Circling the Statehouse

As Federal Spending Tightens, Contractors Seek Out New Clients

(Photo Illustration by The Washington Post)

As tight budgets began to limit state and local government spending five years ago, Bethesda-based Lockheed Martin Corp. unloaded a $700 million operation that sold such services as contracts to chase after deadbeat dads and to install red-light cameras.

Now the Pentagon's biggest contractor, a maker of fighter jets and military satellites, seems ready to give the state and local government market another chance. Lockheed is going after a $500 million contract to consolidate data centers in Texas.

At a time when federal spending is slowing , state and local governments -- flush with cash from rising property-tax revenue and a generally healthy national economy -- are an increasingly juicy target for government contractors. Many have flocked to the state and local market after years on the sidelines, following the money being poured into information-technology projects ranging from humdrum computer system upgrades to innovative wireless networks.

Spending by state and local governments on such projects is projected to reach $54.96 billion in 2008, up from $44.24 billion last year, according to Gartner Inc., a research firm. That follows several years of budget shortfalls after the 2001 economic downturn, which sapped local governments of tax revenue and forced them to tighten budgets.

"Because of the increase in property values, states have come out of their deficits. They have the money now to reinvest in infrastructure," said Kimberley Williams, vice president of global marketing at Curam Software Ltd.

Curam is no Lockheed. The Irish firm got started in the United States only five years ago, and it is still working to establish a foothold. But business has been good enough lately that it was able in January to open a new North American headquarters in Herndon, where the company has 80 employees.

Curam has found profit in updating clunky, decades-old computer systems that are used in providing health care, food stamps, unemployment benefits and other critical services. "These systems are very, very old," Williams said. "They don't even have the people any more to maintain them. So they have to modernize."

Curam sells software designed to function much like an electronic social worker -- making people aware of the services available and speeding the process for getting them.

Such technology did not receive much attention or funding in the first few years after Sept. 11, 2001, when the focus was on national security and contractors invested heavily in selling products and services to the Pentagon or the Homeland Security Department. Many of those companies earned record profits in the process, but now face the daunting challenge of continuing the growth.

That's difficult to do now that defense IT spending has begun to stall, with funding for the wars in Iraq and Afghanistan eating up budgets for more routine programs. Gartner predicts that long-term state and local government IT spending will increase 6 to 8 percent annually, compared with 2 to 4 percent growth at the federal level.

But the state and local markets are not without their drawbacks.

For large federal contractors, the state and local markets can be perplexing with 50 states, 19,000 municipalities and 3,200 counties, each with its own way of doing business. Competition for contracts typically last longer -- 18 to 24 months -- and are generally worth less. But collectively, the competitions are getting larger. That's attracting wider interest.