State and local IT spending on the rise

After a dry spell, governments look to technology

When California consolidated several agencies into a central information technology department this summer, Gov. Arnold Schwarzenegger said it was an important step toward bringing the state's technology structure into the 21st century.

"Californians deserve to have a government that serves them effectively and efficiently, and this reorganization is an important part of accomplishing that goal," he said. "I look forward to working with the legislature to improve and modernize state government so that it better serves Californians."

Market analysis firm Datamonitor recently issued a report that reinforces the governor's view. After several years of IT budget cutbacks, state and local IT spending is on the rise again, said Kate McCurdy, Datamonitor's public-sector technology analyst. Spending will increase from $55 billion in fiscal 2004 to $62.4 billion by fiscal 2009.

Specifically, the report predicts that technology spending at the state level will increase from $27.8 billion to $33.5 billion, while local government spending will rise from $27.2 billion to $28.9 billion.

"One thing that I think is definitely a positive trend [is that] state and local governments are really looking to transform themselves — to become more efficient — and technology is a way to do this," McCurdy said. "It's a matter of both becoming more efficient and serving the constituents better."

She said IT spending will shift away from hardware and networking equipment to software and services because of falling hardware prices, efficient IT services, savings from enterprisewide systems and growing interest in e-government. She said state and local officials are trying to meet constituent demands for round-the-clock access to government services.

Half the IT spending will go toward health and human services — specifically for Medicaid management information systems — and public safety and justice programs, she said.

"There's a lot of technology spending going toward first responders," McCurdy said. "They want them to be able to communicate with each other and communicate with other levels of government."

Governments will also focus spending on transportation, education and general government, such as tax and revenue services.

Additionally, she said many local and state governments, including California's, are consolidating technology purchasing and operations into centralized offices to improve efficiency and reduce costs. The strategy could also shield IT offices from political agendas.

"State and local governments are looking to make central IT offices part of institutional change so they're not connected to one person," McCurdy said. She didn't know how many state and local governments are taking that approach, but she said it's definitely a trend.

In another trend, state and local governments are outsourcing major projects or even entire IT functions. They see outsourcing as one way to meet the challenge of an aging public-sector workforce whose members will soon retire in large numbers, she said.

Rather than outsource all IT functions, McCurdy said the trend would likely be toward outsourcing short-term projects because they're easier to accomplish.

Alan Shark, executive director of the Public Technology Institute, a nonprofit group that works on technology issues with cities and counties, said he found out during conversations with chief information officers that local governments were planning to spend more on IT before Hurricane Katrina hit. The storm's devastation might spur governments to spend more on IT, especially on communications.

"I think that what just happened and the magnitude of what just happened is a wake-up call for all governments of all sizes, and I think we're going to see a greater increase in spending," Shark said.

He said the increased spending will not only benefit first responders but also all local governments because "they're the ones who have to worry about transportation, relocation, communication [and] housing."

Follow the money

Datamonitor, an independent market analysis company, released a new report that predicts:

  • State and local information technology spending will grow from a combined $55 billion in fiscal 2004 to $62.4 billion by fiscal 2009.
  • State IT spending will rise from $27.8 billion to $33.5 billion.
  • Local IT spending will increase from $27.2 billion to $28.9 billion.
  • Investments will shift from hardware and networking equipment to software and services.
  • Investments will focus on public safety and justice, health and human services, general government, transportation, and education.
  • Governments will consolidate their purchasing and operations into central technology offices to reduce costs and improve efficiency and customer service.

— Dibya Sarkar

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