Integration Market Shifts

Washington Technology Online - Eye on the States

Integration Market Shifts

By Thomas R. Davies
Contributing Writer

State and local governments gobbled up a wide range of services from information technology companies last year, yielding fatter integrator bottom lines and, in some cases, record business.

Budget surpluses, increasingly complex user requirements, year 2000 needs, strong political support for technology, a healthy economy and available federal funds all contributed significantly to the continued expansion of IT spending. With any luck, there will be a repeat performance in 1998.

Among the historical trends that continued last year were: the ongoing expansion of electronic benefits transfer systems for the issuance of food stamp benefits; the development of child support collection systems with the states struggling to comply with federal mandates for implementing new systems; and the modernization of tax collection systems as the states raced to collect additional revenues and streamline their tax collection processes.

Signs of a market in transition, especially for the systems integrators, were apparent in 1997. The largest systems integration awards this past year illustrate some of the changes that are occurring in the market. (See chart)

What emerges is a picture of a marketplace in transition. A transition from old established companies to newly emerging contenders; from a marketplace led by a handful of national IT leaders to one led by many IT leaders who dominate very narrow niches; from integrators with broad, generic capabilities to companies who bundle services with highly leveraged solutions; and from companies who have dabbled in many different market niches to those who commit to only a few.

In 1998, traditional systems integration leaders were joined by companies that brought new software solutions to the market. These companies are expanding their software business to include consulting services, implementation support and, in some cases, ongoing operations.

This trend will continue as software companies gain experience in the market and develop a superior understanding of state and local business processes. As these companies change their business model to accommodate the needs of this market, they will increasingly find themselves either partnered with, or competing against, the traditional systems integrators.

Another significant trend is the increased specialization of the systems integration companies. Even the largest companies, with best-in-class capabilities, have had to limit their focus to selected market niches. In an increasingly crowded marketplace the historically dominant integrators no longer have the market to themselves.

Those who are winning business are doing so primarily in areas where they command a significant competitive advantage. And it is rarely the case that being a generalist leads to any advantage in creating customer value for state and local government.

A third trend to watch is the rise of the second-tier integrators. These are companies who have capabilities that are in great demand in the state and local market. They have established footholds and are beginning to compete favorably for new business in highly targeted areas. They are bringing software development skills, deep functional knowledge, application solutions and innovative business models to the market.

Consolidation at the top is another trend that is likely to accelerate in the coming year. Several of the largest awarded contracts were in market areas that are maturing very rapidly, such as electronic benefits transfer. More and more of these awards are going to only a few companies. Although these niches are large, there is only room for a few players. Future market growth for these companies will need to come from strategies other than new contract awards.

One noteworthy market dynamic is the absence in 1997 of megacontracts for enterprise outsourcing. Enterprisewide IT outsourcing received a great deal of attention, but it didn't produce significant new contract awards.

PA Electronic Benefits Transfer $100 million Citibank
MI EBT $85 million Citibank
CA Workflow Automation $68 million Unisys
MI Tax System $63 million GC Services
NY Child Support $50 million Lockheed Martin
FL Toll System $39 million Amtech
IL Drivers Licensing $37 million Viisage
OH Child Support $36 million Dynamics Research
CO Child Welfare $28 million Dynamics Research
NJ EBT $25 million Deluxe Data
Source: Federal Sources Inc.
Indeed, 1997 proved how difficult true enterprise outsourcing is to achieve in state and local government. For many it was further proof that some types of outsourcing continue to fall into the "too difficult to do" category.

The coming year could well end the debate about the future of enterprise outsourcing depending upon what happens in one or two states. Outsourcing on a business process or departmental basis may be the path in the future for many state and local governments.

Thomas R. Davies is vice president of Federal Sources State and Local Government Consulting practice in McLean, Va.

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