State and local market rich with IT opportunities

Like the majority of U.S. states, Ohio is facing serious financial woes, having racked up an $8 billion deficit in 2009 that must be overcome by the end of this year. That reality has forced state officials to start considering some outside-the-box thinking, especially when it comes to its information technology systems.

Last July, Ohio unveiled the first-ever state government shared services center. Built by Accenture, the center offers common transaction processes to state and local agencies, such as accounts payable and travel reimbursement. The consolidation effort, which will be expanded over time, is expected to save agencies between 23 percent and 45 percent of their annual costs for maintaining and operating each consolidated process, according to recent testimony by J. Pari Sabety, director of Ohio’s Office of Budget and Management.

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Time is ripe for the state and local market

Ohio’s decision to embrace a new way of doing business is especially interesting because it appears to be a harbinger of things to come within the state and local IT market in 2010, say market observers and major systems integrators.

As agencies grapple with a once-in-a-generation fiscal morass that has left most of them with massive budget gaps — even as demand for core citizen services is steeply increasing — state and local government officials are increasingly willing to look beyond traditional IT solutions to other types of more cutting-edge fixes that optimize costs, improve constituent services and even enhance revenues.

These include alternative delivery models such as software as a service (SaaS), infrastructure as a service and cloud computing models; regionalization and shared services centers; business process transformation, consolidation and centralization; and public/private partnerships.

Some states and localities are already testing the waters. The New York Metropolitan Transit Authority is in the process of developing a shared services center that will consolidate common business processes within the agency. Los Angeles signed a $7.25 million contract with Google Inc. to move the e-mail of all 30,000 city employees to a cloud computing model.

And Colorado’s Statewide Internet Portal Authority has issued a request for proposals for a SaaS solution for Web-based e-mail, videoconferencing and office productivity applications. SIPA plans to act as a link between the state’s cities, counties and towns and the one or more vendors that will host the applications, which will enable a single sign-on to access all cloud functions.

This new IT outlook is a direct result of the recession, which industry observers say will permanently alter the way state and local government officials approach their IT investments.

“We are seeing, for the first time, governments making decisions that they’re really going to transform their operating models and bring in IT and the private sector to support that — rather than just upgrade or modernize the technology that’s already in place,” said David Wilson, director of Accenture’s U.S. State and Local and Canadian Provincial Client Services Group. “If you look at how citizen services are provided, how back-office business operations are conducted, they have not been transformed and modernized as quickly or as aggressively as the private sector has done. I think this fiscal crisis — being so much more severe and perhaps long-lived — is going to change all that.”

Joe Doherty, executive vice president and group president of government solutions for Affiliated Computer Services, a Xerox company, said his firm has already responded to five requests for information for SaaS and cloud computing models in the last month at the state and local levels. Xerox acquired business process outsourcing services provider ACS last year for $6.4 billion in a move to expand its business capabilities.

“We see state and local governments really getting comfortable with this idea that they don’t need to own and operate the hardware or the applications,” Doherty said. “At the same time, though, they realize that this is a little outside the box, so they’re getting input to ensure they really understand the impact on security, the infrastructure requirements and other issues.”

Michael King, director of business development for civil, safety and infrastructure business at Northrop Grumman Corp., said he sees opportunity in those security concerns over cloud and SaaS models. “As they go to these commercial models and put their data in a location that isn’t controlled by government anymore, we see state and local agencies looking for expertise in providing cybersecurity and other services that can secure that data and all access to it,” he said.

Tough Environment

That's not to say state and local spending won't take a major hit. Rishi Sood, a senior research analyst at Gartner, said state and local IT spending will grow at an average annual rate of 4 percent during the next several years — from $54.4 billion in 2010 to $67.2 billion in 2015.

Sood agrees that states are changing their outlook on future IT strategies but sees this type of revolution hitting its stride further out than 2010. He said the financial environment for state and local agencies is tough this year, so he expects that they will spend their IT budgets largely on solutions that provide immediate relief from their general budget challenges.

“The focus will continue to be on IT cost optimization pathways as many CIOs are worried about just keeping the lights on rather than driving new levels of transformation within their jurisdiction,” he said. “But a key cornerstone of state and local government operation is that not all agencies are created equal. Many agencies get additional funds outside of the general fund that even during an economic downturn will allow them to do large-scale modernization projects.”

For example, Sood said he expects states in 2010 to invest most heavily in the modernization of systems involving Medicaid and human services.

Another major area likely to see a lot of activity this year is integrated tax systems, with a focus on auditing and consulting services that uncover tax fraud and uncollected revenues, Sood said. He also predicts that agencies will begin to move toward a concept he calls enterprise collections systems, which would serve as the de facto source of revenue recovery across all of government. That means collecting not just traditional taxes such as business, property or income but also parking tickets, fines and other fees that often fall through the revenue cracks.

“The technology requirements involved in these types of efforts do often impact the bottom line directly, so agency modernizations for tax agencies almost always get green-lit,” Sood said.

Cutting Costs, Meeting Expectations

The focus on using IT to improve the bottom line will extend to other functions, too, said Adelaide O’Brien, research manager at IDC Government Insights, especially licensing and service agencies that can gain efficiencies and cut out paper costs through self-service models, such as vehicle registration renewals. “Obviously, state and local governments are watching every penny they have, but at the same time, they’re looking for areas where they can conduct the services that they’re required to in a less expensive and better way,” O’Brien said, noting that these agencies are now charging a premium to constituents who take care of business in person rather than online.

She adds that agencies are also being pressured into adopting commercial best practices in customer service by citizens who increasingly expect to interact with organizations online or via social networks. “There are a lot of issues that states and localities are facing, but if they can work their way through it and make very, very smart IT investments, they’ll be better off financially and citizens will be better served,” she said.

Frank Chechile, state and local vice president at HP Enterprise Services' U.S. Public Sector division, agrees that the push for enhanced service is driving the state and local market to invest in IT solutions. He said he sees major opportunities in 2010 in state motor vehicle modernization and the development of 3-1-1 systems that enable one-stop access to agency services, in addition to bigger efforts to conduct business process consolidation across departments and functions.

“In essence, what state and local governments are looking for is innovation, ideas, ways that the technology can be applied to make services better while reducing costs or at least not costing them more,” Chechile said.

Long-Term Change

Ultimately, these new demands on agencies and the long-term economic realities government officials are facing have caused a sea change in perspective among state and local clients, Accenture's Wilson said. And that will have a major impact on what they expect from and how they do business with systems integrators.

“There used to be a belief that the cyclical downturns in revenues and the fiscal challenges that those created would go away as soon as there was an upturn in the economy,” he said. “Now we are finding that a lot of government clients believe that these reduced revenues and the reduced financial capabilities are going to be long term. It represents a paradigm shift, and as such, integrators are going to have be full partners, not just specialists in one area. They’ll need to bring a variety of different capabilities to a project so they can do the consulting and strategy work, transform and consolidate the processes, and create holistic end-to-end solutions that really support a business case for investment.”