Navigating the Budget Shortfalls

Thomas Davies

It's been awhile since states have had to deal with significant budget shortfalls. For many governors, this is their first experience with tough times. All eyes are on them as they deal with slower revenue growth, increased operating costs and lower cash reserves.

Just as the governors face a more difficult economic climate, so too does the information technology industry. Selling to state and local governments when their revenues are growing almost 10 percent annually is quite different than when growth is less than half that amount.

To avoid unpleasant surprises, now is the time for IT companies to re-evaluate sales and marketing strategies.

One of the first areas to be negatively impacted by slower state revenue growth is general government expenditures, such as administration, human resources, accounting and purchasing. When the economic picture becomes cloudy, large and expensive IT initiatives in these areas are some of the first to be cut.

A second area is spending for capital equipment. For the past five years, companies selling equipment, such as routers, switches, networks and servers, have done well. But now states are watching cash used to purchase capital equipment, and what isn't mandatory is now frequently delayed.

By historical standards, states have plenty of cash to deal with an extended economic downturn. But they know small errors in revenue forecasts can drain reserves, and a downturn in the business cycle affects the demand for services, such as job training, placement and medical and social services.

A third area is new IT programs. Even in the strong economy, it was difficult to get funding for new initiatives, such as statewide portals. Lawmakers have been reluctant to support new initiatives that require a commitment of funds over several years. Tight financial conditions will make it more difficult for proposals for new IT programs.

There are steps IT companies should take in this environment. First, they can position themselves to go where the dollars are. Total state expenditures in 2000 were almost $1 trillion. Over a quarter of this came from the federal government through grants. These grants are a source of financing for many state IT programs.

Not all federal grants are equally attractive, however. Some, such as the grants announced by the Justice Department for integrated criminal justice systems, are one-time grants and subject to the whims of the budget process. This is quite different from grants for recurring programs, such as the recent $453 million contract to Accenture Ltd. for an integrated human services eligibility information system for a consortium of California counties.

A second step is to align marketing efforts with customers' top priorities. For example, education will still be a priority and the largest component of state budgets. Also, federal programs, such as E-Rate, that are outside the annual appropriations process will continue to funnel billions in funding to schools across the country.

Companies also must re-examine sales tactics. They must help customers construct compelling business cases to justify increased spending. States have taken a hard look at how to measure results of IT investments. Companies can generate good will by working closely with customers to measure performance.

Fourth, now is the time for companies to demonstrate flexibility. Undertaking a pilot project to demonstrate the feasibility and value of a new IT application can pay off handsomely down the road. Also, creative contracting practices that call for payments by government only when results are achieved and avoid up-front payments will be given serious consideration by most.

Companies should become more selective in targeting which states to pursue. In an era of rising economic fortunes, the differences among states are sometimes overlooked. To borrow a line from Indiana Gov. Frank O'Bannon, all governors for the past few years have been acting like Santa Claus.

However, state and local governments will continue to attract IT companies in the year ahead with their total IT expenditures and reputation for innovation. The companies that stay the course in this more challenging economic climate will be rewarded.

Thomas Davies is senior vice president at Current Analysis, Sterling, Va. His e-mail address is tdavies@currentanalysis.com.

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