Squeeze Play

More and more states look at consolidation to minimize IT spending and get the most out of scarce resources.

by / January 6, 2004
If necessity is the mother of invention, it's little wonder states are interested in IT consolidation. Pressure to rethink business practices has intensified in the last few years, and IT is just one of many government functions being scrutinized for a radical overhaul.

Acute state budget shortfalls coupled with an influx of hard-charging corporate executives into senior state government positions are igniting IT consolidation efforts. This convergence of factors is driving states to act quickly, creating the sudden emergence of political will to make consolidation -- once considered nearly untouchable -- a practical reality in state government.

Pressure Points
States may vary in their approaches to consolidation, but their motivations are largely similar, said Ken Mitchell, managing partner of Accenture Government's East client group. States across the nation are responding to cost and staffing pressures brought on by historic budget woes. Agencies, including IT departments, have reacted to shrinking budgets by viewing staff costs as the quickest place to pare spending.

Early retirement programs and outright job reductions have saved money, Mitchell said. But staff loss, coupled with changing skill requirements for e-government applications and other technology programs, have made IT consolidation attractive.

"You think of it first as a cost play, 'Our budget is being reduced, I've got to do something about it,'" he said. "When you start looking under the covers a little bit, you see these other factors coming in."

In the past, the executive branch and legislators avoided painful decisions that would alter their state's IT landscape. Nobody had to make those decisions because the money continued coming in. So it was business as usual for most jurisdictions, which often meant siloed systems, duplicative applications and fractured procurement methods.

The picture was much different in private industry.

"If you move your focus away from state government and look at private companies, most of the Fortune 100 companies have pursued IT consolidation over the last 10 years," said Robert Anderson, CIO of New Hampshire, where significant IT consolidation is under way.

They had to consolidate, he said, because they were held accountable by stockholders. They must be profitable quarter after quarter, year after year.

"As times got tough, [companies] looked within to optimize and tighten how they did what they did in the area of using and deploying technology," he said. "We've never had the same set of criteria in state and federal government -- where we were held accountable to some level of metrics. Now we are because the budget can't continue to grow. Taxes can't continue to go up."

Political Fortunes
Part of the new willingness to tackle consolidation stems from policy-makers realizing technology's importance to a state's progress -- especially if it dovetails with a particular agenda, Mitchell said.

"Senior government officials are becoming more technology savvy, and they see the impact IT can have in helping them achieve their goals, mission and vision for their administration," he said. "They're also looking at this as a way to get the resources deployed in the right areas that are in line with their mission and vision for their state. By centralizing, they have better control over where these resources are going, what's going to happen with those resources and how they deploy them."

It's not that governments haven't cut costs before -- they've used strategic outsourcing for that purpose for years -- but the drive to cut costs by consolidation resulted from the changing nature of those who hold senior positions, Mitchell said.

"You're seeing more private-sector folks coming into these positions -- governor, CIO, legislators and agency heads," he said. "I think you're going to start to see more acceptance of these concepts, whether it's consolidation or ultimately outsourcing."

Like Minds
Perhaps nowhere is the impact of corporate executives assuming senior government positions more apparent than in Virginia.

Mark Warner became Virginia's governor in 2002, after a successful private-sector career, which culminated in his role as a founding partner of Columbia Capital Corp., a technology venture capital fund in Alexandria, Va. Warner's business background and promises to run the state more like a private-sector enterprise are, in part, what got him elected.

One of Warner's first moves was to appoint George Newstrom, senior vice president at EDS, to the role of technology secretary. Newstrom held a variety of government- and health care-related roles at the company, and headed Asia-Pacific operations for EDS Information Solutions just before his appointment to Virginia government.

In an interview with Virginia Business in November 2002, Warner was asked what he wanted to accomplish and where he would focus his energies during the 2003 legislative session.

"One will be the budget and how we take an additional billion dollars out of our revenue stream, which will mean we will take close to $6 billion out of the state's revenue," he said. "That's unprecedented. No budget shortfall in history has been close to this magnitude. No one will have shrunk government more and in less time than this administration."

Warner added that restructuring and consolidation would play a major role in shrinking expenses. "The overarching theme is how we bring more businesslike principles to state government," he said.

In Virginia's case, the budget shortfall is driving painful consolidation that wouldn't normally rally support. "Some of the structural changes that we're going to bring forward, you'd never get passed in a normal cycle," he said. "You'd never get [them] passed because the institutional resistance to change is enormous. A lot of people make sound bites about wanting to change, but as you've seen on the DMV office closings, the very people who argue for smaller government are the first to scream when they see the effects of smaller government."

In December 2002, Warner rolled out a legislative agenda to restructure Virginia's IT by consolidating the state's technology functions within a single new agency -- the Virginia Information Technologies Agency (VITA) -- and eliminating three existing, stand-alone IT agencies and two government IT oversight boards. Perhaps the most surprising aspect of Warner's plan was that even though state lawmakers weren't gung ho about the idea, he had their support.

"To have the type of coalition we have -- the governor, the general assembly, a large group of stakeholders working to make this consolidation happen -- it does show that if it's done right and done well, it can have traction pretty quickly," said Newstrom.

He said the need for VITA became obvious to Warner when the governor asked two seemingly simple questions: How much money does Virginia spend annually on IT? And how many IT professionals does Virginia employ?

"When he got the answer from me, which was, 'Gee, I don't know,' that raised a whole bunch of red flags for him," Newstrom said. "[Warner] came in with a reform agenda, anyway. VITA is only a portion of his reform agenda, but technology is the underpinning for a lot of this."

Creating an IT superagency in any state generates internal resistance. Virginia was no different. Newstrom said skeptics questioned the need for VITA, its reach and whether it would live up to expectations. Although the VITA legislation was signed into law, the final draft didn't include everything Warner was pushing for.

However, VITA could make one claim other agencies couldn't, Newstrom said. It could immediately save the state money by going after obvious targets, such as duplicative IT contracts. After some poking around, for instance, 15 different contracts with Dell were discovered, he said.

"This area isn't the biggest cost savings, but it's there," he said. "That's not low-hanging fruit. Man, it's on the ground, and it's rotting right now. This is not a knock on Dell, because Dell came to us and said, 'This is how you guys buy.' We're working with them because it's a win-win if we say, 'Here's what we're going to buy. Now, what kind of discount rates can we get with you?'"

Newstrom said VITA in its first year of operation will save the state $10 million to $12 million, and he estimates the state will save more than $100 million over the long term.

"When the governor came in, we originally thought we had a $1.5 [billion] to $2 billion budget deficit," Newstrom said. "That grew to $3 billion, and it finally wound up close to $6 billion. A $6 billion budget shortfall in revenue: That, to me, was the thing that helped us most in getting VITA created."

Shane Peterson Associate Editor