Indiana's public-private partnership is down, but not out. Even if the partnership succeeds over the long run, current troubles only reinforce the general perception that social services outsourcing is risky at best.

Here at GovWin, we've been blogging on the Indiana-IBM/ACS welfare outsourcing deal since it was announced back in 2006. So, while I'm skeptical that major social services outsourcing can succeed within the existing federal programmatic framework, it still came as an surprise when I read that the U.S. Food and Nutrition Service (FNS) had abruptly put a stop to the statewide roll-out. In fact, the stop order came back in late June but only hit the press recently. However, FNS will be working with the state to ensure that the current outlay achieves measurable improvements before giving the green light for further statewide roll-out. According to the Associated Press (linking prohibited), just last week, Ollice Holden, the FNS's Midwest regional administrator in Chicago, had issued a letter demanding that the state provide a variety of monthly reports around the eligibility application and determination process for both the state and its contractual partners. FNS also promised an on-site review of the project in August.

So, where do we stand?

Is the project dead? No, but the recovery rate for projects of this magnitude that stumble this far into the roll-out is not good. (See the lingering cases of Texas and Colorado.) However, Indiana wisely chose to run a 12-county pilot project through last March, and it seems FNS should have identified troubles during its onsite visit in April before the state expanded the program from 27 to 47 of the state's 99 counties in May. The state's chances of getting the project back on track would have been higher 20 or 35 counties ago and before 1,500 state caseworkers were shifted over to ACS this month! These events will surely tarnish Gov. Mitch Daniels (R) re-election run as an innovative privatizer who can make government run like a business.

Regardless of how the Indiana case is resolved, vendors should keep in mind that the Democratic majority in Congress has expressed its dislike of outsourcing related to FNS programs. Whether this displeasure will expand to other federally funded social services programs remains to be seen. Check back here for the latest on Indiana and the evolving federal attitude toward outsourcing in the states at large.

Update as of 08/06/08:
The state of Indiana has issued some talking points refuting some of the claims made by the Indianapolis Star and individuals within the reports. Below is an excerpts that is relevant to my comments above.

"The Star reported: '. . .federal officials who have ordered the state to stop the rollout of its welfare modernization project.'

• The truth: The FNS letter was dated 6/23/08. Zach Main, the Director of the Division of Family Resources had already suspended the transition in an email to employees on 6/13/08. In addition, the following is an excerpt from an email received today from Kate Houston, deputy undersecretary of agriculture for food and nutrition and consumer services:

So, it looks like this is a merely "pause" in the rollout that was jointly agreed to by the state and FNS. We'll keep an eye on how the rollout issues are addressed and when the rollout resumes.

Thanks to Michael Kerr at ITAA for the latest.

Kadix Systems will exit the 8(a) business development program earlier than April 2012.

Announced today, DRC (NASDAQ:DRCO) will acquire Kadix Systems LLC of Arlington, VA for at least $42 million.

Valuation

In 2007 Kadix reported revenue of $23 million and net income of $3.8 million, according to the company. With consideration of at least $42 million, Kadix earns a very attractive multiple of at least 1.8x 2007 revenue.

No small feat, Kadix is CMMI Level 3 certified. DRC is also CMMI Level 3.

Civilian and Homeland Security Gains

With this acquisition DRC gains ground in civilian agencies to complement its defense presence, a move to strengthen civilian market share that is becoming more common as vendors position for war spending and administration changes. DRC's top 4 customers are in defense, accounting for over 85% of its FY07 reported prime obligations.

Kadix will jump start DRC's $2M to $3M per year DHS prime business. Roughly half of Kadix's FY07 prime obligations are from Homeland Security. While both have prime contracts on DHS' go-to EAGLE contract vehicle, Kadix has had more success with it and also has a seat on DHS' new Program Management Support Services (PMSS) contract.

Kadix Prime Contracting Growth

Strong prime obligations growth in last 5 years (Kadix entered the 8(a) program in April 2003):

Service-Oriented Architecture (SOA) has been a hot topic in both industry and government over the past couple of years. And although it is still an emerging market, I'm hoping that federal contractors are keeping an eye on SOA's development in government, because it could fundamentally change how government buys technology.

In the latest GovWin Industry Insights report, "Service-Oriented Architecture: Implications for Government and Industry," I analyzed the potential impact on industry if SOA takes off in the federal government. The good news is that technology doesn't typically "take off" in the government – it eases in – so there is time to develop strategies. The bad news is that it could force some contractors – particularly software developers and systems integrators – to rethink their business models to adjust to the flexibility and reusability factors that SOA introduces. Over time, agencies could begin looking for volume and user fees to replace seat licenses, and the large system integration projects that are common in government could be replaced with smaller, incremental projects. The image below offers a visual representation of the difference between the traditional and SOA models.

Source: GovWin

So let's think about the impact. In the traditional model, all of the functions of an application were self-contained. In the SOA Service Model, those self-contained functions are broken out into discrete services, which could all be provided by a multitude of different vendors. What does that mean for competition? Not only does it mean that one vendor's solution could easily be plucked out and replaced without having to rebuild the entire setup, it also means that many of the proprietary elements that vendors often rely on for differentiation won't play here – standardization is the word of the day.

Although SOA could pack a punch to those contractors unaware of its impact, the providers that start talking to their customers about it and evaluating their business strategies now will be better prepared.

During 2005, the Oregon State Legislature approved funding for the Computing and Networking Infrastructure Consolidation (CNIC) project to consolidate twelve state agency data centers into one facility would save Oregon tax-payers millions. An audit of the project by the Secretary of State has not only revealed that the award-winning data center was ill-prepared, but some of the state agencies are paying millions a year more for technology services.

The audit concludes that the data center consolidation objectives have not been achieved. Though the Department of Administrative Services has completed several projects for consolidation which adhere to the recommendations in the audit report, the department has to continue to make improvements in order to see the promised savings.

The following improvements are imperative to the success of the data center:

The Department of Administrative Services has suggested that the recommendations and other enhancements will be completed during the remainder of the seven year consolidation plan.

Oregon is not the first state to pursue an expensive data center consolidation project. The Georgia Technology Authority (GTA), on behalf of the State of Georgia has a requirement for vendor assistance with the $1.28 billion Georgia Infrastructure Transformation (GAIT) 2010 Project. Furthermore, IBM is in the process of providing the Texas Department of Information Resources with the management and support of their $1.09 billion State Data Center (SDC).

The Oregon data center illustrates the necessity for the government and vendors to have an honest evaluation of the anticipated outcome of a project. The government and vendors have a responsibility to provide the necessary information to ensure that the outcome of the project is in the best interest of the public. While adjustments and amendments can be made to save money in the long run, the amount of money that could have been saved at the onset of this project will never be realized.

The total cost of this project was projected to be approximately $63.6 million consisting of approximately $20 million to construct a new data center building and $43.6 million to equip and configure the consolidated operating environment.

GovWin's Federal Task Orders database was recently updated with EAGLE and FirstSource programs to provide historical task order spending on both DHS contract vehicles.

The following graph provides the top 15 EAGLE prime contractors by awarded value of task orders. These values include base plus all possible option year funding for task orders awarded between September 28, 2006 and May 1, 2008.

The following graph provides a list of DHS agencies according to the amount of funding they have allocated to task orders awarded under the EAGLE program. These values include base plus all possible option year funding for task orders awarded between September 28, 2006 and May 1, 2008.

The following graph provides a list of all FIRSTSOURCE prime contractors by awarded value of task orders. These values include base plus all possible option year funding for task orders awarded between March 15, 2007 and May 30, 2008.

The following graph provides a list of DHS agencies according to the amount of funding they have allocated to task orders awarded under the FIRSTSOURCE program. These values include base plus all possible option year funding for task orders awarded between March 15, 2007 and May 30, 2008.

For information on upcoming EAGLE and First Source task orders please see GovWin's Federal Opportunities database.

EAGLE Program:

Information Technology Infrastructure Program (ITIP/ITMS)

• Opp ID: 36132
• Status: Protest (Post-RFP)
• Value: $1.5 Billion (GovWin Estimate)
• Summary: ITIP will provide the Transportation Security Administration with nationwide information technology infrastructure including managed services, telecommunications, IT support and related services

Microwave Backhaul Buildout

• Opp ID: 44596
• Status: Pre-RFP
• Value: $50 Million (GovWin Estimate)
• Summary: This opportunity will support the SBInet initiative through design, equipment, and installation as well as conversion off of 1.7GHz to meet commercial sale requirements

SBInet IV&V

• Opp ID: 44593
• Status: Pre-RFP
• Value: $10 Million
• Summary: This opportunity will provide enhanced IV&V services for the SBInet initiative over five years, particularly supporting the software, C3I and COP efforts using a RAD/JAD evolutionary approach

Enterprise Applications Development Integration and Sustainment (EADIS)

• Opp ID: 44667
• Status: Source Selection
• Value: $1 Billion
• Summary: This requirement will assist FEMA with the development of multiple enterprise applications, as well as the integration of existing systems. An award is anticipated before the end of FY08

FirstSource Program:

Tactical Two-Way Radio Communications Systems and Subscriber Units

• Opp ID: 44202
• Status: Pre-RFP
• Value: $10 Million
• Summary: This requirement will provide radio communications systems to the DHS Office of Emergency Communications. Multiple solicitations are possible

Shares HF Radio Program for the National Communications System

• Opp ID: 45057
• Status: Pre-RFP
• Value: $500k
• Summary: This requirement will provide a SHARES HF radio program for the National Communications System at the DHS National Protection and Programs Directorate. The solicitation is not anticipated this Fiscal Year

E-Rate has likely reduced the digital divide between rich and poor students, provided the funding required for all public schools to have access to the Internet, and dramatically reduced the number of pupils per classroom computer, but at a cost of over $22 billion. Is it worth it and does the need for E-Rate still exist?

The Telecommunications Act of 1996 required telecommunications providers to make discounted services available to schools and libraries. In 1998 the Universal Service Administrative Company (USAC) began distributing E-Rate (Education Rate) funding to schools and libraries. Since then, $22.7 billion has been doled out over 326,000 times to education facilities for Internet access, telecommunications services, and internal connections such as routers, hubs, network file servers, and wireless local area networks.

The program has little oversight and has been rated as not performing by the Office of Management and Budget. There has been plenty of misuse of E-Rate funds. Just this month a North Chicago school board member and school district employee pled guilty to mail fraud and a Montgomery, Alabama-based E-Rate consulting firm settled two lawsuits by agreeing to pay $750,000 to a Florida school system.

Despite E-Rate's problems, I think we can deduce from the National Center for Education Statistics (NCES) Digest of Education Statistics, that E-Rate may be a prime reason the digital divide is not as deep as it was 15 years ago. In 1993 there was a 19% gap in classroom computer use between students from families making less than $5,000 and those from families making over $75,000. By 2003, that gap had been reduced to 6%. The same NCES report indicates that 89% of all public elementary and secondary schools had access to the Internet in 1998. As of 2003, all 82,480 public schools were reported to have access to the Internet. During that same period the number of school students per instructional computer dropped from 12.1 students to 3.8.

The larger question is: does the need for the E-Rate program still exist? It's certain the Bush Administration won't answer that question, but a new president should. USAC could redirect E-Rate funds to its three other programs. Or Congress could direct the FCC to stop requiring providers to pay into the fund.

Implementation of Health Information Technology is one of the few initiatives that the upcoming Presidential Candidates and Congress agree on. Both Senators McCain and Obama are proposing to spend whatever is necessary to implement Health IT during their Presidency. The Bush Administration and both candidates see many benefits to Health IT. For example, it will save the Federal government money and improve the quality of health care for patients. However, there are many obstacles to the implementation of Health IT.

To address Health IT issues, the American Health Information Community (AHIC), a federally chartered commission under the Department of Health and Human Services, was formed to help advance President Bush's call for most Americans to have electronic health records within 10 years. I attended a meeting of AHIC on July 29, 2008. The meetings occur about every 2 months. The topics discussed included products and approaches that consumers might use to share their personal health information. There were two panels, one representing consumers, the other industry.

Over and over again the participants addressed privacy issues. They mentioned that people are nervous about having their health records on line. The participants noted that people are accustomed to paying bills on line, but are not yet comfortable with having their ehealth records on line. Will it be possible to convince people that having ehealth records on line is safe also? Some think that Congress needs to modify HIPAA and implement stricter privacy regulations. It has also been suggested that the federal government start educating the public by using advertisements to promote ehealth records.

The current leading vendors of ehealth records, such as Microsoft (NASDAQ:MSFT), Google (NASDAQ:GOOG) and Dossia are working on standards for ehealth records.

Also discussed, were plans to establish a successor to AHIC as a public-private partnership based in the private sector in Fall 2008. The AHIC successor will be instrumental in drawing a road map for successful health IT adoption that promotes interoperability through strong standards, while ensuring confidentiality, privacy and security for patients.

Already implemented throughout the Federal Government, Automated Biometric Identification Systems have found a place in state budgets, as New York joins the club of states utilizing FY2009 funding to develop fingerprint identification technology.

On June 16th, 2008, The New York State Division of Criminal Justice Services (DCJS) released an RFP for a new Statewide Automated Biometric Identification System or SABIS (GovWin Opportunity 39287). As noted in the RFP document, DCJS is looking for vendors with experience in replacing older, highly integrated Automated Fingerprint ID Systems (AFIS) with new SABIS technology. According to the RFP, the new system will be used to support agencies that rely on the ability to ID individuals utilizing Tenprint transactions and Latent figerprinting. Interoperability is key for SABIS projects, and this system will not be any different.

Notices of Intent to Bid were due July 3rd, and GovWin has obtained the list of those vendors:

1. CMC Americas, Inc.
2. Cogent Inc.
3. Motorola
4. NEC Corporation of America
5. Sagem Morpho, Inc.
6. Ultra Scan Corporation

These vendors will be submitting final proposals on August 15th, 2008. Site evaluations and presentations will all be a factor in the state's final decision, set to be made by the end of 2008. With New York being one of the last states to start down the road to acquiring this technology, nation-wide implementation will become commonplace. As states become more and more concerned with interoperability, this SABIS project continues to echo the need for cooperation between all levels of government.

Although the House and Senate are still marking up appropriations bills for the FY2009 budget, earmarks in the Defense Authorization bill could have some defense contractors seeing much more green in 2009. According to a Government Executive article, analysis from TaxPayers for Common Sense (a non-profit budget watchdog), showed $9.9 billion in earmarks in the House version of the bill, and $5.4 billion in the Senate version. Looking through the list of "beneficiaries," you can see some familiar names of companies that stand to gain significantly if these earmarks fly. You can access the raw data here, but in case you're not in the mood for spreadsheets, take a look at some of the contractors on the list:

Earlier this year, McCain promised to veto all earmarks and "make their authors famous." It looks like Sen. Joe Lieberman (D-CT) with $292.5 million in earmarks, Sen. Jeff Sessions (R-AL) with $188.0 million, Rep. Solomon Ortiz (D-TX) with $82.6 million, and Rep. Duncan Hunter (R-CA) with $157.8 million would need an agent in a McCain administration.

GovWin expects other states to follow suit in the quest to provide 911 services to IP users as the U.S. DOT's pilot project concludes and other states, such as Michigan, report on their successes with the system. GovWin estimates more funding will be made available in state and local budgets in the next 2-3 years for NG911 technology.

On July 23, 2008, the State of Michigan moved towards the next generation of providing 911 services to Internet Protocol (IP) users by issuing a Request for Proposal (RFP) for a consultant to assess the feasibility of implementing a Next Generation 911 (NG911) system statewide. Only a limited amount of states and localities have implemented NG911 systems, however, many have been successful.

This project comes a few weeks after the U.S. Department of Transportation announced five agencies taking part in a NG911 pilot project. Those agencies include Rochester, NY; Bozeman, MT; King County, WA; St. Paul, MN; and Fort Wayne, IN. The U.S. DOT has committed over $11 million to study the effectiveness of NG911.

While Michigan was not included in the DOT's pilot project, it joins the list of states who either are in the process or have completed deployment of NG911 systems. These states include Texas, Minnesota, Maine, Tennessee, Colorado, and Washington.

GovWin expects other states to follow suit in the quest to provide 911 services to IP users as the U.S. DOT's pilot project concludes and other states, such as Michigan, report on their successes with the system. GovWin estimates more funding will be made available in state and local budgets in the next 2-3 years for NG911 technology.