Eye on the States

Following the Money Trail

Thomas Davies

By Bill Loomis

The state and local government market has grabbed the attention of the information technology industry over the past few years. These days, it is rare for any rapidly growing IT company not to have a strategy for this hot market.

One of the more compelling reasons to target this market is its size and growth rate. But exactly how much do state and local governments spend annually on IT? While some put the price tag as high as $51 billion, this is only an estimate.

In fact, determining how much state and local governments spend on IT is one of the most elusive marketing challenges companies face. The old adage, "go where the money is," can be difficult to apply when it comes to state and local governments. Even buyers in this market do not know exactly how much is being spent on IT, for what, with whom and by whom.

Not surprisingly, companies are frustrated. Before they can commit to a course of action, they need to know what the current and projected markets are for their products and services. Even best-in-class companies, which pride themselves on making fact-based business decisions, struggle in the absence of good numbers.

Why is the state and local market so difficult to get a handle on? There are many contributing factors, and none stands out as the primary reason. Here are some of the more significant reasons.

Fragmentation: There are about 86,400 units of state and local government, not including the separate departments that make up these units. Identifying who the buyers are, let alone finding out how much they spend, is a formidable task.

Decentralization: The largest buyers, such as the big states, delegate spending authority to very low levels. Consequently, much of the spending, especially by local governments, falls below the radar screen.

Management reporting: There is no single point of accountability for reporting on state and local IT spending. Different branches of government and constitutional structures lead to a diffusion of reporting responsibilities. Furthermore, there are various definitions of what IT is. Data processing, telecommunications and video all compete for inclusion. Two states reporting IT expenditures rarely compare on an apples-to-apples basis.

Accounting: Financing for IT comes from many sources, including general appropriations, grants, trust funds, bonds, asset sales, forfeitures, revolving funds and citizen fees. Each has different rules for management accounting. And there are no uniform accounting practices for how state and local governments get IT spending.

Federalism: State government is highly dependent upon the federal government for IT spending. Local governments, in turn, are dependent on both state and federal governments. The education market, for example, relies heavily on local, state and federal governments for significant investments in information technology. About half of K-12 funding comes from state government; roughly 16 percent of state and local funding comes from the federal government.

Budgeting: Public-sector appropriations and budgeting practices vary widely among governments and across functional areas. Some are program-driven, and IT spending is buried deep within program budgets. Others encourage using detailed capital budgets for IT. Many governments require even the smallest IT purchase to be highlighted in budget line items if it is for an administrative purpose. On the other hand, millions of dollars in IT funding can go unnoticed if it is in support of a program or service delivery.

Contracting: State and local contracting practices can obscure how much is being spent on IT. In health care and social services, for example, contractors spend a significant amount on IT. But much of that spending is hidden as part of an overall fixed cost for a unit of work because of the way contracts are structured.

Purchasing: Few, if any, state and local buyers require management reporting of IT purchases. There is no equivalent to the Federal Procurement Data Center at the state and local level. Standard purchasing systems in state and local government rarely capture the necessary detail, especially at the vendor or technology level. That is why vendors often have the best estimate of how much the buyer is spending and on what.

While there is no quick remedy to fix myriad problems associated with reliable reporting of state and local government IT expenditures, a survey by the National Association of State Information Resource Executives offers hope. The survey, slated for completion later this year, will offer a first-time report by state and by department of IT expenditures and planned growth rates. It will be a challenge for the states to respond to the survey, but it will be an invaluable tool for estimating market size.

Thomas Davies is senior vice president for Internet Services at Federal Sources Inc. in McLean, Va.

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