After Northrop Grumman Corp. finished a series of acquisitions to build a $10 billion federal IT business, the company found that it also had a substantial state and local business.
The business, worth about $400 million, was scattered among various units around the company, and none of the parts was making much of an impact on the market.
But that’s changed.
In 2004, the company pulled together the disparate pieces that once had been part of Litton PRC Inc., Logicon Inc., TRW Inc. and others. Now under one roof, Northrop Grumman’s state and local business has won three major outsourcing deals in the last 18 months, helping it to climb a notch on Washington Technology’s 2006 Who’s Who list of the top state and local systems integrators. It now is ensconced among companies with $500 million to $1 billion in annual state and local systems integration revenue, the second biggest category in the ranking.
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Competitors may have dismissed Northrop Grumman as a defense contractor and not an IT company in the past, but they no longer can do that, said Cheryl Janey, vice president of business development and strategy for Northrop Grumman’s commercial, state and local group in Herndon, Va.
“If we were the stealth IT company in state and local, that is no longer the case,” she said.
Northrop Grumman’s story is emblematic of much of the activity in which state and local market growth is surpassing growth in the larger federal market. Companies are moving quickly to avoid missing out on lucrative opportunities.
The market, analysts said, will pick up more momentum over the next 12 months as states, flush with cash from a better fiscal year than anticipated, will be more ambitious than in the recent past. Several massive opportunities in New York and Texas likely will keep competition at a fever pitch.
The one potential speed bump could be November’s state and local elections. Some projects that had been delayed for years, as states waited for their budgets to rebound, could be held up again while state leadership positions are determined, industry analysts said.
State and local IT spending is expected to grow at a rate of 7.5 percent annually from $47.3 billion in 2006 to $58.8 billion in 2009, according to Stamford, Conn., market research firm Gartner Inc.
Despite the rosy growth numbers, a few states are lagging.
“We still have a few clients who haven’t made the turn from a budget perspective,” said Barbara Anderson, vice president of state and local government business at EDS Corp. “But most of our clients have their budget issues under control, and we’re starting to see some uptick.”
Stepping up
For the fifth consecutive year, EDS, IBM Corp. and Affiliated Computer Services Inc. maintained their positions atop Washington Technology’s Who’s Who list. Each company has more than $1 billion in annual state and local revenue.
The other 11 companies on the list have at least $100 million in state and local revenue. Market research firm Federal Sources Inc., McLean, Va., compiled the list and ranked systems integrators by their estimated revenue from state and local IT services work.
No new names were added to the list this year, but Northrop Grumman jumped into the $500 million to $1 billion echelon, joining Accenture Ltd., Deloitte Touche Tohmatsu of New York, Maximus Inc. of Reston, Va., and Unisys Corp., in the list’s second tier.
It was the third time in as many years that a new company broke into the top echelon, following Maximus last year and Deloitte in 2004.
Northrop Grumman’s advance is most visible in its two largest 2005 wins: a 10-year, $2 billion contract to overhaul and run Virginia’s outdated IT infrastructure, and a seven-year, $667 million contract to run San Diego County’s IT and telecommunications capabilities. Computer Sciences Corp. had held the San Diego County contract, which is now in its second cycle.
Add Northrop Grumman’s win in November 2004 of a five-year, $46 million contract from Indianapolis and Marion County, Ind., for outsourcing IT services, and it is clear that the large federal contractor is carving a space for itself in the state and local market.
“Any of our competition could argue one of those [wins] was a fluke,” Janey said. “But all three in a row says, ‘These guys are for real, and now we’re going to have to deal with them.’ ”
Industry analysts are noticing Northrop Grumman’s increased focus and investment in the state and local market, where Janey said the company aims to grow by double digits and cross the $1 billion barrier, though she said no timetable is set for when the company anticipates realizing that goal.
Northrop Grumman IT’s decision to grow its state and local business has paid off handsomely.
“The fruits of attention and resources invested in the state and local business unit are now evident,” said Ray Bjorklund, senior vice president and chief knowledge officer for Federal Sources.
Mega deals
One of the first large requests for proposals for this year is expected from the Texas Information Resources Department for data center consolidation and operations, anticipated to be worth at least $500 million over five years, according to FSI. Northrop Grumman has done data center work for Texas since the 1990s and will bid on the project, Janey said.
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Among those that will challenge Northrop Grumman in Texas is a Unisys-IBM team, said Greg Baroni, president of Unisys global public sector. The two companies paired up to win a seven-year, $500 million data center contract from Pennsylvania in 1999. But IBM will lead the team on the Texas pursuit, whereas Unisys led in Pennsylvania, Baroni said.
“We have a competitive shot at the opportunity there,” he said. “We realize we have stiff competition, but I think the Northrop team is beatable.”
ACS also is looking at the Texas opportunity, said Tom Burlin, ACS’ government solutions group president. But the entrance of the federal contractors has Burlin worried.
“They’re going to be tough competitors,” he said. “They scare me, because they have the size to leverage deals. But they only scare me in that they have financial strength.”
ACS and Unisys both struggled with internal issues in 2005 and continue to do. ACS, a state and local giant faced with slowing growth in 2005, hired Burlin away from IBM to reinvigorate sales. While ACS is still far from the 20 percent growth it saw for much of the early 2000s, and Burlin’s goal for revenue growth in the future, the company is watching its state and local revenue grow rather than shrink, he said.
The company hired more than 50 new sales representatives and has built a pipeline of more than $1 billion in potential sales for 2006. About one-third of the opportunities are in the first half of the year, with the remaining two-thirds coming in the final stages of 2006, Burlin said.
Unisys, which reacted several years ago to declining state and local growth by shifting its focus to the federal market, has seen yet another climate change and is increasing its focus on state and local customers, Baroni said.
Unisys plans to leverage its federal competencies in health and human services, especially in claims processing, with a sharp focus on 10 or fewer of the largest and most active states.
“We’re going to get very creative in that claims processing business over the coming months,” he said. “Stay on the lookout for us, we’re going to be a player.”
Market watch
ACS, EDS and IBM pointed to a backlog of states that need new Medicaid systems or are hiring a company to run their systems.
But Rishi Sood, Gartner research vice president, said the need for new systems to comply with Medicaid Information Technology Architecture may hold up some projects. The company that is first to develop a compliant solution will have a big edge, Sood said.
Integrators and analysts both see opportunities coming in 2006 in child welfare and other human-services systems.
“I’ve seen much stronger demand in the past 12 months for large-scale child welfare systems,” said Mike Keating, senior vice president of western United States and state and local government at CGI-AMS of Fairfax, Va., a subsidiary of CGI Group Inc. of Montreal. “You saw that in Georgia. You saw that in Florida. You’re going to see several more in the next six to nine months.”
The biggest 2005 win in human services went to Accenture, which in June won a five-year, $870 million integrated eligibility contract from Texas to improve the state’s Medicaid, food stamps and temporary assistance programs.
Two large-scale integrated eligibility projects in human services are on the horizon. The first is in Indiana, where the state has an RFP on the street similar to that for Texas’ program, said John Maguire, managing director for Accenture’s state and local government practice.
The second project, in New York, may be further out, possibly toward the end of 2006 or beginning of 2007. But count on the state drawing plenty of attention when it puts out an RFP for a redesign of its human-services system.
At least another half dozen states are planning similar projects, industry officials said.
Enterprise resource planning is still a hot trend in finance and administration services, as states continue to look to reduce back-office costs, Maguire said. Now, states are considering large-scale implementations, not the modular approach as has been the case in the last few years. The shift, a result in part of better state budget conditions, means the size of opportunities will increase.
“These things go through cycles, and we’re in another upswing in ERP,” Maguire said. “Public officials are more willing to take on a little pain up front in order to realize benefits downstream.”
Accenture will continue to focus on finance and administration systems, including tax and revenue applications, along with human services and health care systems, Maguire said.
Another area that many integrators see as fertile ground is infrastructure updates and overhauls, often including building out an infrastructure with ERP to many systems, said Marianne Cooper, executive vice president of public sector for IBM. The company is tracking IT infrastructure opportunities at the state and local level, she said.
“It’s the play around getting the house in order, and making sure they’ve got the infrastructure and the mechanics in place to their run business effectively,” Cooper said.
With the need to consolidate and update infrastructure, the states’ needs in health care and human services and the potential for more large-scale outsourcing contracts, 2006 and the next several years likely will be lucrative times to be a state and local integrator.
The top integrators are bullish on the market for obvious reasons.
“There’s some real forward thinking going on in states, and we want to be part of it,” Northrop Grumman’s Janey said.
Staff Writer Ethan Butterfield can be reached at ebutterfield@postnewsweektech.com.
