State & local special report: State markets ? tough nuts to crack

The formula that Dynamics Research Corp. used to enter the state and local market consisted of equal parts business savvy and plain luck.In the mid-1990s, the defense contractor based in Andover, Mass., was marketing Year 2000 services to states with mainframe systems. It wanted to bring its experience on Air Force mainframes to bear on the problem and ultimately found a niche performing Y2K services in state human services agencies, said Kathy Perras, vice president and general manager of DRC's state and local programs. But the company yearned for large, statewide projects.That's when luck walked in the door. DRC wanted to build statewide child welfare systems, but customers wanted to hire companies that could transfer systems used in other states rather than build new ones. So DRC went to the federal government, which oversees state health and human services programs, and asked if there was any child welfare software in the public domain that it could obtain. The federal government obliged."New Hampshire wanted Oklahoma's system, so we got Oklahoma's system up and running, and we bid it. We bid against Deloitte, which actually wrote the software, and we beat them. That's how we got our first qualification," she said.That was in 1996. And the company has focused primarily on child welfare and related programs since, Perras said.In addition to New Hampshire, DRC has worked on child welfare projects in Arkansas, Colorado and Ohio. The company won a $35 million project in Ohio three years ago. The system is moving from the test stage to a statewide deployment and is scheduled for completion in November.DRC has about $20 million in annual sales from its state and local business but hopes that will increase with more wins in the human services area this year. But the company will have to compete against a formidable set of opponents focused on child welfare that includes Accenture, CGI and Deloitte, Perras said."We didn't win as many opportunities last year as we had hoped, so we have a refocused effort this year," she said.Perras is skeptical that DRC's strategy would work for other federal integrators now. The federal government no longer helps companies replicate existing systems, although it might be possible to obtain one from a particular state, she said."There is a very large barrier to entry," Perras said. "You have to come to the table with a solution. You must have a child welfare system in your pocket to come into a state and bid. No one is paying for brand-new ones anymore. ... It doesn't matter how big you are, you don't qualify."The remaining alternative for breaking into the health and human services market is to either acquire or team with a company that has an established business, Perras said."There are some companies that have gone that route, but that is the only way to get in. It is a closed space," she said.