Companies Parlay Y2K Work into New Business
Companies Parlay Y2K Work into New Business
By Steve LeSueur, Staff Writer
While government spending on year 2000 remediation projects has provided a windfall to small information technology companies that made it the core of their business, many of them now are scrambling to find new avenues for continuing work with state and local government customers after Jan. 1, 2000.
The demand for year 2000 services will not disappear completely after that date, but the drop-off in spending will be much faster than originally anticipated, according to Bill Loomis, managing director of the technology research group at Legg Mason Inc., Baltimore. "That's good, because there's a lot less pressure on non-Y2K budgets," he said.
But for companies whose bread and butter is fixing year 2000 problems, this will require a faster transition into traditional IT services. "Unless they are able to wrap their solutions into another source of work, they're not going to have a very long life span," said Leslie Kao, a senior analyst in the public sector group for G2R Inc., Mountain View Calif.
The most obvious course for companies in this position is to secure additional IT work with existing government clients. This is what Computer Technology Associates already has done in Kansas and Michigan.
Bethesda, Md.-based CTA depends on Y2K work for nearly 40 percent of its revenue, reported in 1998 at $116 million. It has contracts with 13 states for remediation and testing. In the course of delivering Y2K services, the company also has gained valuable knowledge of the computer systems and IT culture within the states' agencies.
"They know our mainframes, applications and our unique environment," said Rose Wilson, chief information officer in Michigan's Department of Management and Budget. Consequently, when Wilson's department extended CTA's contract for Y2K testing, it also asked CTA to provide support for modernizing the department's legacy systems.
CTA also made the jump to other work in Kansas, where it has a master agreement with the state that allows government agencies to initiate task orders for a wide variety of IT projects. For instance, CTA has helped develop the statewide Courts Reporting Management System and the Kansas Aging Management Information System.
"There is no question that our year 2000 work has been the springboard that allowed us to reach into the state and local government arena," said Dave Swender, a regional manager at CTA.
So far, 80 percent of CTA's public and private customers have expressed interest in having the company perform follow-on work, such as enterprise resource planning and network management, said Sy Inwentarz, president of CTA's software engineering group.
"In many cases the only thing slowing them down is their concern about Y2K," he said.
Another way companies have sought to expand beyond Y2K remediation is through acquisitions. ZMAX Corp., Germantown, Md., is following this plan.
ZMAX became an IT company in November 1996 with its purchase of Century Services Inc., a Y2K remediation firm also based in Germantown.
Mike Higgins, chief executive officer for ZMAX, said the company started with year 2000 projects because Century Services had a product, Vision 2000, that officials believed would be in demand for its remediating capabilities.
Company revenue was only $1.4 million in 1997, but jumped to more than $9 million in 1998. State and local government customers, including New York's unified court system and California's state compensation insurance fund, account for about 30 percent of company revenues, said Higgins.
In November 1998, ZMAX acquired Eclipse Information Systems, a firm specializing in a full range of IT services such as enterprise resource planning, network management and Internet and intranet development, said Higgins. Eclipse had revenue of $8.5 million in 1998.
The goal now is for its two subsidiaries, Century Services and Eclipse, to capitalize on existing relationships and share customers, allowing the Y2K specialists within the firm to move gradually to traditional IT services.
Higgins said ZMAX intends to acquire at least two more companies this year that can provide high growth and high margin IT services: one in the South and another in the Midwest. "We have our targets identified and are going through the steps," he said, declining to name the companies.
Higgins projected Century Services and Eclipse revenues would each grow by 50 percent in 1999. "Our goal, with the two acquisitions, is to have revenue of $40 million to $50 million by the end of the year," he said.
While acquisitions provide an aggressive path for obtaining new skills and products, one company has found that the powerful search engine in its remediation and validation tools can have uses beyond year 2000 applications.
CCD Online Systems Inc., Arcadia, Calif., provides year 2000 remediation services, primarily independent validation and verification tools, for a number of local, state and federal government customers, including the Los Angeles County Health Department, California Public Employee Retirement Services and the Social Security Administration.
But the search features used by CCD Online software to track down and identify dates can be modified to perform other kinds of searches, said Jan Gruenwald, CCD Online vice president for marketing. The software, for example, could assist in the merger of two banks by searching computer code to identify and then reconcile the banks' two different systems of personal identification numbers assigned to customers.
"We think our product for Y2K probably has the most robust search engine in the business," said Gruenwald. The privately held company doesn't release its financial data, but Gruenwald said CCD Online grew from 18 employees to more than 100 in the last 18 months as a result of the Y2K stampede. CCD Online officials also are studying other options for expanding beyond their Y2K business, and they will likely make a decision within the next three months, she said.
Officials for these three firms are counting on a gradual rather than abrupt transition to non-Y2K work. The IT research firm the Gartner Group, Stamford, Conn., is projecting that 70 percent of the problems that will arise because of the date change will occur after Jan. 1, 2000.
John Bace, a research director with Gartner, said he expects 10 percent of the problems will crop up this year, another 20 percent around Jan. 1, and the rest during the remaining months of 2000. However, some will linger for the next several years.
Some companies that provide year 2000 services are already beginning to exit the business, he said, but "there still will be work to do after Jan. 1."
Gruenwald agrees. "Many organizations are looking at their critical areas first and haven't yet addressed those that are less than mission critical," she said. "We expect to have a lot of business."