By Renae Merle and Griff Witte
Washington Post Staff Writers
Monday, October 23, 2006; D01
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.
For example, about 225 people attended market research firm FedSources Inc.'s annual conference on the state and local market at the Hilton McLean Tysons Corner in June, an increase of about 25 percent from when the conference was held two years ago, according to Ray Bjorklund, FSI's senior vice president.
Of the large defense contractors, Northrop Grumman Corp.'s push for the state and local market has been among the most extensive. Northrop has doubled its revenue in the sector over the past four years, to more than $600 million. In 2004, Northrop established a Herndon-based state and local business group. The group's workforce has since risen from 2,700 to 4,100 employees. It is aiming for 10 percent annual revenue growth, company executives said.
"Spending is higher than I have seen it in five years. It is a very active time in the state and local market," said Cheryl L. Janey, vice president of Northrop Grumman's business development strategy for state and local governments.
Northrop has focused on the largest customers, pursing business in 15 to 20 states and a few major municipalities, company executives said. "The state and local market is a relationship-driven market. You can have good technology, but if you are not a known supplier it will be difficult," Janey said. "Building up those relationships over time is very important."
So far, it's paid off, Janey said. Last year, Northrop won a $2 billion contract with Virginia to overhaul the state's information-technology infrastructure, and a seven-year, $667 million contract to manage San Diego County's IT and telecommunications systems.
Among the state competitions attracting the most attention this year is one run by the Texas Information Resources Department to consolidate 31 computer data centers, a potential $500 million, seven-year deal.
While most deals are far smaller than that, they can help a company build momentum, said Todd S. Ramsey, a general manager at International Business Machines Corp. "We will go after small deals to go after large deals. It's hard to win in a deal in California if you don't have a track record in other states," he said.
Companies employ a variety of tactics to break into the market. Lockheed is angling for large statewide programs, particularly those funded by the Homeland Security Department, said Robert H. Trice, the company's vice president of strategic relations. General Dynamics Corp., based in Falls Church, limits its focus to projects in which the company can leverage its military experience, such as building law enforcement training centers and wireless communications systems. Electronic Data Systems Corp. has emphasized the importance of managing medical records electronically to reduce health-care costs.
"There's an increasing focus, even more than last year, on the rising cost of health care," said Barbara Anderson, vice president of EDS's state and local business. "We're seeing a significant trending toward new systems."
At Silicon Valley-based technology firm Cisco Systems Inc., which has 600 employees in the Washington area, company salespeople have focused on getting their message out to political candidates this fall so that officials who take office in 2007 will consider major upgrades.
To the public, Cisco says, the upgrades could mean fewer problems when filing taxes or applying for benefits. To politicians, they could mean a happier electorate when reelection time comes around.
"I can live anywhere. So as a public official, you have to make it attractive and put the proper infrastructure in place so that I want to live in your jurisdiction," said John Goggin, who heads a group at Cisco that's focused on state and local customers. "If a governor is slow to catch on to that, they're going to start losing businesses and people."
The city of Dublin, Ohio, is already sold on the idea. It paid Cisco to help install a citywide wireless-Internet network. Dublin, an affluent suburb of Columbus, budgeted a million dollars for the program, so its police officers will have access to high-speed data from their cars and building inspectors can file reports from the field. Even the snowplow drivers will use the network to alert dispatchers to which streets are clean, and which they are about to clear.
"Snow is something our citizens care deeply about. Whenever we get a storm, Dublin is famous for being the first city to get it plowed," said City Manager Jane S. Brautigam. "Our community has high expectations for us."
