To the Rescue
Homeland security will give a needed boost to floundering market<@VM>Budget blues<@VM>Security investment <@VM>Trends and alternatives
- By William Welsh
- Feb 14, 2002
Huge shortfalls in state budgets may squeeze the business of state and local integrators this year, but funding for homeland security from the federal government will restore the market by year's end, according to analysts and industry observers.
Spending by state and local governments on information technology products and services, after a relatively flat year in 2001, will gain momentum and grow at a sturdy 8.2 percent clip during the next three years, according to Gartner Dataquest of Stamford, Conn.
The market research firm predicts state and local IT spending will grow from $44.4 billion in 2002 to $56.4 billion in 2005, with the fastest growth occurring in areas related to homeland security, such as public safety, criminal justice and health.
Not surprisingly, the companies featured in Washington Technology's annual list, "Who's who in the state and local market," are gearing their offerings to homeland security. The top three systems integrators with more than $1 billion in 2001 state and local revenue are Affiliated Computer Services Inc. of Dallas; Electronic Data Systems Corp. of Plano, Texas; and IBM Corp. of Armonk, N.Y.
The rise of ACS from a third-tier to a first-tier integrator is largely a result of its purchase of Lockheed Martin IMS for $825 million in July 2001.
While homeland security will replace e-government as the dominant trend in the state and local market, e-government will remain a driving force, according to government and industry officials. Its primary purpose will no longer be to improve service delivery to citizens, but to facilitate information sharing among agencies, they said.
Even with business slacking off in some areas, many integrators say they have not experienced a noticeable decline in revenue. In fact, all executives interviewed for this article said their companies anticipate modest to strong growth in their state and local business this year.
ACS, for example, expects its state and local business to grow by at least 20 percent, said John Brophy, president of ACS' state and local solutions group. The company may achieve a growth rate of 30 percent if it makes more acquisitions in the market, he said.
Paul Robinson, Deloitte Consulting's practice director for public-sector, Americas, said his company also expects to grow its state and local business by 20 percent in 2002. "We're going to have the best year we've ever had, by a fairly wide margin," he said.The state budget situation has severely worsened since last year. Forty-three states are reporting revenue shortfalls for 2002, according to the Denver-based National Conference of State Legislators.
All totaled, states are facing budget shortfalls ranging between $40 billion and $50 billion in fiscal 2002, according to the National Governors Association, based in Washington. The unanticipated expenditure of $6 billion by states for homeland security since Sept. 11 has exacerbated the budget situation, the organization said.
The budget crunch has caused some cutbacks in planned IT spending. Gartner Dataquest, which last year projected state and local IT spending of $48.8 billion for 2002, has slashed that prediction by more than $4 billion.
In the near term, funds may not be available for many types of projects, including enterprise resource planning, legacy system upgrades, e-procurement and customer relationship management, said government and industry officials.
"For systems integrators that do large projects, it's going to squeeze them," said Ray Bjorklund, vice president of consulting services at Federal Sources Inc., a McLean, Va., market research firm.
Some companies already have seen projects delayed.
"In general, governments will be forced to put their internal improvement projects on hold to focus on the protection of their current infrastructure," said Meredith Luttner, manager of state and local database services for Input, a market research firm in Chantilly, Va.
Donna Morea, vice president and general manager of state and local solutions for American Management Systems Inc., Fairfax, Va., said demand remains for upgrades to legacy systems that can reduce service delivery costs.
"But upgrades for technology's sake, those days are gone," she said.
"Last year there were two areas set to explode: CRM and e-government," said Ron Salluzzo, senior vice president for state and local services at KPMG Consulting Inc., McLean, Va. "Neither has gone as far as anyone would have guessed," he said. "They are still here to stay, [though], and are core tools."
"You will see a lot less CRM, which is ... not absolutely necessary," said Marianne Cooper, IBM's vice president of public sector.
But Dave Ross, managing partner of the West Coast Client Group for Accenture Ltd., Hamilton, Bermuda, disagreed, saying states will use CRM to enhance legacy systems until they can be replaced.
Government officials, of course, are weighing their options carefully. Connecticut, despite an expected $500 million shortfall this year, is planning to proceed with a number of large projects, said Rock Regan, the state's CIO and president of the Lexington, Ky.-based National Association of State Chief Information Officers.
For example, the state intends to move forward with an enterprise resource planning project valued at more than $100 million, he said. Although it is not directly tied to homeland security, ERP can facilitate emergency procurement and other key emergency processes, Regan said.
"We won't delay ERP, because that would be damaging," he said.
The tighter, more competitive market will be tough on some companies, but it won't necessarily hurt the large integrators, which have deep and broad capabilities and are skilled at repositioning themselves, said Tom Davies, senior vice president at Current Analysis Inc., Sterling, Va.
"The next few years will separate the winners from the losers," he said.
Both Davies and Rishi Sood, principal analyst at Gartner Dataquest, predicted the downturn in the state and local market will be short-lived. In the near term, however, Sood cautioned integrators to stick to their primary business lines and core competencies.
"The focus of 2002 should largely be on a back-to-basics approach to systems integration, focusing on core mission-critical systems and making sure a lot of legacy systems are integrated with front-end systems that are being developed," Sood said.While IT spending begins modestly in 2002, it is expected to grow late in the year, especially if state and local governments receive an infusion of federal funds for homeland security initiatives.
The president's fiscal 2003 budget includes $3.5 billion for firefighters, local law enforcement and medical personnel, known collectively as "first responders." An unspecified portion of this fund would go toward upgrading emergency communications systems.
The president's budget also includes $5.9 billion for defense against bioterrorist attacks. The states would receive $1.2 billion of this to improve their capability to respond to such attacks.
"Most of the funding [for first responders] is being channeled through the states, and that is good for us, because we can coordinate where it goes," said Thom Rubel, program director for information technology at the National Governors Association.
NGA requested in December that the federal government provide $3 billion in immediate assistance to the states. The request included $2 billion to respond to bioterrorism threats and $1 billion for public safety and emergency response.
The president's budget also includes $722 million for improvements to information sharing within the federal government and between the federal government and state and local jurisdictions. This figure includes $380 million for an entry-exit visa system, $298 million for cyberspace security and $125 million for the FBI's National Infrastructure Protection Center.
While the language in the budget for first responders explicitly states the money will go to state and local authorities, the language regarding the funding for information sharing is less clear, Rubel said. Because of this, the governors association intends to monitor closely how the funding is spent.
"We will be working with the appropriate people to make sure the money goes to the states," he said, referring to the organization's close ties to the Office of Homeland Security.
Homeland security has thrown states back to the early days of information planning, where officials endeavored to identify key data and how best to integrate it, Accenture's Ross said.
"It's a coordination issue first. People are trying to get their arms around that before putting applications out there," he said.
KPMG's Salluzzo said government agencies are still trying to decide what homeland security means. "What is evolving is the balance between physical and cybersecurity. People are interested in improvements on both sides," he said.
Cheryl Janey, Northrop Grumman's managing director for state and local programs, agreed.
"What we're seeing is that homeland security is split in two. The cybersecurity side is more CIO or data center-related, and the homeland security director does other things," she said.
Kentucky CIO Aldona Valicente, for example, said her state is investing heavily in cybersecurity. The state is implementing e-mail security, erecting firewalls and installing intrusion protection software, she said.
Connecticut's Regan said states also will be looking for integrators that can help their agencies improve how they share information with state and local police departments. Integrators that want this business should be focused and specific in their conversations with state officials rather than speak in "utopian terms" about total integration, he said.
Once federal funding for homeland security reaches states later this year, companies with federal security expertise, such as Computer Sciences Corp. of El Segundo, Calif., EDS, Northrop Grumman and TRW Inc. of Cleveland, will be looking to apply their intelligence and security know-how to state and local government.
Northrop Grumman is discussing security enhancements with large states such as California and Texas, Janey said. In Texas, the company runs the state's data center and has successfully tested disaster recovery services to keep agencies operating in the event of an incident.
Delivering security solutions to the states may require companies to tailor their solutions to the special needs of this market, Janey said. For instance, states may require a different level of security or encryption than federal customers, she said.
Dave Zolet, TRW's vice president and general manager of civil systems program division, said his company will be looking for new opportunities to build emergency command centers and enhance the interoperability of emergency communications at the state and local level. Such projects will help spur an anticipated 15 percent to 20 percent growth in TRW's state and local business this year, he said.
States also will be issuing biometric requirements for driver's licensing, said Kevin Curry, vice president and general manager of North America Public Sector at Unisys Corp., Blue Bell, Pa. Unisys has multiple partnerships with companies specializing in various biometrics, including facial scanning, fingerprinting and iris scanning, he said.
Curry said Unisys is shifting resources within the company to meet the high demand for homeland security this year, as well as next year.
"Homeland security is not going to disappear off the landscape," he said.Governments facing severe budget constraints will be turning to integrators to help identify where they can gain efficiencies and reduce costs, said government and industry officials.
"When we talk about return on investment and productivity with clients, it seems that [customers] are listening more closely to that conversation," said KPMG Consulting's Salluzzo.
Some integrators report that demand for their work goes up in hard economic times, because they offer solutions that not only help government cut costs but also raise revenue.
"We do well in rough times. We flourish when the economy is struggling," said ACS' Brophy.
Brophy said ACS is focusing attention on helping states get optimum results from difficult and complex revenue streams, including unpaid child support, parking tickets and income taxes, he said.
A number of integrators said they see opportunity for growth in outsourcing and business process outsourcing. The latter is the management of back-office processes such as accounting, billing, claims processing, data entry, document management, forms processing and transaction processing.
AMS is broadening its service offerings to include outsourcing and business process outsourcing for federal as well as state and local customers, Morea said.
"The time is right. The economics [of outsourcing] are compelling," she said.
Unisys has had substantial success in this area. For example, the integrator won a five-year, $60 million contract in 2001 with the California State University system for administrative support services, Curry said.
Another major trend seen by state and local integrators has been the changing focus of e-government. While e-government remains a high priority, since Sept. 11 its role has shifted from service delivery to the creation of a better infrastructure to support homeland security and public safety.
Steve Kolodney, a vice president with AMS' state and local solutions group, said e-government's new focus continues to provide fresh opportunities for public-private partnerships.
"Homeland security gives a boost to the need to accelerate and build the enterprise communications infrastructure," Kolodney said.
Homeland security and e-government "go hand-in-hand," Sood said.Staff Writer William Welsh can be reached at email@example.com.