State & Local special report | Helping hands

As budgets shrink, the top companies in the state and local marketare bracing for a tougher, more competitive 2008. Statecoffers have run full in the past few years, but the bleak outlooktoday is reminiscent of earlier this decade, when statebudgets hit rock bottom."The heyday seems to have disappeared in a nanosecond,"said Caroline Rapking, vice president of U.S. Stateand Local Government at CGI Group Inc.Companies are holding talks with prospective stateand local clients to see how they can help their customersincrease productivity, reduce costs and produceadditional revenue, she said. "Because of the economicslowdown, we don't just see this as a 2008 thing.This could linger for a few more years."The seasoned players on WashingtonTechnology's 2008 Who's Who in the Stateand Local Market have weathered such storms before. They know that the key tostrong sales lies in having the right mix of large-scale business processing and informationtechnology outsourcing projects coupled with domain-specific projects fueledby federal dollars.For those reasons, the industry executives interviewed for this year's report areconfident they can hold on to existing clients and even grow their businesses despiteodds that seem stacked against them."We have a great backlog," said Dave Zolet, president of Northrop GrummanInformation 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 respondersin New York City. Zolet conceded thatthe market is on the verge of a downturn,but he said he remains confident that thecompany's state and local business will continueto thrive."In the markets where we have won, weare well-positioned and protected," he said.Thirteen integrators with state and localrevenues ranging from $100 million to morethan $1 billion made this year's list. Headingthe list are Affiliated Computer Services(ACS) Inc., EDS Corp. and IBM Corp. ? allwith annual sales exceeding $1 billion.Northrop Grumman, which is steadilyclimbing the Who's Who chart, is one of fivecompanies in the $500 million to $1 billioncategory, along with other brand names suchas Accenture Ltd. and Unisys Corp.The list was compiled for WashingtonTechnology by FedSources Inc., a McLean,Va., market research firm.The looming state budget crisis is overtakingthe market more quickly than the one thatoccurred six years ago, said Lisa Mattivi, vicepresident of state and local government atIBM Global Business Services. Despite the fiscalcrunch, she said, IBM and the other topcontractors will see opportunities this year toshore up IT infrastructure, overhaul systemsand deploy governmentwide financial systems."We're doing a lot to help customersaddress budget problems," she said. "Theyare going to have to make investments tosave, but they seem to know that and aremaking those kinds of smart investments."Growing their business in hard times andhelping states generate revenue rather thandeplete existing funds are integral parts of thego-to-market strategies for the Who's Who.For example, ACS offers a variety of businessprocess outsourcing strategies designedto generate revenue for clients, said SkippStitt, ACS' chief administrative officer."While we're well-positioned when peopleare growing and adopting new technologies, in tough times we also are well-positioned to[help clients] take in new efficiencies andbecome more productive," he said.Success in the state and local market centerson the ability to build solid past performanceand stick to core competencies, said RayBjorklund, senior vice president and chiefknowledge officer at FedSources.Companies with a stake in the marketshould work this year to gauge the extent ofthe downturn and adjust expectationsaccordingly, he said. "Companies that arepublicly traded and those with similar levelsof shareholder interest [should] reduce salestargets to realistic levels that will enable thecompany to meet performance expectations,"Bjorklund said.State and local IT spending is expected toincrease at an average annual growth rate of4 percent, from $51.1 billion in 2008 to$57.6 billion in 2011, according to the marketresearch and consulting firm GartnerInc. But the window ofopportunity for discretionaryprojects is closingfaster than the gradual slowdownthat was expected 18 months ago, said RishiSood, a research vice president at Gartner.The top companies in the market continueto derive revenue from proven lines of businessand by positioning themselves forchanges driven by external factors, such asthe federal push for electronic health recordsor biometric and database opportunities thathave resulted from the 2005 Real ID Act.EDS Corp. positioned itself for humanresources opportunities and Real ID workwith 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 forhuman services that EDS has really neverbeen able to penetrate before," Sood said."It's a big benefit for them."The Saber purchase could be the icing onthe cake for EDS' alreadyblockbuster sales in the stateand local market. The Plano,Texas-based systems integrator hasMedicaid system fiscal services or modernizationwork in 22 states, said BarbaraAnderson, vice president of EDSGovernment Health and Human Services.The company also provides technology-relatedhealth care services to another 16 states,she added.EDS' chief competitor for Medicaid-relatedwork is ACS. The Dallas-based company providesMedicaid fiscal agent services in 13states and the District of Columbia, Stitt said.Last year, it won a 10-year, $130 million contractto build and run Alaska's new Medicaidsystem; a three-year, $67 million contract tocontinue operating Colorado's system; and aseven-year, $111 million contract for similarwork in Washington, D.C.EDS will compete this year against other companies, such as BearingPoint Inc., that areangling for DMV work. Last year,BearingPoint won a five-year, $50 millioncontract to build a new DMV system forMissouri and a two-year, $14.1 million projectto build a Web portal through whichCalifornians can perform DMV-related transactions.IBM has staked out its state and localground as one of the top IT outsourcing companies.In the fourth quarter of 2006, thecompany landed a 10-year, $1.1 billion projectto modernize Indiana's aging welfare eligibilitysystem. It also won a data center outsourcingdeal with Texas worth $863 million over 10years.One of IBM's flagship projects in the humanservices sector is an $80 million contract tomodernize Pennsylvania's unemploymentinsurance system using service-oriented architecture,Mattivi said. "We're very focused on thesocial services market, where there are atremendous [number] of legacy systems forchild welfare, child support and unemploymentinsurance."One sure way for states to improve workflowand drive savings is a large-scale enterpriseresource planning implementation, industryexecutives say. Accenture has ERP projectswith New York City, Connecticut, Ohio andWashington state. And the savings can be considerable.When Ohio implemented its initiative,state officials said they anticipated saving$251 million through improved efficienciesover the course of the five-year project.Other top state and local contractors, such asCiber Inc., CGI, Deloitte and Touche USA LLPand IBM, also have significant public-sectorERP portfolios. CGI announced in May 2007that it had won a six-year, $84 million projectto implement its Advantage human resourcessystem for Los Angeles County. The companyalso has key ERP projects with Kentucky,Wyoming and New York City.Ciber has ERP projects with the DelawareTransportation Department and thePennsylvania Turnpike Commission, andDeloitte has a major implementation with theMiami-Dade County public school system.Accenture is seeing a number of public-sectororganizations doing strategic planning andbusiness case justifications to prepare for ERPprojects, said David Moskovitz, managingdirector at Accenture's State and LocalGovernment Client Group. ERP functions,such as human resources, payroll and finance,lend themselves to a shared-services model.Several states, including Illinois, NorthCarolina and Minnesota, launched such modelsin 2007."When states are considering large ERPinvestments, it can be a catalyst for shared-servicesimplementations as well," Moskovitzsaid.The health care and human services sectorsin particular will provide growth opportunitiesfor integrators in 2008, Bjorklund said. Inaddition to the impetus for electronic healthrecords, integrators also will find digitalrecords and other electronic platforms forentitlement management becoming increasinglyimportant in the human services area, headded.Beyond that, companies also can expect continuinginvestment in infrastructure modernizationand consolidation, "where jurisdictionscan spend money now to save in thefuture," Bjorklund said.One of the largest infrastructure modernizationopportunities on the horizon isGeorgia's initiative to outsource its technologyinfrastructure operation to the private sector. IBM, Northrop Grumman and others areplanning to bid on the project, which couldbe worth as much as $1.4 billion over sevenyears, according to market research reports.Surpassing the Georgia project is a massive12-year, $1.6 billion ERP project in Californiacleverly named Fi$cal. Although the solicitationwill not be released until 2009, theopportunity has created substantial buzzamong the top players in the state and localmarket.Meanwhile, companies are scrambling tochase the last major growth opportunities instate and local government before the economicdownturn becomes a firm reality,Sood said. Once the downturn is in fullswing, he added, state and local customerswill be checking to see if project proposalsaddress the need to contain costs and generaterevenue."Those tend to be the projects that get amuch faster green light than other projectswhen we get into this belt-tightening type ofa world," he said.