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Live Online Archive: Washtech.com
Steve LeSueur
Steve LeSueur
(Washington Technology)
Washington Technology
Live Online Transcripts

Washington Technology: Who's Who in the State and Local IT Market
Guest: Federal Sources Inc.'s Ray Bjorklund

Friday, Feb. 22, 2002

Ray Bjorklund
Ray Bjorklund
(Washington Technology)

Despite revenue shortfalls and spending cuts in most states, many IT executives and analysts are still predicting a sturdy growth of nearly 7 percent this year in the state and local government IT market. According to Washington Technology's special report, "Who's Who in the State and Local Market," many in industry are counting on federal funding for homeland security initiatives to give the market a much needed boost during the year's latter months.

Washington Technology editor Steve LeSueur hosted Ray Bjorklund, a vice president with IT research and consulting firm Federal Sources Inc., for a discussion of major issues and trends in the state and local market. Bjorklund, who will help lead FSI's annual State of the States Conference March 18 in Washington, D.C., helped Washington Technology put together this year's ranking of the top systems integrators in the state and local market.

An edited transcript follows:


Steve LeSueur: Welcome, readers and participants. We're just about ready to get started here. We've received several questions about the local IT economy in the Washington, D.C. area. While we'd like to help you, this chat is about the state and local government IT market throughout the United States. The blurb on the Washington Post home page is a little misleading. So my apologies to those of you expecting a discussion of the Washington, D.C. area job market. But you're welcome to stay anyway for an interesting discussion about what state and local governments are doing to improve citizen services and their operations using IT.

Vienna, Virginia: There has been a lot written in the press lately about declining state budgets. How will this affect new information technology opportunities this year? Are local governments facing a similar situation or are they better off than the states?

Steve LeSueur: Welcome, and thanks for joining our chat. And welcome and thanks to Ray Bjorklund, an analyst with Federal Sources Inc. FSI tracks IT opportunities in the state and local and federal market, and provides consulting to government agencies as well as companies doing business with government. Ray, I'll let you get started with the first question.

Ray Bjorklund: We believe that there will be a "dampened enthusiasm" for information technology, or IT, in state governments. Certainly there are some serious declines to deal with in state revenues, and those declines will in turn affect state discretionary spending. But state governments and their constituents have experienced the benefits of a new emphasis on IT through eGovernment and related ways of delivering government services. Consequently, we believe the growth in state IT spending will still be quite strong.

Local governments are facing a more difficult situation. Much of their revenue flows from the states, and local governments have generally been further behind in building their eGovernment and electronic service delivery environments. Consequently, we do not see as much growth in local government IT spending.

Washington DC: Some analysts who follow the state and local government IT market say that large integrators will redirect their resources toward the federal market because that is where the big money will be this year for homeland security. Do you agree with this assessment? How much will go to the states and when will they get it?

Ray Bjorklund: There's the old adage about "following the money." So we think that some of the integrators and solutions providers will be taking their best practices and lessons learned from their state and local experience, and then applying those to the new opportunities at the federal level. Those integrators need to be cautious, however, that despite the large numbers budgeted for homeland security, the amount allocated to IT is not at the tens-of-billions dollar level. The market may thus be crowded at the federal level for these integrators and solutions providers.

How much will go to the states and when will they get it is a little more daunting. While there have been direct appropriations for states like New York, New Jersey, Maryland, and Virginia and there have been some changes in the law enforcement grants programs, much of the anticipated funding has not yet been appropriated. We intend to follow the situation closely.

Arlington, Va.: How large is the state and local government market?

Ray Bjorklund: We are currently refining our company's forecast for 2003 state and local IT spending, in light of the new money coming out of homeland security and other intergovernmental initiatives. We believe the 2003 market for state and local government IT spending to be between $40 billion and $45 billion.

Washington DC: What do you see as the chief differences between working with state and local government customers and federal government customers? If a company doing either commercial or federal work wants to break into the state and local market, what does it need to know to succeed?

Ray Bjorklund: There are a lot of common factors in working with public servants, whether at the federal level or at the state and local levels. Some of the distinctions that we see are in how to sell to the government. State and local governments tend to try things from new companies (mostly in their geographic region). Federal customers tend to rely more on proven past performers. Federal customers often seek the path of least resistance, through contract vehicles like GSA Schedules and ID/IQ contracts. State and local governments are more willing to consider alternative financing methods to get the contract rolling.

Gaithersburg, Maryland: Are e-government initiatives going to suffer at the state and local level the next couple years, as priorities shift to IT security and intelligence-gathering measures?

Ray Bjorklund: As I suggested in an earlier answer, constituents have tasted from the fountain of eGovernment and they like the way government services can be delivered to them electronically. eGovernment is gradually improving the cost-effectiveness in running governments. So while it is becoming increasingly important to protect state IT infrastruture with security measures and to improve sharing of intelligence information among federal and state law enforcement organizations, we do not see anything significant being taken away from eGovernment.

However, we do see a slight slowing in eGovernment spending at the state and local level, as governments figure out how to tie the eGovernment "front-ends" to the legacy computing systems.

Arlington, VA: What are the implications for the state and local market if Northrop Grumman is successful in buying TRW?

Steve LeSueur: Here's a link to the Washington Post's story today: Defense giant Northrop Grumman Corp. launched an $11.4 billion unsolicited bid Friday to buy TRW Inc., aiming to boost its aerospace business only three months after it sealed a deal to buy the country's only builder of nuclear powered aircraft carriers.

Ray Bjorklund: This proposed merger is indeed an interesting change in the competitive landscape for the state and local market. Both TRW and Northrop Grumman have been solid performers in the market, with an ability to replicate proven solutions from state to state. In this marketplace, the proposed combination could be a powerhouse in justice and public safety and in social services systems.

McLean, Va.: How can smaller IT companies break into servicing the federal arena? And how can they compete against the SAIC's and DynCorp's of the world?

Ray Bjorklund: Since we're focusing this discussion on the state and local IT market, I'll answer it that way. Small companies, if reasonably well-established in a state or a multi-state region, have the best leverage for selling to state and local governments. Knowing your customer, feeling your customer's problems, and closely advising your customer on the next steps all go a long way to establishing a credible, trusted relationship with the customer. "Personalized service" can indeed enable you to compete against the largest companies at the state and local level.

Washington DC: Who are the toughest competitors in the state and local government IT market? Are there any mergers or acquisitions that occurred last year that will change the marketplace?

Ray Bjorklund: In our answers to earlier questions, we talked a lot about the size of some of these companies and how that has made them a powerhouse in the state and local market. In addition to the proposed merger between TRW and Northrop Grumman, Affiliated Computer Services' purchase of Lockheed Martin's IMS unit last year created another very large player in the state and local IT market.

But size isn't everything. Companies that have innovative solutions that really match--as well as solve--a government problem do well in this market. And companies that can develop a close, trusted relationship with the government user to tailoring the company offerings to government needs also do well.

Vienna, Virginia:

Are market research companies like Federal Sources able to provide unbiased forecasts of government markets? That is, how do you manage to be fair and accurate and withstand subtle, or not subtle, influence by the companies that use your services?

Steve LeSueur: And I would add: How do you resist the temptation to "hype" the market, since your clients and potential clients would rather hear that the government market is rapidly growing than in a decline?

Ray Bjorklund: We take pride in the objectivity of our market forecasts at Federal Sources. In both the state and local and the federal market, our forecasts have often been validated by empirical data provided by government.

Even during the dot-com bubble, we resisted the "hype" of that period. We want to provide our industry the market numbers that are useful to them. It does no good to our clients to introduce an new product line or build a new business unit if the market is not there. Over the last decade, the hype became a serious problem that the telecommunications industry is still grappling with.

Washington, DC: Where do you see the state and local government market for online payment processing going, e.g. citizens/businesses using credit cards or ACH to pay for services.

Ray Bjorklund: This particular market should grow gradually over the next couple of years. Strong players like NIC and ezGov have provided good services to their government clients in the area of online payment processing. Because we believe that the overall eGovernment market will be slowing up in the near term, demand for these services will taper off. In the long term, we think that the cost efficiencies realized by many state and local governments will become increasingly attractive to other governments that are not using such services. Then the market should take off again.

Vienna, Va: A number of companies, including AMS, EDS and IBM, have run into problems in the past on contracts at the state level, in some cases having to refund money to states. Are problems more likely to occur on contracts for certain types of projects such as Medicaid management than other projects?

Ray Bjorklund: We don't think that the type of system, whether Medicaid mangagement or revenue collection or any other type of system at state government, is really at the heart of the matter. Certainly those types of systems that have a very important fiduciary role like managing pensions or trust funds or social service entitlements are critical to the fiscal performance of the states that use them and the citizens that benefit from them.

On top of the fiduciary responsibility, we think that it is far more important for the vendor to collaborate fully and openly with the government while the system is being designed, to deliver according to its promises, and to continually work with the government on ideas to improve system performance.

Steve LeSueur: That's all the time we've got for today. Thank you, participants, for the great questions. I'm sorry we didn't have time for them all. But I think Ray gave us a good tutorial on the state and local market. Thanks, Ray, for going overtime for a great discussion.

Editor's Note: Washingtonpost.com moderators retain editorial control over Live Online discussions and choose the most relevant questions for guests and hosts; guests and hosts can decline to answer questions.

© Copyright 2002 The Washington Post Company


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2001 The Washington Post Company

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