.
Northrop Grumman's Janey said the acquisition of TRW rounds out Northrop Grumman's suite of services. In the past the company focused on IT infrastructure support and outsourcing, but with TRW, Northrop Grumman will be a force in health and human services, criminal justice and public safety, she said.
Still, the company will proceed cautiously. Northrop Grumman has no plans to pursue any state projects that might require a special legislative appropriation nor any type of project that it hasn't done before this year, she said.
"This isn't a year we are going to branch off and try something new," Janey said. *
Staff Writer William Welsh can be reached at wwelsh@postnewsweektech.com.
John Brophy, president of the state and local solutions group at Dallas-based Affiliated Computer Services Inc., said business has never been better for his company, despite the states' budget woes.
Henrik G. deGyor
Todd Ramsey of IBM Corp.'s global-government industry said because of the budget crunches they face, state and local customers will want to see "quick returns on just about anything they spend money on."
Olivier Douliery
John Brophy said things have never been better in the state and local market for Affiliated Computer Services Inc.Brophy, who is president of the Dallas-based company's state and local solutions group, is seeing an explosion of opportunities in business process outsourcing. This comes not despite, but because cash-strapped state governments are searching for ways to sustain and even improve services at lower costs.
With state budget shortfalls expected to almost triple from $30 billion this year to $85 billion next year, state and local customers are going to be more willing than ever to outsource what Brophy called their "sacred cows" -- critical functions such as human resources, payroll and child support that many governments traditionally have kept in-house.
"No government would ever think about outsourcing its human resources function before, [but] Florida has already done that," he said.
That deal wasn't won by ACS, but by Convergys Corp. of Cincinnati, which in August snagged a seven-year, $280 million contract to provide all Florida state employees with human resource services, such as benefits and payroll administration, recruiting and training.
Brophy and other industry executives said budget pressures are ratcheting up the demand for IT solutions that can contain costs and increase revenue, such as delinquent tax or parking fine collection systems. At the same time, many governments are looking to consolidate their IT infrastructure and improve network security.
"There are millions of dollars potentially available, and clearly the savings alone will fund the contract costs and still leave money for the state," said John Engler, regarding opportunities to consolidate IT infrastructure. Engler, former governor of Michigan, is now president of state and local government for Electronic Data Systems Corp. of Plano, Texas.
The best hope for growth, many experts said, is business process outsourcing, IT consolidation and other initiatives that can help states survive the budget crisis.
Integrators should "develop and push solutions that will enable re-engineering of customer service in order for states to make dramatic reductions in current operational budgets," said John Kost, vice president of worldwide public-sector research for Gartner Inc.
MARKET LEADERS
EDS and ACS are joined by IBM Corp. as the top three systems integrators in Washington Technology's 2003 "Who's Who in the state and local market." All three companies, which raked in more than $1 billion in state and local sales, topped last year's list as well.
Northrop Grumman Corp. of Los Angeles, with its acquisition of TRW Inc. of Cleveland, moved up a notch in this year's ranking with revenue between $300 million and $500 million.
Three companies slipped in the rankings. BearingPoint Inc. of McLean, Va. (formerly KPMG Consulting Inc.), dropped to between $300 million to $500 million in state and local sales, while American Management Systems Inc. of Fairfax, Va., and Science Applications International Corp. of San Diego both fell to between $100 million to $300 million.
Ciber Corp. of Denver joins the rankings for the first time with more than $100 million in state and local revenue in 2002.
Federal Sources Inc., a market research and intelligence company in McLean, Va., provided the revenue figures for the Who's Who ranking.
Overall, state and local IT spending is expected to increase at an average annual rate of 4.6 percent, from $41.4 billion in 2003 to $47.4 billion in 2006, according to the research and consulting firm Gartner Dataquest, Stamford, Conn. But spending will be mostly flat this year and next year, with growth picking up sharply after 2004, according to Gartner.
"The market is moving sideways," said Ray Bjorklund, FSI's vice president of consulting services.
Some sectors will do well, and some won't. Many states, for example, cannot afford to begin federally sponsored projects in health care, transportation and welfare, even though 80 percent of the funding comes from matching federal grants, Kost said.
State and local governments also are still holding out hope that federal dollars will flow for first-responder systems and homeland security programs. But integrators are skeptical that funds will be released any time soon.
"Homeland security is vaporware," said Ed Burns, Ciber's head of state and local government. "We're not basing our business plans on it."
BPO BOOM
With many states hoping to cut costs by shifting nonessential operations to the private sector, industry officials said they are taking a fresh look at business process outsourcing.
"[Information technology] consolidation and business process outsourcing are at the top of every governor's list as long-term solutions to mounting budget deficits," said Meredith Luttner, manager of state and local market development services at the market research firm of Input Inc., Chantilly, Va.
Business process outsourcing -- government functions or operations that are taken over by contractors -- are typically back-office processes, such as accounts receivable, billing, claims processing and transaction processing.
In recent years, systems integrators have had considerable success processing transactions and collecting fees for parking and traffic fines, bridge and road tolls, and child support payments and delinquent taxes, according to analysts and company officials. Companies are also seeing emerging opportunities to provide eligibility determination for health and human services programs.
Two opportunities on the horizon are child support enforcement projects with the California Department of Child Support Services and the New Jersey Department of Human Resources, according to Input. The California project is valued at more than $10 million; the estimated value of the New Jersey deal has not been determined.
Although the projects call for operational support and systems implementation, the states likely will award them to contractors that also can handle the outsourcing side, Luttner said.
ACS last year picked up some big wins in this area, including a $234 million contract from Ohio to operate the state's child support collections and disbursement unit. The company is set to sign a similar deal with Illinois, Brophy said.
IBM is another company poised to capitalize on business process outsourcing opportunities. The company's purchase of PWC Consulting last year gives IBM a powerful combination of skills to transform infrastructures and business processes, said Todd Ramsey, general manager for IBM's global government industry.
Covansys, Farmington Hills, Mich., also is moving quickly to position itself in this arena. Last year the company acquired PDA Software Services Inc. of Overland Park, Kan., in a deal designed specifically to strengthen the company's business process outsourcing capabilities in the commercial and government sectors.
Through the PDA acquisition, Covansys now has a division that outsources banking services for women, infant and children programs in a number of states, company officials said.
COST CONSCIOUS
Analysts and industry officials believe growth opportunities for systems integrators this year will occur in the areas of cost containment or avoidance, infrastructure hardening and revenue enhancement.
"The major innovations may generate new business, but only if the promise of business process re-engineering will save money," Kost said.
"There's almost a maniacal focus on understanding customers' issues and what we call 'pain points,' " Ramsey said. Because of this, state and local clients will want to see "quick returns on just about anything they spend money on," he said.
Enterprise resource planning is one of the most effective ways to cut costs, because it standardizes processes across agencies. But ERP is difficult because of the cultural change it requires from government employees and agency leaders, analysts and industry experts said.
In 2002, AMS got two key ERP wins in Iowa and Massachusetts, worth $9.4 million and $25.2 million, respectively. At the local level, Deloitte Consulting is implementing a $30 million ERP project for San Antonio, company officials said.
A routine part of IT outsourcing contracts in the aftermath of the Sept. 11 terrorist attacks is the "hardening" of infrastructure, both by enhancing security of IT systems and by providing disaster recovery services.
For example, Northrop Grumman won a six-year, $33.8 million contract last year from the Texas Department of Criminal Justice to manage the department's data center operations. The deal significantly expanded the company's data center contracts with state agencies. It also marked the crossing of an important threshold, when the department agreed to allow its data to be shared with other state agencies, said Cheryl Janey, vice president of state and local solutions for Northrop Grumman Corp.
Unisys won a three-year, $252 million contract renewal last year from the Pennsylvania Office of Administration for the continued operation and maintenance of the state's data center facility. The company also won a seven-year, $56 million contract from Minneapolis to provide outsourcing services to support the city's IT infrastructure.
REALLOCATING RESOURCES
The top companies are making a variety of changes in their organizations and strategies to take advantage of new state and local opportunities.
BearingPoint, instead of cutting back its state and local efforts, is pulling together resources from within the company to bolster its state and local business, said Ron Salluzzo, senior vice president for state and local services. For example, top executives are pushing for greater collaboration between the company's education and state and local practice groups, he said. These groups, which have worked independent of each other in the past, are now developing joint opportunities.
Unisys has been hiring away key employees from other integrators to help shore up key areas of its public-sector practice, said Kevin Curry, vice president and general manager of Unisys' North America Public Sector. Last June, Unisys hired about 150 employees from the government services unit of now-defunct Arthur Andersen LLP.
The staff transaction brought Unisys business consulting, change management and business process management capabilities, said Greg Baroni, president of Unisys' global public sector. The company also is searching for possible acquisitions in the United States and Canada, he said.
EDS will take a hard look at how it can improve its health-care offerings in contemplation of changes to Medicare and Medicaid programs, Engler said. The company will be looking to improve services associated with pharmacy benefits, mental health and disease management, he said. Engler hopes to blend some of the company's commercial sector financial and accounting strengths with yet untapped state and local business process opportunities.
At AMS, officials are choosing carefully which opportunities they pursue, and will continue to concentrate on finance and administrative solutions from which it derives more than half of its state and local revenue, said Ed Nadworny, head of AMS' public-sector services.
Northrop Grumman's Janey said the acquisition of TRW rounds out Northrop Grumman's suite of services. In the past the company focused on IT infrastructure support and outsourcing, but with TRW, Northrop Grumman will be a force in health and human services, criminal justice and public safety, she said.
Still, the company will proceed cautiously. Northrop Grumman has no plans to pursue any state projects that might require a special legislative appropriation nor any type of project that it hasn't done before this year, she said.
"This isn't a year we are going to branch off and try something new," Janey said. *
Staff Writer William Welsh can be reached at wwelsh@postnewsweektech.com.