Tim Larkins


Making the case for the $95B state and local market

Conducting business as usual has been no walk in the park for federal contractors over the past two years. Sequestration, government shutdowns, and flat-to-declining budgets have had a negative impact on the overall market.

Hundreds of companies that were thriving five years ago are no longer in existence, and once profitable behemoth corporations are projecting soft earnings statements in the coming years.

So what’s a federal contractor left to do?

Well for many of us, taking a look into new markets is a key to profitability; and recent growth in the state and local market makes it just as good a target as any.

Throughout the recession, the state and local market was avoided by big tech companies for a number of reasons. One reason is that IT purchases across state and local governments are fragmented.

Companies focused on selling to the federal government are used to a standard procurement methodology put in place by the FAR. But no FAR exists for the nearly 100,000 governments that comprise the state and local market. Another reason for avoiding state and local is that the recession hit states, counties, and municipalities particularly hard – so we saw little to no growth in IT spending for a very long time.

The good news for those seeking to enter this market is that a plethora of resources now exist to assist companies in their sales and business development efforts. Websites and databases have been built (and can be accessed, for a fee) to provide users with centralized access to state and local government solicitations. Many provide tips and tricks on how to become an approved vendor in a state or local government and may offer guidance on how to navigate the murky water that is state and local procurement.

From a funding standpoint, the outlook is as rosy as it’s ever been.

State and local markets have emerged from the recession, and the slowing of fiscal 2014 IT investments due to sequestration is no more. As a matter of fact, state and local governments will spend over $3.2 trillion in fiscal 2014, nearly $95 billion of which will be on IT, and IT spending is projected to rise in 40 states and the District of Columbia in fiscal 2015.

At a recent state and local CIO summit, state CIOs discussed their top ten priorities in the coming years – which include shared services, cybersecurity, health care, data center consolidation, virtualization, storage, applications, disaster recover/COOP, budget and cost control, and retention of competent IT personnel.

Those priorities exist in large part as imperatives to meet their most basic needs (related to health and human services, transportation and infrastructure, and finance and administration) are becoming even more difficult to satisfy.

As states struggle to deal with Medicaid expansion, growing caseloads, and aged IT systems, we’ll see over $23 billion in IT dollars spent in the state and local health and human services vertical in fiscal 2015, with needs emerging for mobile technologies, business intelligence & analytics, and document management tools.

As the country’s physical infrastructure ages and gets more congested, as citizen engagement becomes more important, and as the influx of public data becomes overwhelming, over $9 billion will be spent on the state and local transportation and infrastructure vertical, also leading to requirements for data storage and analytics, mobility, and security.

Additionally, as legacy systems sunset and as paper based systems need to be eliminated, finance and administration at the state and local level will represent an $8 billion market for networking, cybersecurity, and analytics vendors.

What’s interesting is that among these top priorities and technology requirements, one may notice the absence of cloud.

Sure, cloud may be implied through verbiage such as “data center consolidation, virtualization, and storage,” but let’s face it – state and local spending on cloud technologies has been less than stellar over the past five years.

According to Forbes, businesses in the United States will spend over $13 billion on cloud computing and managed hosting services in 2014.  Yet a recent survey shows that 37 percent of state CIOs say they are hesitant to adopt cloud solutions.

But while industry can currently offer technology to meet today’s demands, government remains hesitant to purchase it due to existing gaps in security policy and potential legal ramifications of exposed personally identifiable data. So it would seem that we are at a good old fashioned stale mate… except for one thing: despite some initial hesitance, it turns out that most of them actually WANT cloud.

The National Association of State CIOs specifically called out cloud computing as the top priority for them in 2014. Around 30 percent of state and local governments reported moving IT services to the cloud in 2012 (with storage and unified communications being the most popular targets), while 74 percent of state CIOs report that their state had made a move to the cloud in 2013.

States like Minnesota have leveraged cloud based systems to migrate to an enterprise unified communications platform with enormous success. Ohio and Kentucky are other states that are considering software as a service and infrastructure as a service options to deliver services to its citizens more efficiently. California, Texas, and Arizona have made it a point to evaluate cloud solutions so that core systems can be securely migrated to the cloud.

After migration, agencies have cited improved efficiency, improved staff mobility, and reduced IT related costs; and those surveyed suggest that they plan to spend 27 percent of their IT budgets on cloud solutions.

The march toward embracing a cloud environment has indeed been a slow one in both the federal and state and local markets, but state CIOs have suggested that industry use its influence through lobbyists (among other means) to alter existing policy and lean on future requirements to satisfy the needs of the contractors, thereby ensuring innovative cloud solutions are made available to the state and local market sooner rather than later.

Establishing trusting relationships and creating an ecosystem of partners to help guide government through adoption of new technologies will be key in the coming years.

Governments are going to continue having some difficulty letting go of their data, and industry will continue cobbling together state and local sales strategies to meet the diverse and complex needs that their various customers have. But encouraging collaboration between state and local governments and industry partners will certainly ensure that the $95 billion in IT expenditures results in efficiency for the government and profit for technology vendors.

About the Author

Tim Larkins is manager of market intelligence for immixGroup, which helps technology companies do business with the government. He can be reached at tim_larkins@immixgroup.com

Reader Comments

Wed, May 7, 2014 Jim Kane

A $95B market, new websites and databases for business development, and a new set of customer IT requirements . . . if successfully penetrating the State and Local (S&L) market were only that easy. Expanding from federal to S&L is a very challenging strategic move. It’s not just a simple implementation of “same offering/new customer”. Rather, it requires a fundamentally different business model and ecosystem that is more aligned to the commercial market. A basic Gap Analysis by functional area showing key requirements for the S&L market vs. a company’s current capabilities will quickly highlight the challenges of profitably expanding into state and local.

Wed, May 7, 2014 Mel Ostrow

Tim, Be sure to mention the $500 mil or so that SAIC had to repay NYC after its project manager guided the City into spending so much for a timekeeping system that did not work and took money in the process. Or ask why Booze & Allen, having been bruised now and then in S&L engagements decided to pretty much withdraw from the business. A lot of firms have found the politics excessive, and more threats of corruption on the customer side. Not the walk in the park you suggest. Plus, many states and local govts insist on in-state, in-city, in-country firm or permanent presence. Federal feeding is a lot easier, in the judgement of experts.

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