AMS Rides Tax, Revenue System Successes
By Andrea Novotny
American Management Systems Inc. is reaping the rewards of the growing shift among states to performance-based contracts, where government entities pay winning contractors from benefit streams derived from things such as higher tax collections.
The Fairfax, Va.-based integrator landed a record $500 million in new state and local government contracts in 1997, company officials said. By comparison, AMS garnered $135 million in new state and local contracts in 1996.
Almost half of that $500 million came from the tax and revenue area, making it the fastest growing segment of the company's state and local government business, said Ross Kory, vice president and general manager of AMS's state and local government practice.
The company's tax and revenue business rose 60 percent last year, significantly faster than the growth for the company's overall state and local government practice, said Steve Shubella, vice president and manager of AMS's tax and revenue practice.
"Government leaders today seek solutions that will improve efficiency, performance and . . . customer service."
Total state and local government revenues hit $172 million in 1997, up 20 percent from one year earlier.
The market for state and local tax and revenue systems is estimated to reach $250 million this year and grow at a rate of 15 percent annually, said William Loomis, equity analyst at Legg Mason Inc., Baltimore. The overall state and local government market is expected to swell from $11 billion in 1997 to $13 billion this year, he said.
Integrated tax systems such as those offered by AMS consolidate information from registrations and returns, such as sales and corporate taxes, and produce a comprehensive profile of the taxpayer. Such systems have resulted in a swiftly growing market for AMS, analysts say.
For 1998, Loomis expects AMS's state and local business to grow 22 percent to $214 million. The company's overall annual revenue should increase 14 percent to $995 million, Loomis said.
The California Franchise Tax Board is using a $28 million tax system developed by AMS that has generated incremental tax revenues of more than $36 million for the state. The system, which is helping the state close its $2.7 billion tax gap, paid for itself within nine months, Shubella said.
Such results are a strong sell for state and local governments. By automating the paper-intensive tax collection and audit process, states are better able to track down delinquent taxpayers and significantly increase their revenues. Officials at the state and local government level also are becoming more attuned to providing better service to their citizens, industry officials and analysts said.
"Government leaders today seek solutions that will improve efficiency, performance and ... customer service," Kory said.
Last year, AMS won contracts to develop and install integrated tax systems for the states of Hawaii, Utah and Virginia, Kory said.
The company began work late last year on a $34 million contract for Utah to reengineer and integrate its tax revenue management, collections and motor vehicle administration.
AMS officials now are negotiating the final terms of the Hawaii and Virginia contracts, which are expected to have a combined value of more than $100 million, Shubella said.
The ability to use benefits funding for such contracts is a strong incentive for these and other states, analysts and industry officials say.
Kansas began a $49 million multiyear project called Kansas Tax 2000 to overhaul the state Department of Revenue's tax administration processes using this performance-based approach. AMS is working with the department to refine its organizational structure, reengineer business pro- cesses, implement new systems and support overall management activities.
|AMS State and Local Government Annual Revenue:|
|1998 estimate||$214 million|
To date, Kansas has increased tax collections by more than $24 million, Shubella said. By the project's completion in 2000, the system is expected to generate more than $205 million in additional revenue, he said.
AMS has been one of the older players in the state and local government marketplace, launching its effort more than 20 years ago. That helped lead the company's push into public sector tax and revenue collections in the mid-1980s.
In 1991, the company expanded its revenue services outside the collections realm, taking on Andersen Consulting, Chicago, which had established itself as a leader in the integrated tax segment of the marketplace. To date, Andersen remains AMS's top competitor in the state and local public sector, as well as in providing tax systems, analysts say.
Other integrators haven't made a lot of noise in this niche market, analysts and industry officials say.
"It's a marketplace that has a history of [integrators] coming in and out - typically out," said Frank Rovinski, a partner in Andersen Consulting's revenue practice. "It's extremely complicated and high-risk."
|California Franchise Tax Board|
- Estimates a tax gap of more than $2.7 billion.
- Collects $5 billion from corporations and $18 billion from individuals annually.
- Processes 15 million individual tax returns and 700,000 corporate tax returns a year.
Companies have to shell out large investments to break into the market, but often realize too late that they can't fulfill the contract, he said.
For AMS and Andersen, that's good news. AMS now has tax systems in more than 20 states and several local governments, Kory said.
"Tax systems are big projects that have inherent barriers to entry," Kory said. "Clients don't want to do business with first-time companies supplying major applications. The state and local government marketplace is ... driven by references and experience."
Last year, Andersen made more than $100 million from new state and local government contracts for integrated tax systems, Rovinski said. The company's revenue practice is growing annually at 20 percent, he said.
Overall, the company's annual revenues were $6.6 billion last year, up 25 percent from 1996.
Currently, Andersen is negotiating a contract with Washington to reinvent the district's tax agency, from billing collection to the discovery of new taxpayers, he said. That contract will represent the company's largest tax project to date, he said.
The company also has integrated tax systems in more than a dozen states, including a system for the city of Detroit that began last month and will be paid with benefits funding, Rovinski said. That contract is valued at $15 million, he said.