Systems Integrators Target Target
By Ed McKenna
With new responsibilities, increasing citizen demands and surplus funds to spend, state and local governments are upping their information technology investments, sparking sharp competition among leading IT companies and luring new firms into the fray.
There are many significant sized projects going on for outsourcing and systems integration every day in state and local governments, ranging in size from $10 million to $100 million, said Thomas Davies, vice president of state and local for the market research firm Federal Sources in McLean, Va.
Federal Sources photo
Thomas Davies, vice president of state and local at Federal Sources
IBM Corp., Armonk, N.Y.; Electronic Data Systems Corp., Plano, Texas; and Unisys Corp., Blue Bell, Pa., reaped the most revenues from the state and local market, according to a ranking of the top 10 state and local contractors compiled late last year by G2R Inc., of Mountain View, Calif. The market research firm compiled the list using revenue comparisons that it did not disclose in its report, "State & Local Competitive Analysis and Market Directions, 1996-2001." Many of the larger companies could not supply annual revenue figures for their state and local business. IBM, for instance, lumps its state and local revenues into its public sector revenues.
Rounding out G2R's list of leading state and local contractors were: Andersen Consulting, KPMG Peat Marwick LLP, MCI Systemhouse, Deloitte & Touche, American Management Systems, Computer Sciences Corp., and Litton-PRC Inc.
Bethesda, Md.-based Lockheed Martin Corp. was not included in the G2R ranking because earnings derived from business process outsourcing were not included in G2R's revenue comparisons. But Lockheed Martin Corp. pulls substantial earnings from the state and local market and is a major presence in states such as California, Florida and Maryland.
Offering a full range of consulting, technical and outsourcing services to state and local markets, these companies have been able to forge a strategy that builds on their long standing presence in the state and local marketplace and expansive IT experience in the government and private sectors in the United States and abroad.
These market leaders cannot afford to become complacent, however. This is because a growing roster of firms are vying for a share of the business, including smaller federal integrators, telecommunications firms and nimble companies seeking niche roles, analysts and industry officials say. Among them are Dynamic Research Corp., Lucent, Printrak International and Lau Technologies.
|LEADING STATE & LOCAL|
| IBM |
| EDS |
| Unisys |
| Andersen Consulting |
| KPMG Peat Marwick |
| MCI Systemhouse |
| Deloitte & Touche |
| American Management Systems |
| Computer Sciences Corp. |
| Litton-PRC |
| *Ranked by revenues, excluding |
business process outsourcing.
Also pursuing work in this market is Claremont Technologies Group of Beaverton, Ore. "I'm looking for applications in the government environment that have similar processing characteristics to those in the private sector," said Steve Hawley, senior vice president and manager of the benefits industry group at Claremont Technologies.
His company provides its reusable pension management software to private and public customers, including states of California, Nevada and Mississippi. Claremont upped its focus on the state and local marketplace in April with its acquisition of TDS Group Inc., which developed a Child Care Management System now being installed in Kentucky. "Originally it was just a systems implementation, but now it has changed to a outsourcing deal where we are doing both operational and outsourcing there," Hawley said.
As the Internet plays a bigger role in the capabilities that states seek, there will be more networking and telecommunications companies seeing if they can meet the market's needs, industry officials said.
Sixth-ranked MCI Systemhouse's State Government Solutions Group has implemented IT and business re-engineering solutions in welfare administration, child-support enforcement and employment support services. In addition, networking companies, such as Bay Networks Inc., Santa Clara, Calif., are
increasingly focusing on the state and local markets.
Reaching $40 billion in annual information technology expenditures, state and local government spending far exceeds the federal government's $29 billion investment, said Davies. That gap is expected to widen over the next few years as the state and local market grows at double digit rates and the federal market is flat, he added.
Indeed, Connecticut is expected to spend $1.4 billion to outsource its information technology management over the next seven years. And Pennsylvania is poised to invest up to $400 million on new information technology services. Large as they are these projects are, they just the tip of the iceberg.
This segment promises to be "a very vibrant and competitive marketplace for at least the next decade," said David Calabro, vice president and general manager for the public sector information services group at Unisys.
"It is fair to say that demand for professional services and outsourcing is happening more or less across the board," added Michele Grisham, vice president of G2R. State and local entities are looking to these companies for help for everything from streamlining their bureaucracies to modernizing their tax systems.
Much of the market growth is expected to come from the federal government's devolution of welfare and other programs to the states. "Many of the initiatives under welfare reform are programmatic in nature meaning additional job training, job placement and child care and the investment in information technology will ramp up significantly as those programs are put in place," Davies said.
Most states are still trying to determine how to proceed with the sweeping welfare reforms enacted by Congress so the impact of devolution will be greater in the long-term, he and others say. Instead, market growth is being driven by a convergence of economic good times and rising citizen demands.
"Financially, the state and local governments are very healthy right now, largely due to the strong regional economies that are generating tax revenue collection above what had been forecasted," said Davies.
At the same time, demands by citizens at the state and local level are continuing to increase significantly in many areas, he said. Such demands exceed the resources of the state and local governments, which are helping to close that gap with technology, he added.
Largely free from many federal procurement regulations, the state and local markets still pose serious challenges to contractors.
The fact that these markets are not subject to the specific requirements that have been fairly uniform across the federal agencies "is sometimes beneficial and sometimes not," said Jack Winters, vice president of IBM global services, government industry.
The expertise and the experience of the government team can vary greatly, he said. Some governments have a lot of experience in implementing large integration projects and others are quite new to it, he said.
The cost of selling in the decentralized state and local market where there are 6,000-plus entities to address makes it prohibitive for many companies, said Bill Dvoranchik, president of state and local government at EDS. Coupled with that, he said, is the fact that the contracts can sometimes be rather small.
Local business practices and politics can also be challenging. In the case of welfare programs, all the states and even the counties that administer many of these programs have a long history of processes they have used, said Winters.
"Whatever solution you come up with has to meet not only federal mandates, but also the state mandates and be compatible with ways of working that have developed over the years in local jurisdictions," said Winters.
Because state and local jurisdictions are relatively small and IT procurements carry large dollar values, they tend to capture greater interest from politicians than they might at the federal bureaucracy level, industry officials said.
G2R's Grisham agrees. It can be more political at the state level, she said, where the use of lobbyists is widespread. "If you are bidding on really large jobs you need somebody who really knows the political lay of the land," she said. "Then when you get down to counties and municipalities, it can be very personal and political."
To help them clear these hurdles, the top three companies are leveraging their long-standing presence in the marketplace and substantial portfolio of service offerings. IBM and Unisys have the "advantages of having an installed base [in the states], which virtually guarantees market presence even in areas in which the firms do not necessarily focus," according to G2R's report.
Bill Dvoranchik, president of state and local government at EDS
"EDS has a presence as well because we've been in Medicaid claims processes in 17 states," said Sharon O'Malley, vice president of state and local government at EDS. "We also have people in every state from all the other business lines we have," added Dvoranchik.
State and local government officials are looking for better ways of delivering government services, which requires a re-engineering or rethinking of their business processing along with the integration of the newer technologies, Davies said.
The companies swamping the market with their solutions have different approaches. At IBM, the state and local markets are part of the company's government unit.
"We look at the government sector in a number of application areas, such as public safety and justice, health and human services or welfare, defense, postal service, and we divide up our expertise and focus it on those segments," Winters said.
IBM also divides up its focus geographically since it is difficult to be responsive to state or local customers without some local presence.
The company is active in the health and human services arena in a large number of states, said Winters, and the largest project is probably in California.
As part of the state of California's $1 billion Child Welfare System Program, the company is developing and implementing the Child Welfare Service Case Management System. Implemented in over 10,000 work stations throughout the state, "the application is probably the biggest in the nation in the child care arena," said Cris Jensen, health and welfare data center deputy director WS/CMS project for California.
The system has just begun production use in all 58 counties, and IBM's role now is to provide maintenance and operations through January 1999, said Jensen.
EDS has a dedicated state and local government business unit. "We're only focused on one area of the marketplace within one chain of command but we still leverage across all the capabilities and competencies of the big company known as EDS," said Dvoranchik.
The company is keenly interested in health and human services and outsourcing efforts such as the one being eyed by Connecticut, he said. EDS is competing with IBM and Computer Sciences Corp. for the Connecticut contract.
After seeking a role in Texas' abortive plan to outsource human services, EDS continues to work with the state on its new, more incremental approach to welfare changes, said O'Malley.
Unisys targets the market through a separate public sector unit. The company addresses four specific areas: public safety, social services, tax modernization and imaging, according to Calabro. By necessity, he said, the company has a horizontal interest in year 2000 work that spans each of those areas.
Two large areas of growth for Unisys are public safety and tax management, said Calabro. The Pennsylvania Department of Revenue is a major client whose work is growing, he added.
Unisys also implemented an enhanced statewide, integrated criminal justice information network for the Massachusetts Criminal History Systems Board. In addition, the company installed the Workers Information System, a statewide client/server application that automates social services program, for Kentucky's Department of Social Services. That system won an award for innovative use of technology from the National Association of State Information Resource Executives.
Thomas Grissen, president of BDM's state and local system strategic business unit
While these companies are expected to continue to command substantial stakes in the marketplace, the growing state and local markets are also drawing a host of other competitors.
"We're seeing a number of formerly federal-focused companies competing on state bids, and I don't expect that trend to abate," said Calabro.
BDM International Inc., McLean, Va., which started a state and local strategic business unit earlier this year, is counting on its federal experience to give it a boost in the state and local market.
"We have very solid methodologies coming out of years of systems integration work for the federal government," said Thomas Grissen, president of BDM's state and local system strategic business unit.
Human services and justice are the fastest growing markets, said Grissen. The company has installed child support enforcement systems in nine states to track parents who are not paying child support. BDM has been contracted to manage seven of them and is employing former welfare mothers to help operate the systems, he said. The company also is implementing a justice information system in Illinois that links all elements of the criminal justice process in the state.