Companies Plug In to State and Local Market
With pressure at an all-time high to cut bureaucracy and deliver more services to the citizen, the public sector finds it difficult not to justify infotech investment
or years, diversification in the infotech industry meant one of three things: Go from federal to commercial business, expand from domestic to international markets or turn from defense to civilian opportunities. These days, it means moving into the state and local market, no matter where a company built its reputation in the past.
State and local governments, now more than ever before, feel the pressure to invest in information technology -- not just buying commercial hardware or software, but contracting for more sophisticated jobs such as systems integration, network services and outsourcing. This is exactly the kind of stuff federally focused infotech companies have been pushing for years, so the move to state and local seems a natural one.
Michele Walsh, vice president at California-based G2 Research, pointed out that "major shifts [will] take place in this market. We've been saying that since 1990, but nobody listened to us."
It seems everybody is listening now. And why not? With the federal market growing in single digits, the state and local governments offer seemingly unending opportunities. Consider that there are 86,692 local governments and 50 states all being pushed by the feds to operate more efficiently through modern, standards-based, non-proprietary information systems.
Input, the Mountain View, Calif., market research firm, estimates that state and local governments spent about $9 billion in 1994, a 13 percent increase from the previous year. The company predicts a compound annual growth rate of 14 percent during the next several years, creating a $15 billion market by 1999. Input suggests that network services and outsourcing will have the highest growth rates, 20 and 19 percent respectively.
Still, opportunity is one thing; turning it into top- and bottom-line growth is quite another. Infotech companies such as CACI International Inc. and Science Applications International Corp. have just begun to penetrate the state and local markets, and they face some tough challenges. Although the market shows great potential for business opportunities, it also offers more customers than most companies can handle. State and local agencies employ 17 million workers, and 13 states, in fact, would qualify for the annual Fortune 500 list.
With thousands of organizations involved, companies find it more difficult to track procurements. Infotech vendors rely heavily on interstate agency referrals and their own personnel scattered nationwide to alert them of potential contracts.
Each state also has its own procurement process, forcing companies to learn new sets of regulations. Companies must adjust to performing work for state and local agencies based on a fixed price, a rarity in the federal systems integration and services market. "Fixed price software development is not for the faint of heart," said Paul Stewart, senior vice president of BDM Technologies' Public Sector Group.
In addition, some infotech vendors have found that technologies or systems built for a federal customer do not necessarily make a good fit for a state or local agency. The technologies proposed by some contractors, Walsh noted, are too expensive and sophisticated for the states' needs.
Companies typically have approached the public sector industry by targeting specific vertical markets or selecting a technology, such as imaging, that has applications across various vertical niches. Analysts believe state and local agencies will investment in systems and services that support finance and accounting, public safety, public services and health and human services.
In the area of public safety, companies such as PRC Inc. have selected criminal justice and law enforcement as specific targets. For the last 25 years, the McLean, Va., company has had a foothold in the two niches. In that time frame, PRC officials have seen the competition change every three to five years. Walter Lawrence, vice president of PRC's Public Sector group, said at one time, the phone companies tried to penetrate the public safety market using their 911 systems as an entree.
Recently, Lawrence said the competitive mix has started to include hardware vendors and some small software development companies. Occasionally, PRC faces competition from federal integrators such as TRW Inc. and BDM.
PRC's presence in the public safety state and local market has evolved from its federal work in criminal justice information systems and its computer-aided dispatch systems and mobile data terminals used by local police units. The states and local agencies have started to feel the heat from the federal mandate requiring them to be able to run automated gun checks by 1998, as required by the Brady bill.
But with 17,000 law enforcement units nationwide, it would be virtually impossible for PRC or any other infotech company to reach all of them. Donald Sutherland, PRC's manager for law enforcement systems, said if the company determines a small contract might give it the entree to win a new customer, PRC will go after the bid.
But Sutherland pointed out that PRC relies on referrals for much of its public safety business. "You've got to perform well. If you screw up your last contract, you'll be out of work for awhile," he said.
The toughest issue even for PRC, despite its long history in the state and local market, comes down to people. Because most contracts are much smaller than in the federal government, the company rarely establishes an office near its public sector customer. Its technical staff spends most of its time traveling to customer sites to help field a system and provide on-site support during the initial transition.
The constant traveling, Sutherland said, causes high rates of employee burnout. As a result, PRC rotates its personnel through its customer service operation at company headquarters, giving employees some relief from life on the road.
BDM handles the personnel issue differently by establishing remote offices to handle public sector contracts worth $2 million or more. "We become part of the local economy. We don't just travel there for one or two weeks," Stewart said.
BDM Technologies, formed in January 1993, grew out of the company's state and local practice that began in 1988 in the federal sector business. The company began to diversify into the public sector, winning some early contracts in New Mexico and Montana. BDM traditionally has focused on systems supporting social welfare programs, specifically the child welfare area.
Its work in Montana led to a contract in Alabama to build a child support enforcement system. The Montana system, in fact, was the first federally certified child support system.
The company, under contract with the state of Iowa, also will design and implement the nation's first automated Family and Children System to support foster care, subsidized adoptions and immunization records for Iowa's children.
Achieving success in the social welfare niche, BDM has begun to branch out into the criminal justice area and establish a leadership position in education information systems integration. The company works with school districts in Nevada, Virginia, Ohio, Maryland, California, New Mexico, Washington and New York.
Just as BDM has found lucrative opportunities supporting social services, so has Unisys Corp. The Blue Bell, Pa., contractor processes 29 percent of the nation's Medicaid claims and 50 percent of public assistance recipients. The company runs a child welfare system in Indiana and Kentucky and developed a fingerprint identification system for the city of San Diego to counter public assistance fraud.
Harvey Weiss, president of Unisys' Worldwide Public Sector Division, said success in marketing to the public sector industry depends on identifying the states that are the most aggressive in buying information technology. Sometimes, Unisys will offer consulting contracts to establish relationships and goodwill with senior state and local agency officials.
"These procurements take forever to unfold and get executed," Weiss said. State and local acquisitions can take 12 to 24 months to complete.
But once a contract is awarded, performance is crucial especially in the public sector where agency officials frequently talk to their counterparts in different states. "In this business, there are two places you don't want to be -- coming in second and winning a contract that never gets executed. And both cost the same to bid," Weiss added.
Unisys also has made a concerted effort in pursuing health care information management work and the finance and accounting market, especially in the taxes and revenue niche. The company uses imaging technology, such as optical character recognition, to reduce data entry costs and create image-enhanced systems for Massachusetts and Alabama to handle their tax audit and post-audit processes more efficiently.
Despite the difficulties in the state and local market, PRC, Unisys and BDM have proven that success is possible. Input suggests companies use the consulting approach to establish credibility, replicate applications from one state to another and increase their own awareness of the market needs.
Driven by the same budget constraints as their federal counterparts, state and local agencies know they cannot survive and function without technology. Nevertheless, obtaining money for infotech investments remains difficult because of the pressure to channel more available funds to the public.