Eye on the States

Outsourcing Deals Demand Sound Strategy

Thomas Davies

By Thomas Davies

Billion dollar outsourcing awards, such as the one unveiled by the state of Connecticut, are clarifying the future direction of the IT outsourcing market in the states.

Most importantly, Connecticut's award goes a long way toward dispelling any doubts that the outsourcing market may not be real or sustainable.

So what's driving this market?

It's tempting to be simplistic and cite one or two factors. For example, certain individuals ? both buyers and sellers ? have made a critical difference to many deals. Outsourcing certainly is a reflection of the creativity, determination and values of the people involved.

However, such myopic thinking overlooks the fundamental dynamics of the state outsourcing market and leads to misunderstandings of where the business opportunities are.

At its essence, outsourcing is state governments' way of adapting to an increasingly complex IT world. Unable to respond fast enough to this complexity solely with in-house resources, the states are turning to external suppliers for support.

Today, state and local governments vary tremendously in their capabilities to manage the complexity of IT in a cost-effective manner. Therefore, it should come as no surprise that they also differ in how they approach outsourcing and in their rate of adoption.

Outsourcing is a foregone conclusion for state and local governments. The real question for most states is not if, but how outsourcing will be done.

How large will the outsourcing market in the states become? On an annual basis, state and local governments spend about $50 billion on IT.

But as these governments redesign their delivery systems to take advantage of technology, especially Internet-based platforms, their entire spending ? over $1.5 trillion annually ? will come into play.

Picking the right outsourcing opportunities to focus on is the key to success for most companies. Most experienced companies realize their wins and losses have as much to do with their initial targeting decisions as anything else they may do. However, picking the right opportunities is easier said than done.

There are more than 83,000 buyers in state and local government. Each state government is responsible for about 600 to 700 core mission-critical applications that keep their enterprises running.

While the overall potential size of the IT market is quite large, especially in comparison to other markets such as transportation and insurance, the fragmentation of the state and local market requires companies to approach outsourcing very strategically.

Last year, companies spent millions on sales, marketing and bid and proposal efforts in pursuit of state government outsourcing deals. In return, a small but growing number of companies have won hundreds of millions in additional business.

For others, a market filled with opportunities has yet to pay off. And companies that have adopted a wait-and-see position have found themselves on the outside looking in with their noses pressed against the window.

Companies that are successful in state and local outsourcing excel at selecting opportunities where they can create a competitive advantage.

From hard-won experience, they know companies compete on more than just price. Cost savings can make newspaper headlines, but they are rarely what separates winners from the rest of the pack. Companies compete mostly on their business model, capabilities and customer relationships.

Not all outsourcing opportunities in state and local government are equally attractive. Buyers in this market have extremely diverse needs, buying practices, desired benefits, competencies and governance models.

There is thus no such thing as a typical outsourcing buyer.

Failure to give sufficient attention to the subtle yet critical differences among outsourcing buyers has been the source of woe for many companies and explains the disparate outcome of initiatives in states such as Arizona, California, Connecticut, Florida, Indiana, Iowa, Pennsylvania and Texas.

Another marketing challenge for companies targeting the growing outsourcing market is forming competitive teaming relationships. Long gone are the days when a company could singularly command all capabilities needed to win. Now strategic partnering relationships must be formed around specific opportunities.

In the future, the competition will be among teams of companies. Going it alone in the state government outsourcing market will relegate a company to marginal business opportunities.

What's more, the outsourcing market in state government will become increasingly specialized. Deep niches will form, and each niche will have its own unique barriers to entry and competitive landscape.

Being the first to sense and respond to these niche outsourcing opportunities will be a hallmark of market leaders.

For example, it's already apparent that only a few companies can credibly claim to be in a position to deliver enterprisewide outsourcing services. While there are many wannabes, buyers will use the purchasing process to disqualify them from serious contention.

Another emerging market reality is that the states are expecting best-in-class outsourcing solutions. This is forcing companies to bring to the state government market their best global outsourcing practices.

Also, states are shedding their "we're unique" mind-set. State leaders are more inclined to see similarities across industry boundaries than they are differences. This comes as a surprise to some companies that are not used to the states stretching their suppliers beyond their comfort zone.

The outsourcing market in the states is coming of age, and those moving the market forward today are much different than the ones that traditionally drove it. Strategy will separate the market leaders from the wannabes.

Thomas Davies is senior vice president of Federal Sources Inc. in McLean, Va.

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