Limited options

Five steps to success in 2003

* Seed market development in emerging areas, such as homeland security.

* Extend contract life in exchange for near-term cost savings to customer.

* Focus on core areas of expertise.

* Help customers find alternate revenue streams outside general funds.

* Introduce benefits sharing or shared savings contract models.

Five hot state and local opportunities

* Business process outsourcing

* Health and human services case management

* Technology infrastructure consolidation

* Enterprise resource planning

* Homeland security

Given the budget crisis and uncertainty surrounding new IT projects, states will be looking to take advantage of contracts they already have in place, said the Meta Group's John Goggin.

Henrik G. de Gyor

"The budget situation is worse than the governors thought it was. They will have to think about what are and what are not essential services." ? Steve Kolodney, vice president of public-sector services at AMS

As states face staggering budget deficits, select IT solutions should win favor

Technology companies hoping to protect or even expand their work with cash-strapped state governments will need to step forward with solutions that can produce short-term savings or generate badly needed revenue for state customers.

Analysts and company officials said that states struggling under the weight of their growing budget deficits will try to get by in the fiscal crisis with existing systems and architectures. The few new projects that states begin will be those that demonstrate clear and immediate benefits.

"The challenge for the IT community will be to provide, for every circumstance in every state, that there is a return on investment," said Ron Salluzzo, senior vice president for state and local services at BearingPoint Inc., McLean, Va., formerly KPMG Consulting Inc. "If you can't articulate the value [of the initiative], then the opportunity is poor."

The state budget shortfall is expected to worsen in 2003. The aggregate state budget gap is expected to increase from $37.2 billion in 2002 to $49.1 billion in 2003, according to a November 2002 survey by the National Conference of State Legislatures, based in Denver. Incredibly, since the survey was released, California's deficit alone has reportedly grown to more than $35 billion.

"The budget situation is worse than the governors thought it was. They will have to think about what are and what are not essential services," said Steve Kolodney, vice president of public-sector services at American Management Systems Inc., Fairfax, Va.

Despite the large budget gaps in many states, industry officials believe the state and local IT market will remain a profitable source of revenue for systems integrators, and that funding will be available for certain types of initiatives, such as those that generate revenue or attract federal funding.

State and local government spending on IT hardware, software and services is expected to grow from $40.4 billion in 2003 to $41.5 billion in 2004, according to the market research firm Federal Sources Inc., McLean, Va.

"With this economic environment and this change in leadership, you will continue to see CIOs draw and rely on the private sector," said Greg Baroni, president of Global Public Sector for Unisys Corp., Blue Bell, Pa.

Because of the election of new governors in 23 states, companies will see few new initiatives in the first and second quarters but should expect to see "tremendous opportunities" in the third and fourth quarters of 2003, Salluzzo said.

The states will show a keen interest this year in so-called shared savings contracts that will enable them to preserve cash from general funds for other purposes, according to analysts and industry officials. Under a shared savings contract, the contractor pays for the cost of building a system and splits the revenue it produces with the customer.

Integrators have had substantial success with these projects in tax collection and transportation over the past several years. For example, AMS has shared savings projects that improve income tax collection for the California Franchise Tax Board and the Virginia Department of Taxation.

In the transportation sector, Affiliated Computer Services Inc. of Dallas won a $450 million contract last year to provide New Jersey with its electronic toll collection program. The company now operates electronic toll collection programs in nine states, including California and New York.

Joe Martz, ACS' managing director of municipal services, said the company's state and local customers are now interested in having the company process sanitation and other violations in addition to parking and traffic. Also, the company is widening its customer base for processing of violations to include midsize cities and counties as well as large ones.

Martz said that in Montgomery County, Md., the company produced as much revenue processing violations in six months as the county had processed on its own in one year.

States also will show a continuing interest in solutions that enable them to contain or cut costs this year. The most obvious of these is the implementation of enterprise resource planning software that enables states to streamline one or more functions that cut across all state agencies, such as accounting, budgeting, payroll, personnel and purchasing.

BearingPoint is the prime contractor and systems integrator for a project in Pennsylvania, the largest project of this kind at the state level. The company has a three-year contract to install software upgrades for 52 state agencies to streamline five major business functions.

On a smaller scale, AMS won a $9.4 million contract to install a Web-based ERP solution for Iowa, and a $25.2 million contract to implement a statewide financial management system for Massachusetts.

The most forward-looking states are considering outsourcing the consolidation of data centers and telecom operations as a way to cut costs and leverage their technology investments, according to analysts and industry officials. While expensive to undertake, the savings are impressive.

The largest of these projects is Pennsylvania's Data PowerHouse project that belongs to Unisys. In October, the company announced that it had won a three-year, $252 million contract extension from the state to continue managing the operation and maintenance of the state's data center facility. The company won the initial $621 million contract in 1999. The company expects to save the state $141 million over 10 years.

Given the budget crisis and uncertainty surrounding new IT projects, states will be looking to take advantage of contracts they already have in place, said John Goggin, director of e-government services for the market research firm of Meta Group, Stamford, Conn.

He said that savvy contractors can expand on existing work by renegotiating current contracts with state agencies. Companies can help cash-strapped customers by reducing this year's contract value in exchange for a longer term contract. In addition to gaining the long-term contract, the company will solidify its relationship with valued -- and grateful -- customers and establish a basis for increased work when the budget outlook improves.

Companies also should position themselves for work when the states begin getting federal funding -- expected to be substantial -- in areas such as health and homeland security in 2003 and 2004.

Jeff Rhoda, director of Global eGovernment for IBM Corp., Armonk, N.Y., said many of the homeland security projects at the state level will have a cross-jurisdictional focus and will involve integrating applications between state government agencies and corresponding federal and local agencies.

Network security will be an important element of new projects as well. Rhoda said state technology officials understand that security needs to be addressed as an integral part of the IT enterprise architecture and not simply tacked on after a project is completed.

But awareness alone will not make systems more secure. "Now it's a matter of how to do it," he said. *

Staff Writer William Welsh can be reached at wwelsh@postnewsweektech.com.

About the Author

William Welsh is a freelance writer covering IT and defense technology.

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