Outsourcing Wins Fatten Bottom Lines

Outsourcing Wins Fatten Bottom Lines

Cathy Welsh

By Steve LeSueur, Staff Writer

While the largest systems integrators run after San Diego County's huge contract to privatize its information technology services, two less prominent companies are quietly dominating the outsourcing market in America's smaller cities and counties.

Systems & Computer Technology Corp. and Affiliated Computer Services Inc. are managing the IT functions for 31 local governments. SCT has 19 customers, ACS has 12. Plus, each company is picking up an additional one to three customers each year.

That might be relatively unremarkable growth in today's fast-paced IT arena, but it is sufficient to position these companies well for the long term if the long-predicted boom in government outsourcing occurs.

"This is one of the true untapped markets among state and local governments because the big outsourcing companies do not focus on it," said Thomas Davies, senior vice president of Federal Sources Inc., McLean, Va.

The value of these smaller government outsourcing contracts is usually $1 million to $5 million annually for each, although Malvern, Pa.-based SCT has a contract with Indianapolis/Marion County that pays $18 million a year. The companies provide their government clients with services such as IT planning, data center management, desktop support and network management.

"This market might appear small relative to San Diego County, but it's a large segment in the IT market, and it's a growing market, too," said Mike Adkins, senior vice president of sales for state and local services at ACS of Dallas. Adkins estimated that together, ACS and SCT have captured 85 percent to 90 percent of an estimated $120 million outsourcing market for small and medium-sized governments.

This market has gone relatively unnoticed in the media hoopla over big-ticket outsourcing projects in Connecticut and San Diego County.

In December 1998, Connecticut selected Electronic Data Systems Corp., Plano, Texas, for an IT outsourcing contract valued at $1 billion over seven years. And San Diego County officials just last month issued a request for proposals for a planned $500 million to $700 million, 10-year outsourcing deal.

Other state and local government officials are watching the Connecticut and San Diego projects closely and waiting to see if a large government can make enterprisewide outsourcing succeed, analysts said.

The one exception is the city of Chicago, where Chief Information Officer Elizabeth Boatman has outsourced about 95 percent of the city's IT functions in the last two years. But unlike Connecticut or San Diego, Chicago is dividing up at least $25 million in annual IT contracts among a variety of companies, including TASC Inc., Reading, Mass., and Unisys Corp., Blue Bell, Pa.

While IT outsourcing is relatively common in the private sector, there are many political barriers to government outsourcing, said Ellen Zidar, a senior analyst for the Gartner Group Inc., an IT consulting firm in Stamford, Conn. Often government agencies are unwilling to give up control of traditional tasks and responsibilities, as are the employees whose jobs are being transferred to the private sector.

"You really need strong political sponsorship and support from your leaders if outsourcing is going to be successful," Zidar said.

In Indianapolis/Marion County, a city-county "Unigov," Mayor Stephen Goldsmith is said to have been a driving force behind IT outsourcing.

"The mayor's vision is to find opportunities to compete jobs and functions that are not part of our core business," said Jake Moelk, chief information officer for Indianapolis/Marion County, where SCT has been providing IT services since 1995.

Cathy Welsh, president of SCT Services, concurred. "The mayor was a very visible advocate for privatization," she said.

Industry officials cite several reasons why smaller governments have been more willing to attempt outsourcing.

First, they probably have a more difficult time hiring and retaining skilled IT workers than a large government. Also, the entrenched bureaucracies in smaller government organizations are easier to challenge and overcome.

Finally, a smaller government can benefit more immediately from the services of large IT firms.

"A major company can help you finance short-term and long-term solutions to your problems," said Tom Campanella, county administrator of Tulare County, Calif., where SCT provides outsourcing services. "We also benefit from the fact that they can bring people in from other sites when they're needed."

SCT earns $63 million annually from its 19 government outsourcing projects, Welsh said. The company manages all or most of the IT services for such governments as Indianapolis/Marion County; Anaheim, Calif.; Charleston County, S.C.; Dallas County, Texas; and Tooele County, Utah.

SCT provides a variety of software and resource management services not only to local governments, but also to universities, manufacturing plants and utilities. It has about 3,600 employees, and in 1998 reported net income of $21 million on revenue of $403 million.

For many years, SCT's chief competitor in the local outsourcing market was BRC Holdings Inc., Dallas, but the 30-year-old BRC was acquired by ACS in a deal finalized in February. BRC's stable of 12 local government customers was transferred to ACS.

The acquisition of BRC and other companies has made ACS one of the largest IT contractors among federal, state and local governments. The company provides systems integration, business process outsourcing and other technology services to both governments and a wide spectrum of commercial clients. Founded in 1988, it has 12,300 employees, and in 1998 reported net income of $54 million on sales of $1.2 billion.

ACS' local government outsourcing customers include Carrolton, Texas, and Irvine, Riverside and Pomona, all in California. Adkins declined to provide the value of ACS' outsourcing contracts, but an estimate of their market share suggests that the company's 12 government clients bring in about $40 million in annual revenue.

Thus far, larger integrators such as Computer Sciences Corp., El Segundo, Calif., EDS, and IBM Corp, Armonk, N.Y., have concentrated their attention on the large-scale outsourcing projects in Connecticut and San Diego.

EDS has been providing outsourcing services to Auburn Hills, Mich., since 1993, but this project, while successful, has been an exception. Officials from these three companies said it usually does not make business sense for them to pursue smaller local government projects at this time.

In the future, coalitions of cities or counties might join together to purchase IT services, said Jack Winters, vice president for government and education industries for IBM Global Services.

"I think you could see more benefit with the economies of scale you can get when you have a region coming together," he said.

But for now, the smaller government market is wide open for SCT and ACS. Although company officials hesitate to predict any immediate stampede by local governments to embrace outsourcing, they expect to continue their steady accumulation of city and county clients.

"We're seeing a lot more interest and can count on getting two to three new customers a year," Welsh said.

Reader Comments

Please post your comments here. Comments are moderated, so they may not appear immediately after submitting. We will not post comments that we consider abusive or off-topic.

Please type the letters/numbers you see above.

What is your e-mail address?

My e-mail address is:

Do you have a password?

Forgot your password? Click here

Washington Technology Daily

Sign up for our newsletter.

Terms and Privacy Policy consent

I agree to this site's Privacy Policy.


contracts DB