State and local IT budgets to grow

Input analysis suggests fed market growth will slow

Some technology companies may want to consider putting more effort into cultivating state and local government clients rather than federal ones. An Input analysis, presented at the 2006 MarketView event held in late March, suggests that growth in many federal technology areas will be more sluggish than in state and local settings.

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Companies tempted to make such a move should proceed with caution, according to market consultants. The state and local market may seem less complicated than the federal government, and perhaps more accessible, but it is not necessarily an easy jump to make.

“The cost of sales is astronomical,” said Chip Mather, senior vice president of Acquisition Solutions. “It’s like 50 different countries. They all have their own rules, they all have their own cultures, they all have their own politics. They’ve already got the companies they prefer to do business with.”

The Bush administration’s budget proposal for fiscal 2007 requests $63.8 billion for information technology projects, a marginal increase from the $63.5 billion enacted for 2006, said James Krouse, Input’s director of market analysis. “Taking into account inflation, you could almost say this is a downturn,” he said.

Although the exact numbers will change as the budget moves through Congress in the coming months and the amount spent on IT will almost certainly be more than the initial request, fiscal 2007 is unlikely to be a banner year for the federal IT market, Krouse said. Based on the new analysis, Input also reduced its federal market forecast through fiscal 2010.

At MarketView 2005, Input projected the federal IT market in fiscal 2010 would total $91.4 billion. This year, the firm lowered the 2010 projection to $88.8 billion, followed by a rise to $93.4 billion in 2011. The projected compound annual growth rate (CAGR) is 4.4 percent, compared with the 5.5 percent Input predicted in 2005.

State and local governments, on the other hand, propelled by a different set of drivers, could grow more quickly, Krouse said. He projected a 7.5 percent growth rate through 2011 for those organizations, including a jump from $49.8 billion this year to $59.2 billion in fiscal 2008. By 2011, the figure is $71.5 billion.

A rival research firm, Datamonitor, offers a different view, projecting a CAGR of 5 percent in the federal sector but only 2.6 percent for state and local. Datamonitor’s projections cover fiscal 2005 through 2010 for federal and 2004 through 2009 for state and local.

In dollars, the IT budget in the federal sphere will grow from $60.5 billion in fiscal 2005 to $77.2 billion by fiscal 2010. The state and local IT spending figure will rise from $55 billion in 2004 to $62.4 billion by 2009, according to Datamonitor’s forecast. Despite Datamonitor’s lower projected growth rate for state and local governments, the market still presents a fertile opportunity for contractors, said Kate McCurdy, Datamonitor’s analyst for public-sector technology. The state and local market has great potential, she said.

“Across the board, they’re looking to modernize and transform,” she said. “That means replacing the systems they have, that they’ve developed over the years. Governments are looking to integrate them and consolidate to be more productive.” At the same time, she added, citizens are demanding better service from their governments, and governments are responding in part with technology improvements.

State governments also want to outsource work that isn’t a core government function, Krouse said.

Several states, including Virginia, Maryland and North Carolina, have formed investment review boards to assess large IT projects. No such boards existed as recently as two years ago, Krouse said. IT review boards often have chief information officers, chief financial officers and lawmakers from the Democratic and Republican parties as members, he said.

“You can call it too many cooks in the kitchen,” Krouse said. “But on the other hand, it reduces uncertainty and questions about large IT initiatives.”

Although the dollar amounts are typically smaller for state and local contracts, the market offers a broader range of opportunities that may potentially be more accessible to smaller companies struggling to win federal contracts. But companies trying to make that move will face their own hurdles, according to experts.

Some major firms in Washington, D.C., already have thriving state and local operations, said Alan Balutis, president and chief executive officer of government strategies at Input. However, a lot of state and local IT business is carried out by smaller firms based locally, with some firms serving a single city or state and others having a more regional reach.

Still, the opportunity is there for companies willing to commit the time and resources necessary, Balutis said. “This is clearly the growth area for the next several years,” he added.

Consultant Al Gordon, chief executive officer of National Strategies, said contractors trying to succeed in state governments should recognize that the executive branch of government — the governor’s office and state agencies — is one of several paths into state government. State legislative bodies are also influential, but contractors often ignore them.

“Many times you will see people in the executive branch interact with the legislative branch in a way that lets the legislative branch drive certain projects,” Gordon said at the MarketView event.

Vish Varma, vice president of corporate development at AlphaInsight, which was recently acquired by CACI International, said companies should not underestimate the acumen of government officials at the state and local levels.

“From my conversations with many companies in the IT services sector, most of them seem to have a stereotype of state and local customers as corrupt and unsophisticated,” he said. “I think they are making a mistake. The potential for a burgeoning market aside, the sector is like any other sector: One needs to pay one’s dues, learn the ropes, form the relationships and have a compelling value proposition. If it was easy, every damn fool would be doing it.”

Contractors attuned to the federal market can find the mélange of state governments challenging, said Larry Allen, executive vice president of the Coalition for Government Procurement. Each state has its own procurement rules and procedures. Some use General Services Administration schedules under GSA’s cooperative purchasing program, while others use the schedules merely as a pricing guide, just one of dozens of factors unlikely to be the same in any two states.

“Many state buyers haven’t bought into the best-value or multiple-award concepts,” Allen said. “Others feel more acutely the presence of their legislative and political overseers. This doesn’t mean they do the will of individual legislators, but rather that they know, or feel they know, what direction the legislature wants them to go in. Anything counter to that view isn’t likely to budge them.”

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