As budgets shrink, the top companies in the state and local market are bracing for a tougher, more competitive 2008. State coffers have run full in the past few years, but the bleak outlook today is reminiscent of earlier this decade, when state budgets hit rock bottom.

“The heyday seems to have disappeared in a nanosecond,” said Caroline Rapking, vice president of U.S. State and Local Government at CGI Group Inc.

Companies are holding talks with prospective state and local clients to see how they can help their customers increase productivity, reduce costs and produce additional revenue, she said. “Because of the economic slowdown, we don’t just see this as a 2008 thing. This could linger for a few more years.”

The seasoned players on Washington Technology’s 2008 Who’s Who in the State and Local Market have weathered such storms before. They know that the key to strong sales lies in having the right mix of large-scale business processing and information technology outsourcing projects coupled with domain-specific projects fueled by federal dollars.

For those reasons, the industry executives interviewed for this year’s report are confident they can hold on to existing clients and even grow their businesses despite odds that seem stacked against them.

“We have a great backlog,” said Dave Zolet, president of Northrop Grumman Information Technology’s Commercial, State and Local Group. The McLean, Va., division of the defense giant has been on a winning streak the past several years, snapping up long-term IT outsourcing jobs in Virginia and San Diego County along with a large wireless project for first responders in New York City. Zolet conceded that the market is on the verge of a downturn, but he said he remains confident that the company’s state and local business will continue to thrive.

“In the markets where we have won, we are well-positioned and protected,” he said.

Thirteen integrators with state and local revenues ranging from $100 million to more than $1 billion made this year’s list. Heading the list are Affiliated Computer Services (ACS) Inc., EDS Corp. and IBM Corp. — all with annual sales exceeding $1 billion.

Northrop Grumman, which is steadily climbing the Who’s Who chart, is one of five companies in the $500 million to $1 billion category, along with other brand names such as Accenture Ltd. and Unisys Corp. The list was compiled for Washington Technology by FedSources Inc., a McLean, Va., market research firm.

STORM CLOUDS AHEAD
The looming state budget crisis is overtaking the market more quickly than the one that occurred six years ago, said Lisa Mattivi, vice president of state and local government at IBM Global Business Services. Despite the fiscal crunch, she said, IBM and the other top contractors will see opportunities this year to shore up IT infrastructure, overhaul systems and deploy governmentwide financial systems.

“We’re doing a lot to help customers address budget problems,” she said. “They are going to have to make investments to save, but they seem to know that and are making those kinds of smart investments.”

Growing their business in hard times and helping states generate revenue rather than deplete existing funds are integral parts of the go-to-market strategies for the Who’s Who.

For example, ACS offers a variety of business process outsourcing strategies designed to generate revenue for clients, said Skipp Stitt, ACS’ chief administrative officer.

“While we’re well-positioned when people are growing and adopting new technologies, in tough times we also are well-positioned to [help clients] take in new efficiencies and become more productive,” he said.

KEEP FOCUSED
Success in the state and local market centers on the ability to build solid past performance and stick to core competencies, said Ray Bjorklund, senior vice president and chief knowledge officer at FedSources.

Companies with a stake in the market should work this year to gauge the extent of the downturn and adjust expectations accordingly, he said. “Companies that are publicly traded and those with similar levels of shareholder interest [should] reduce sales targets to realistic levels that will enable the company to meet performance expectations,” Bjorklund said.

State and local IT spending is expected to increase at an average annual growth rate of 4 percent, from $51.1 billion in 2008 to $57.6 billion in 2011, according to the market research and consulting firm Gartner Inc. But the window of opportunity for discretionary projects is closing faster than the gradual slowdown that was expected 18 months ago, said Rishi Sood, a research vice president at Gartner.

The top companies in the market continue to derive revenue from proven lines of business and by positioning themselves for changes driven by external factors, such as the federal push for electronic health records or biometric and database opportunities that have resulted from the 2005 Real ID Act.

EDS Corp. positioned itself for human resources opportunities and Real ID work with state motor vehicle departments (DMVs) when it bought Saber Corp. for $420 million in November 2007, Sood said.

Saber, of Portland, Ore., provides EDS “with an entry into agency modernization for human services that EDS has really never been able to penetrate before,” Sood said. “It’s a big benefit for them.”

The Saber purchase could be the icing on the cake for EDS’ already blockbuster sales in the state and local market. The Plano, Texas-based systems integrator has Medicaid system fiscal services or modernization work in 22 states, said Barbara Anderson, vice president of EDS Government Health and Human Services.

The company also provides technology-related health care services to another 16 states, she added.

READY TO BATTLE
EDS’ chief competitor for Medicaid-related work is ACS. The Dallas-based company provides Medicaid fiscal agent services in 13 states and the District of Columbia, Stitt said.

Last year, it won a 10-year, $130 million contract to build and run Alaska’s new Medicaid system; a three-year, $67 million contract to continue operating Colorado’s system; and a seven-year, $111 million contract for similar work in Washington, D.C.

EDS will compete this year against other companies, such as BearingPoint Inc., that are angling for DMV work. Last year, BearingPoint won a five-year, $50 million contract to build a new DMV system for Missouri and a two-year, $14.1 million project to build a Web portal through which Californians can perform DMV-related transactions.

IBM has staked out its state and local ground as one of the top IT outsourcing companies. In the fourth quarter of 2006, the company landed a 10-year, $1.1 billion project to modernize Indiana’s aging welfare eligibility system. It also won a data center outsourcing deal with Texas worth $863 million over 10 years.

One of IBM’s flagship projects in the human services sector is an $80 million contract to modernize Pennsylvania’s unemployment insurance system using service-oriented architecture, Mattivi said. “We’re very focused on the social services market, where there are a tremendous [number] of legacy systems for child welfare, child support and unemployment insurance.”

One sure way for states to improve workflow and drive savings is a large-scale enterprise resource planning implementation, industry executives say. Accenture has ERP projects with New York City, Connecticut, Ohio and Washington state. And the savings can be considerable.

When Ohio implemented its initiative, state officials said they anticipated saving $251 million through improved efficiencies over the course of the five-year project.

Other top state and local contractors, such as Ciber Inc., CGI, Deloitte and Touche USA LLP and IBM, also have significant public-sector ERP portfolios. CGI announced in May 2007 that it had won a six-year, $84 million project to implement its Advantage human resources system for Los Angeles County. The company also has key ERP projects with Kentucky, Wyoming and New York City.

Ciber has ERP projects with the Delaware Transportation Department and the Pennsylvania Turnpike Commission, and Deloitte has a major implementation with the Miami-Dade County public school system.

Accenture is seeing a number of public-sector organizations doing strategic planning and business case justifications to prepare for ERP projects, said David Moskovitz, managing director at Accenture’s State and Local Government Client Group. ERP functions, such as human resources, payroll and finance, lend themselves to a shared-services model.

Several states, including Illinois, North Carolina and Minnesota, launched such models in 2007.

“When states are considering large ERP investments, it can be a catalyst for shared-services implementations as well,” Moskovitz said.

The health care and human services sectors in particular will provide growth opportunities for integrators in 2008, Bjorklund said. In addition to the impetus for electronic health records, integrators also will find digital records and other electronic platforms for entitlement management becoming increasingly important in the human services area, he added.

ON THE HORIZON
Beyond that, companies also can expect continuing investment in infrastructure modernization and consolidation, “where jurisdictions can spend money now to save in the future,” Bjorklund said.

One of the largest infrastructure modernization opportunities on the horizon is Georgia’s initiative to outsource its technology infrastructure operation to the private sector. IBM, Northrop Grumman and others are planning to bid on the project, which could be worth as much as $1.4 billion over seven years, according to market research reports.

Surpassing the Georgia project is a massive 12-year, $1.6 billion ERP project in California cleverly named Fi$cal. Although the solicitation will not be released until 2009, the opportunity has created substantial buzz among the top players in the state and local market.

Meanwhile, companies are scrambling to chase the last major growth opportunities in state and local government before the economic downturn becomes a firm reality, Sood said. Once the downturn is in full swing, he added, state and local customers will be checking to see if project proposals address the need to contain costs and generate revenue.

“Those tend to be the projects that get a much faster green light than other projects when we get into this belt-tightening type of a world,” he said.

William Welsh (wwelsh@1105govinfo.com) is deputy editor at Washington Technology.