Deltek’s In-Depth Analysis of the Growing IT Market

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The state and local IT market is projected to grow from $58.5 billion in 2013 to $68.6 billion in 2018, bringing in $8.5 billion in new spending, according to a new report.

With the stabilization of the improved economic health of state and local governments, agencies are reinvesting in enterprise IT infrastructures after putting them on the back burner during the recession.

So why have IT investments not been significantly affected by the cutbacks caused by federal gridlock?

Chris Dixon is the SeniorManager, State & Local Industry Analysis, at Deltek, the leading global provider of enterprise software and information solutions.

Federal funding that is dedicated specifically to state and local IT systems is only a small part of all federal aid to states and localities. The most significant federal funding streams for IT come in the form of federal funding participation (FFP) for systems that states use to deliver federal benefits to their citizens.

As a prime example of this, Mr. Dixon cites the federal funding for Medicaid Management Information Systems (MMIS), where the federal contribution can be as much as 90 percent of total development cost. The recent cutbacks of federal grants to states and localities, including "sequestration," have not affected FFP for IT.

Mr. Dixon said: "Much of the confusion on this matter arises when observers hear about federal or state cuts to a particular program, such as unemployment insurance. When Deltek’s clients inquire about IT impacts from such cuts, I encourage them to think about it in a different way. Cuts in benefits to citizens or program administration are unlikely to affect the IT systems that support the program.

"Unless the program is completely shut down, the same number of people will likely be coming to what I call ‘the window’ to get their government service or benefit. Sure, the service might be slower or the benefits reduced, but the IT system will have to be there for whatever staff remains to administer the program.

"In most cases, federal cuts can cause delays in upgrades or maintenance of certain IT systems. However, over the long run, such cuts only increase the demand for IT-driven modernization. As with any other organization, governments save money by cutting staffing costs and boosting productivity, not by cutting IT."

Mr. Dixon is the author of "State and Local IT Market Forecast, 2013-2018," a free summary of the report can be seen at www.Govwin.com/

Freeze! Slash! Improve!

He characterizes the current recessionary cycle as Freeze! Slash! Improve! That sums up the predictable cycle of reaction made by senior political leaders and county commissioners when a major revenue downturn occurs.

First, they freeze all new spending in hopes that a recovery will soon follow, but once they recognize that the downturn will last for more than a budget cycle or two, they are forced to make cuts. They cut back office expenses the deepest since they are not readily visible to the public.

Eventually, if the downturn lasts long enough, they cut front-line services, such as classroom education and policing. Usually, these layoffs result in the incumbent elected officials being voted out of office and replaced by new leaders with a self-declared mandate to get things back on track.

Mr. Dixon said: "This is when the demand for operational improvement begins. When it comes to government layoffs, it’s last-fired first rehired. For obvious reasons, politicians want to restore education and public safety funding before spending on back-office operations. So, the back-office remains under budget pressure long after the budget downturn has begun to lift.

"Legislators, councilors and school boards will avoid replacing back-office staff, looking instead to business streamlining with particular emphasis on operational consolidations. However, while they are thinking about merging offices, staff, and furniture, they usually forget about IT systems.

"The CIO or the manager will end up in front of them soon enough looking for funds to invest in modernized platforms and integration services. At this point, they are in-for-a-dime in-for-a-dollar. They can’t throw away $20 million in consolidation savings over $2 million in IT investment."

The Electronic Health Records Challenge

The role of state and local governments in the health care industry is peculiar and pervasive, and they face challenges on multiple fronts. In the case of public safety net hospitals that are owned by localities, most have had their administrative concerns outsourced to major hospital administrative companies.

So, they will implement electronic health records (EHRs) as part of the larger regional health care marketplaces. However, many cities and counties operate community-based health clinics (some of which have been outsourced, too) that will be implementing EHRs that must interface with regional non-governmental health care providers as well as state-level and national systems. They will ride on the larger trends for their regions and size of practice.

"A recent study in the Medicare & Medicare Research Review predicts that 80-90% of primary care physicians in larger practices will have achieved meaningful use of EHRs by around 2018," Mr. Dixon said.

"Physicians in smaller practices and specialists will lag behind this rate of adoption — most likely in the 75-80% range by 2018. My guess is that public hospitals will lag slightly behind comparably large private providers. Community health centers will lag their similarly sized peers.

"This will be due mostly to the added layers of public-sector bureaucratic oversight and the need to accommodate the record-keeping needs for a patient population that is more transient and economically challenged than that served elsewhere. They will have the most significant need for robust record sharing and accuracy via regional and national exchanges."

Citation: http://www.cms.gov/mmrr/Downloads/MMRR2013_003_02_A02.pdf

The Next Big Things

Mr. Dixon believes that mobile computing and the virtual data center will be the primary drivers over the next few years. In the government context, mobile computing represents the push of back-office processes up to the front lines.

Politicians instinctively understand that they get the best ROI — measured in terms of public support — by delivering services directly to as many citizens as possible. If police officers and teachers can collect more data and complete more bureaucratic processes during their usual workflows, the need for back-office support is reduced. Funding for front-line personnel is increased.

He said: "We will continue to see mobile terminals in patrol cars become ever more robust and connected to backend systems within and across jurisdictions. In the case of teachers, tablet PCs will begin to eliminate all the paper-based worksheets and test taking. Results will roll up instantly into the gradebooks.

"Digital curricula will use those grades to adapt to the needs of individual students based on those scores. Manipulation of paper-based testing results will end. Teachers will spend less time on paperwork and more time doing what they do best—providing individualized attention to students. It sounds utopian, but these are the two most important outcomes for IT in state and local government."

Keys to Success

Deltek has established a great track record of serving project-based businesses over the last 30 years. For those businesses that seek to capture work in the public sector, Deltek’s GovWin solutions provide them with market intelligence that they need to understand this unique business environment.

Mr. Dixon said: "We study the peculiarities of the federal, state, and local IT marketplaces so that our clients can allocate their business development resources efficiently and focus on pursuing the solicitations that are best fitted to their products and solutions.

"Very few of our clients focus exclusively on the public sector, so we are here to supplement their street-level insights with our strategic knowledge in the market."