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Sourcefire Outperforming In Cyber Market; Could Serve As Model For Smaller Contractors To Follow

At FIA, we believe Sourcefire Inc., a cybersecurity provider with a comprehensive portfolio of solutions, will continue to increase its federal business while expanding its capabilities in the growing cyber market. The information security market continues to be one of the most attractive growth segments within the federal IT space, and is expected to grow from $9.2 billion in 2011 to $14 billion in 2016, representing a CAGR of 8.8%, according to Deltek’s Federal Information Security Market, 2011-2016 report.
 
In 2011, Sourcefire generated approximately $34.8 million (21%) of its total revenue from the U.S. government, including the Department of Defense and various intelligence agencies. This compares with $32.7 million in revenues from the U.S. government in 2010, and $30 million in revenues in 2009. 
 
FIA Perspective:
 
Sourcefire seeing dramatic top-line growth with diversified portfolio. In the latest first quarter, Sourcefire’s revenue shot up 50% to $46.3 million, compared with $30.8 million in last year’s first quarter, reflecting 60% growth in revenue from the company’s federal government sector. In addition, Sourcefire saw its commercial business revenue rise 28% to $20.8 million, while international revenues skyrocketed 87% to $15.7 million.   
 
Sourcefire said its federal government business generated $9.8 million of revenue in the latest quarter, up 60% over the year ago quarter. The company noted that earlier funding of federal agencies versus what the firm experienced last year seemed to stabilize the procurement process, and as a result, Sourcefire saw greater deal flow over last year’s comparable quarter.
 
Looking ahead, Sourcefire believes it can grow its business by 25% on the top line in 2012, reflecting a growing awareness and demand for cyber security solutions like its Next-Generation IPS, the expanding size of the firm’s total addressable market, and a more stabilized federal spending environment through at least the remainder of the current federal fiscal year. Sourcefire noted that it now expects its federal business to show a 500 basis point to 600 basis point improvement for 2012. 
 
Sourcefire could serve as model for smaller contractors looking to branch out. With Sourcefire sporting a nicely-diversified list of capabilities and solutions across the commercial, government and international markets, the firm’s success could serve as a blueprint for other small contractors in the federal cyber sector to emulate moving forward. In the latest quarter, Sourcefire’s commercial business accounted for 44.9% of the company’s overall revenues, while international and government business checked in at 33.9% and 21.2%, respectively. In addition, Sourcefire also has a nice blend of product and service revenues, which stood at 59% and 41% of total revenues, respectively.
 
Over the past few years, Sourcefire has continued to develop new security products and services, while adopting an “Agile Security” vision in order to evolve with today’s rapidly changing market. In 2011, Sourcefire launched two innovative solutions into two adjacent markets - next generation firewalls and advanced malware protection. This effort is expected to increase Sourcefire’s addressable market from $1.7 billion to more than $10 billion over the next four years, the company noted.
 
Sourcefire also continues to grow its international presence, while expanding its relationships with partners, resellers, distributors, and government integrators. In 2011, Sourcefire launched its first North American distribution partnerships with recognized channel leaders, Synnex and Computerlinks, and is now making investments in these partners with the objective of increasing its percentage of channel-influenced revenue. The company also continues to add members to its distribution network. At the end of 2011, Sourcefire had agreements with 576 third parties for the distribution of its products, compared with 339 at the end of 2010.
 
Overall, we believe Sourcefire’s strategy to broaden in reach while expanding its current capabilities could be a nice model for smaller federal contractor’s to emulate moving forward. With shrinking budgets government-wide and increasing competition from larger players, smaller contractors may need to look outside-the-box, and seek cyber opportunities in commercial and international markets to continue their growth over the next few years. 
 
Also helping smaller contractors is a renewed emphasis on supporting and expanding the role of small businesses in government contracting, as Deltek discloses in its recent Small Business Federal Contracting: Trends and Drivers? report. The report discusses how federal agencies are participating in interagency groups to focus on communicating best practices and proven strategies for increasing small business utilization across multiple agencies, and how small business can achieve success going forward. 
 
Cybersecurity is getting attention at the highest levels, as contractors jockey for market share.  According to Deltek’s Federal Information Security Market, 2011-2016 report, cyber attacks are up 650% since 2006, as attackers continue to go after targets to disrupt government operations and U.S. critical infrastructure. However, while agencies continue to make incremental progress toward securing systems and data, environmental complexity, technical challenges, and workforce shortages have inhibited the federal government’s pace in implementing a comprehensive and cohesive national cybersecurity strategy.
 
While the strategic direction for cybersecurity seems to be hazy at the moment, the Obama Administration has clearly sated that cybersecurity a top-priority. As a result, almost every major IT firm is jockeying to contend for current and upcoming cyber-related opportunities, and we expect these opportunities to multiply over the next several years.
 
Sourcefire could be seen as an attractive takeover target. Since Sourcefire is a proven supplier with numerous government customers, it could be an attractive takeover target for a top-tier IT firm looking to expand its cybersecurity footprint.  IT contractors typically use strategic acquisitions to gain a foothold in growing markets, while broadening their offerings, and supporting organic growth.  
 
Overall, mergers and acquisitions activity in the cyber arena has continued to be robust this year, and we expect this trend to continue throughout 2012. Notable deals in the cyber arena include Dell’s purchase of SonicWall, and ManTech’s acquisition of HBGary.  Juniper Solutions has also been active on the cybersecurity front, acquiring Mykonos Software, while Salient Solutions has purchased ATS Corp. to enhance its cyber-related capabilities. We believe that M&A activity in the cyber arena will continue to be strong for the remainder of the year, as larger contractors look to expand their expertise in this growing sector while recognizing the vast number of smaller firms already working on the next cyber threat.
 
Our Take:
 
We think that Sourcefire has done a great job over the years in building its comprehensive portfolio of security solutions, while expanding into new and adjacent markets. We also like that Sourcefire has a well-diversified cyber portfolio split among the commercial, international and government markets, and close to an even split between its product and service revenues. Despite a tightening budget environment and competition from larger and better-funded rivals, we believe Sourcefire has what it takes to be successful in the ultra-competitive cyber market, and will continue to gain market share within this high-growth industry over the next several years. 

 

 

Cities overlook potential of business one-stops

While nearly every state has some sort of business one-stop in operation, major cities have overlooked their potential value. The U.S. Small Business Administration’s (SBA) Office of Advocacy has found that “(s)mall firm establishment births have a larger impact than any other factor examined on GSP (gross state product), SPI (state personal income), and total state employment.” So, it’s no surprise that governors have been touting the value of one-stops in both good times and bad. Kentucky is the latest state to carry out a major one-stop implementation as detailed in Deltek’s latest report, “State & Local Business One-Stops, 2012.”
 
In fact, what Deltek calls “Economic Development/Regulation issues” are the second most prominent item in the governors’ annual addresses, second only to education. Anecdotal evidence indicates that these same issues are second only to public safety at the local level. So, why is the market for one-stops so under-developed? Most likely major vendors are not wowed by the small price tag of one-stop implementations, which are often awarded to smaller, local integrators and web-interface developers. Some one-stops are deployed using only in-house resources.
 
However, timely research funded by the Kaufmann Foundation, which is devoted to promoting entrepreneurship, ranked the states and numerous localities on the “friendliness” of their licensing and regulation. Nearly half the states earned a “C” grade or worse with more than a few getting “D’s” and “F’s.” Results for the cities were equally troubling. These insights can be valuable to vendors looking to seed one-stop opportunities and make a name for themselves with senior decision makers in government.
 
Analyst’s Take:
  • While this data does not indicate business one-stop satisfaction for any given state or locality, it certainly appears that one-stop implementations have much potential as opportunities to help streamline business practices and provide more user-friendly interfaces.
  • Business one-stops have some relatively attractive “soft” (but convincing) return on investment (ROI) for a limited population of end-user business applicants. However, governors and mayors are very tuned in to this constituency. So, despite the modest price tag of business one-stops, they provide vendors with tremendous opportunity to build their reputations as solutions providers at the highest levels of the state and local marketplace.

Hawaii, living up to New Day Plan

Governor Neil Abercrombie identified three major priorities for the 2012 legislative session under the New Day Plan, with an ultimate goal to change Hawaii’s path by moving away from economic and social policies of the status quo. The governor’s three main priorities are:
1.     Immediate job growth to a sustainable foundation – Creating jobs for people so they are able to do more than just make ends meet. This is also expected to improve the business climate for entrepreneurs and small businesses.
2.     Invest in education, skills, and the well-being of Hawaii’s people – Building private-public partnerships in early childhood, health care technology, housing, preventative social sciences, and other previously indentified long-term priorities.
3.     Transform state government into an efficient and effective enterprise – Rehabilitating the state’s fiscal health, carefully managing cash flow, and professionalizing human resources management to bring out the best of Hawaii’s outstanding public workforce.
Governor Abercrombie achieved many high points during his first year in office under the New Day Plan. The state was initially up against a $1.2 billion deficit between December 2010 and June 2013; however, by the end of June 2011, the state entered the new fiscal year with positive general funding for the first time in three years. Abercrombie’s administration tackled the deficit by reducing the impact on public services. Figure 1, below, shows the state’s all-funds budget’s steady increase year after year.
Technology and innovation are a large component of Hawaii’s New Day Plan. For that, vendors should pay attention to each and every agency within the state. The interest in expanding technology shows the state’s confidence in using technology to increase efficiencies across agencies statewide. Much of the state’s FY 2011-2013 budget is devoted to this area, which suggests statewide opportunity for IT-related contracts.
For a complete analysis on Hawaii’s New Day Plan and upcoming technology initiatives, go here!

 

Opportunities beyond the portal: The importance of call centers in the insurance exchange initiative

States such as Oregon, Washington, and Nevada, that have either completed or are currently engaged in contracting for their health insurance exchange portal, will have opportunities for vendors to get involved in, particularly with call centers and consumer assistance. These types of contracts are an integral component to the insurance exchange initiative. Customers must be able to navigate through the portals and painlessly seek assistance if problems occur in their purchasing process. Under the Affordable Care Act (ACA), states are required to have toll-free telephone numbers to assist consumers and small employers in all phases of the exchange portal. If consumers are unable to compare and purchase plans with ease, meaningful use (a term coined by David Blumenthal) will be at stake. For that, states realize the importance of consumer assistance in their exchange initiatives.
 
Numerous states have expressed interest in contracting for insurance exchange call centers, including the following: Missouri, West Virginia, Nevada, Kentucky, Ohio, IllinoisWashington, CaliforniaIdaho, Maryland, Tennessee, Arkansas, Arizona, District of Columbia, Oregon, Pennsylvania, Rhode Island, and Delaware.
 
To learn more about insurance exchanges, download a copy of Deltek’s recent report, “Evolving Health Insurance Exchanges,” here. As always, be sure to follow Deltek’s Health Care and Social Services team on Twitter @GovWin_HHS and LinkedIn to get expert analysis of health IT initiatives across state and local government entities

Purchasing preferences for veteran-owned businesses on the rise

As the unemployment rate for Iraq- and Afghanistan-era veterans continues to climb, more states and localities are establishing purchasing preferences for veteran-owned businesses (VOBs). Current-war veteran unemployment is more than four percentage points higher than the national average of 8.5 percent. According to the Bureau of Labor Statistics, 13.1 percent (248,000) of current-war veterans were without a job as of December 2011. This figure is up from November’s 12.1 percent, and sharp rise from 2007 (6.1 percent), 2009 (10.2 percent), and 2010 (11.5 percent).
 
Results of the 2007 Survey of Business Owners (SBO), as part of the U.S. Census Bureau, show that 9 percent of businesses were owned by U.S. military veterans. These 2.4 million businesses employed approximately 5.8 million people and accounted for 4.1 percent of all business receipts nationwide, totaling $1.2 trillion. California, Texas and Florida reported having the most veteran-owned businesses across the states, and Los Angeles County, Calif., had more VOBs than any other county (62,667). Additionally, survey figures reported 32.5 percent, or one-third, of VOBs fell under the professional, scientific, technical services and construction fields.
 
Eleven states currently have legislation in place that gives some sort of preference to VOBs or service-disabled veteran-owned businesses (SDVOBs) in state procurement, according the National Veteran-Owned Business Association. These states include:
 
  • Alaska
  • Louisiana
  • Michigan
  • Minnesota
  • Missouri
  • Nevada
  • New Jersey
  • Oregon
  • Washington
  • West Virginia
  • Wisconsin
Furthermore, four states have laws that set aside at least 3 percent of spending for SDVOBs and VOBs: Arkansas, California, Illinois and Maryland.
 
Last month, New Jersey became the latest state to establish purchasing preferences for veteran-owned businesses. As part of the new Veteran-Owned Business Assistance Act, the New Jersey Department of Treasury will take special consideration of VOBs when awarding state contracts. The department is also required consult with the Economic Development Authority and the Department of Military Veterans Affairs (DMAVA) in an effort to rally more VOB participation in bidding processes.
Originally, the bill introduced by Ocean County, N.J., legislators proposed a mandated 3-percent set-aside for awarding contracts to VOBs. However, Gov. Christie vetoed the proposition, citing concerns regarding the overall needs of VOBs and the state’s ability to hire contractors.
 
Christie has been knee-deep in reviewing New Jersey’s procurement activity as of late. He just ordered a comprehensive review of all state purchasing laws and public contracting processes after a report revealed one in five multimillion dollar contracts, or 126 out of 553 purchases, violated state procurement laws. He attributes negligence to a majority of the infringements, though admits corruption probably plays a small part. Christie said he aims to simplify purchasing processes and better educate departments on best practices. He anticipates much of the procurement overhaul will be tackled by year’s end.  
           
Lastly, it looks like Hawaii will be the next state aboard the VOB-preference train. The state’s House Republican Caucus recently introduced a bill requesting that 3 percent of all state contacts – approximately $33 million a year – be awarded to Hawaii-based VOBs. If passed, the bill would authorize a 4.5 percent preference for VOBs and a 5 preference for SDVOBs. The state currently has an estimated 10,300 VOBs and would become only the fifth state to establish a procurement-percentage mandate for VOBs.
 
Military preference in state contracting is sure to rise as more veterans return home amid an economic downfall. In November, President Obama signed the Veterans Opportunity to Work (VOW) to Hire Heroes Act into law. The act establishes tax incentives for businesses that hire veterans who have been unemployed for at least a month, with even greater tax credits granted to businesses who hire veterans out of work for at least six months. Additionally, the tax break doubles for disabled-veteran hiring.
 
The VOW act is yet another example in the nationwide effort to acknowledge and protect veterans after they’ve completed their service. From a national, state, and local level, more government entities are reviewing current practices in an attempt to better recognize veteran workers and their businesses. While it may draw criticism from those who oppose preference policies, it is anticipated that more veterans will see an uptick in contracting and employment as states try to bridge the gap between military service and getting back to work. Therefore, vendors outside of the preferential base should consider teaming or partnering with veteran-owned businesses to give their solutions a leg up in the market.

 

Local purchasing preference in state and local contracts

In order to grow local economies and tax revenue, many state and local governments now take the location of a vendor into account when making procurement decisions. Law and ordinances called purchasing preferences are being implemented across the county in order to give local vendors a leg up in contracting and thus assist states and localities in generating jobs and revenue.

                                                                                                                                                  

In 2010, the Virginia Department of General Services compiled a table of 38 states’ purchasing preferences. Preferences vary widely across governments, from general needs to specific good and services. Some apply to all bids, while others apply only to contracts worth more than $50,000 or construction projects.

 

The city of Los Angeles, Calif. recently passed an ordinance that gives Los Angeles-based vendors an 8 percent advantage for bids on city projects worth more than $150,000. For example, a $1 million bid from a local vendor would be evaluated at $920,000. To qualify, businesses must have an address in Los Angeles County and have either 50 full-time employees or half of their full-time employees working 60 percent of the time in the county. The ordinance will go into effect on November 24, 2011. Sponsors of the ordinance believe the new policy will bring in more revenue through sales, property and other taxes from local business employees. GovWin is currently tracking an estimated $14.2 million worth of Los Angeles contracting opportunities that will be affected by this ordinance.

 

New Mexico also recently passed a law that revised its purchasing preference policy. The state extended its 5 percent bidding preference for in-state vendors to include state contracts for accounting, architecture, law, and information technology. The revision also eliminated a $5 million bid cap included in the original preference. According to bill co-sponsor Senator Timothy Keller, this law will create at least 3,000 jobs each year. The law also stiffens the requirements to qualify as a resident vendor by requiring companies to prove they have leased or owned property in New Mexico for at least five years, paid taxes to the state, and have at least three full-time employees who live in the state. GovWin is currently tracking more than $1 billion worth of New Mexico contracting opportunities that could be affected by this law.

 

In response to local preference purchasing polices, governments have created reciprocal preference policies that require public contracting agencies to add a percent increase to each out-of-state bidder's price that is equal to the percent of preference given to local bidders in the bidder's home state. That is, if the low bidder is from a state that grants a 10 percent preference to its own in-state bidders, the contracting agency must add 10 percent to that bidder's price when evaluating the bid.

 

Analyst’s Take:

 

State and local governments have not sat idle on the sideline while the federal government and big corporations garner most of the job creation and economy-related headlines. They were hit extremely hard by the Great Recession and continue to struggle to keep their books in order as federal aid dries up. State and local governments’ tax revenues are largely tied to economic performance, and right now they cannot afford to wait around for other entities to spur economic growth. Purchasing preferences are tools utilized in an attempt to create jobs and boost local economies. States and local entities need to be efficient and receive the best bang for their buck, as one wrong deal can have devastating effects (see Jefferson County, Alabama).

 

When bidding on a contract, it is imperative that vendors know the contracting government’s preference laws in order to truly know how a bid will be evaluated. Knowing a bid will be evaluated at 10 percent less or more can completely alter a proposal. Though governments are looking for the best value, it is also important to recognize that it’s not always about the lowest bid. Vendors who know all the rules and laws at hand will have a commanding advantage and be more likely to succeed in the current competitive landscape.

STARCOM 21 Resurfaces

The state of Illinois' STARCOM 21 project that roared with controversy earlier this year has resurfaced once again. A lot of backlash resulted from STARCOM 21's $114 million soul-source contract to Motorola, awarded in May, but that hasn't stopped the project from expanding. Illinois recently decided to contract out radio equipment compatible with the STARCOM 21 network through a new invitation for bid (IFB) released on September 13, 2011.

Initially, Harris Corporation filed a formal protest alleging the awarded Motorola contract was a monopoly and bypassed open competition between vendors. The STARCOM 21 network services more than 18,000 subscribers and is owned and operated by Motorola. The intention of the past state procurement was to allow continued use of the existing STARCOM 21 network in order to maintain infrastructure and leverage the original investment.

The new solicitation is looking to establish a statewide indefinite quantity master contract(s) for the purchase of STARCOM 21 compatible subscriber radio equipment (P25) along with associated installation, extended warranty, parts, and accessories for various state agencies, officials, boards and commissions. All radios must be FCC type-accepted and PC programmable. Proposals are due October 4, 2011. Vendors with equipment not currently approved for the STARCOM 21 network are eligible to bid, but must have the equipment approved to operate on the network after the award is posted.

Analyst's Take

With this contract being more equipment-based as opposed to infrastructure-related, this may be an opportunity for new vendors to gain the upper hand. It is likely that big-name corporations such as Motorola or Harris Corporation may not even bid on this contract. Although much controversy may not arise this time around, it is still important for vendors to thoroughly research before bid proceedings. Vendors should find out what most satisfies the customer and then properly gauge their pricing accordingly. Also, it is always important to be aware of protest procedures in the event a contract is deemed unfair.

Obama American Jobs Act: Contractor Implications

On Thursday night, President Barack Obama revealed the American Jobs Act, an ambitious $447 billion package of spending plans and tax cuts designed to stimulate the U.S. economy and create badly needed jobs. And according to Obama, the plan will be paid for in full by rolling it into the list of spending to be offset by the Joint Committee focused on a deficit reduction plan.

Overall, Obama pushed for more federal spending to help jump-start the economy, although he avoided the word "stimulus," which has become an issue with Republicans. Clearly, the GOP will continue to oppose anything resembling the last stimulus, and is quite weary of the threat of continued out-of-control spending.

Below are some key points from Obama's speech which could affect the government contracting community:

  • Helping Small Businesses – As part of his infrastructure revitalization plan, Obama called for significant investments in schools, roads, rail and airports while helping small business contractors compete for infrastructure projects. He also called for tax cuts, reforms and regulatory reductions to help entrepreneurs and small businesses access capital and grow, which could benefit smaller contractors just getting started and those looking to expand their operations.

    Contractor Impact: Obama's plan includes changing the way the government does business with smaller firms. The Administration will soon announce a plan to accelerate government payments to small contractors to help put money in their hands faster. The President is also charging his CIO and CTO to, within 90 days; stand up a one-stop, online portal for small businesses to easily access government services.

  • Transportation Infrastructure - Transportation infrastructure presents a double opportunity for Obama - a chance to get Americans working, while modernizing the U.S.'s deteriorating infrastructure. In total, Obama called for $50 billion to be spent on immediate investments for highways, transit, rail and aviation. The President's plan includes investments to improve America's airports, support NextGen Air Traffic Modernization efforts, and resources for the TIGER and TIFIA programs, which target competitive dollars to innovative multi-modal infrastructure programs. Another $10 billion will be spent on an infrastructure bank to help get private funding to support infrastructure-related projects.

    Contractor Impact: Infrastructure work would benefit AEC contractors over the next several years. According to Deltek's "Federal Architecture and Engineering Market Outlook, 2011-2016" report, demand for architecture and engineering (A/E) services by the U.S. government will increase from $8.1 billion in 2011 to $9.5 billion in 2016 at a compound annual growth rate (CAGR) of 3.2%. As transportation infrastructure modernization progresses, so does the embedded technology, which could mean additional opportunity for technology contractors.

  • School Infrastructure - Obama also wants to create jobs to work on construction projects at thousands of deteriorating schools, with rural and Bureau of Indian Education funded schools having top priority. Obama aims to invest $25 billion in school infrastructure, including Internet-ready classrooms. He also emphasized the need to rehire teachers who have been laid off, and will look to spend $35 billion to help protect those teachers.

    Contractor Impact: Infrastructure work would benefit AEC contractors and firms that could provide IT enhancements and upgrades. Projects would include energy efficiency upgrades, modernization of science and computer labs and technology upgrades.

  • Expanding access to high-speed wireless - The President is calling for a deficit reducing plan to deploy high-speed wireless services to at least 98% of Americans, including those in more remote rural communities, while freeing up spectrum through incentive auctions, spurring innovation, and creating a nationwide, interoperable wireless network for public safety.

    Contractor Impact: There is opportunity for not only companies that provide wireless network capabilities, but also adjacent technology areas that would be facilitated by broader access, such as telehealth and telework.

  • Supporting the Unemployed – The President proposes an overhaul of the Unemployment Insurance program, extending benefits and giving states more responsibility and flexibility to design better programs for reemployment, particularly for the long-term unemployed. There are some 6.2 million Americans who have been out of work for more than six months. States would also have the flexibility to help long-term unemployed workers create their own jobs by starting their own small businesses.

    Contractor Impact: Depending on the scale and nature of the overhaul, states may need assistance in developing, implementing and monitoring new programs and information.

  • Creating Tax Benefits: The Act has several tax incentives for businesses to spur hiring:

    • Payroll taxes - Topping the President's jobs initiative is the cutting of payroll taxes. The plan is to expand cuts worth $240 billion so that workers could expect to see their share halved through 2012. This provision would also cut the payroll tax in half to 3.1% for employers on the first $5 million in wages.
    • Tax Credits for Hiring the Long-Term Unemployed - President Obama's plan would also give companies a $4,000 tax credit for hiring from the 5 million, long-term unemployed Americans.
    • Tax Credits for Hiring Veterans - The unemployment rate for U.S. veterans below the age of 30 hovers around 24%, and that rate could expand. Currently, there are 2 million veterans of the Afghanistan and Iraq campaigns back home. But once those missions fully draw down, that number could easily double, reports say. The "Returning Heroes tax credit" will set aside $5,600 to $9,600 to encourage the hiring of unemployed veterans.

    Contractor Impact: Tax incentives are useful to any company struggling with cashflow issues.

Spending Summary

Source: White House Office of the Press Secretary

The biggest criticism of the plan that seems to be leading the online debate is the tax credit element, the argument being that businesses only hire when the demand for their product or service is there, not simply to take advantage of tax credits. I tend to believe this will be true, except for those specific areas of investment that will drive demand and therefore the need to hire (e.g. transportation, education, wireless). Driving demand for struggling businesses in flattened industries outside of these will be an issue.

In the current environment, the first question might be "how will the government pay for all of this?"To pay for the plan, President Obama is calling on the Joint Committee that is currently working on a deficit reduction plan (required as part of the debt ceiling agreement) to find additional cuts. Obama noted that in the coming weeks, he would further outline his deficit reduction plans.

So what are the chances of this act passing Congress? Considering the level of contentious debate that has occurred since the 111th Congress was formed, particularly around budget-related legislation (e.g. FY11 budget, debt ceiling), this bill will likely face the same level of scrutiny. However, there are no less than 26 other job bills that were introduced and stalled in Congress in 2011 (some of them with very interesting names such as the "Keep American Jobs from Going Down the Drain Act of 2011," and "Don't Default on America's Debts and Destroy American Jobs Act of 2011").

I'm sure President Obama is hoping for the "Can We Please Just Pass This Bill Without Drawn Out and Stubborn Debate Act of 2011." And he may get his wish. Spurred by plummeting Congressional approval ratings, negative public perception and plain old weariness of continuous head-butting over numerous issues, Congress may be more willing to compromise than we've seen on any other issue in 2011 - as long as Obama's plan to pay for it comes to fruition.

Minnesota shuts down government; Gov. Dayton and legislature cannot agree on budget

By: Chris Cotner and Randi Powell

In a press release dated June 30, 2011, Minnesota Governor Mark Dayton said, "I deeply regret that the last week of intense negotiations between Republican legislative leaders and Senator Bakk, Representative Thissen, and myself have failed to bridge the divide between us." He continued, "Our major difference remains the same. It is the difference between my balanced approach of significant spending cuts combined with income tax increases only on the very wealthiest Minnesotans, versus the Republicans' 'all-cuts' budget."

Taxes and spending are at the conflict's core. Dayton wanted to cut less and tax more. The Republicans rejected tax increases and wanted to cut. Both are trying to reach the goal of fixing an approximated $3.6 billion budget shortfall.

However, this seems beyond the pale of partisan politics, with the governor blatantly calling out his opposition and blaming their perspective for the government having to shut down critical functions. His criticism is direct and biting deeper in the release, twice calling the Republicans "adamant" in their stance against the budget; accusing them of "protect[ing] the richest handful of Minnesotans at the expense of everyone else;" accusing them of protecting their "rich" friends; and, in case you missed his primary point, four times he blasts "so that millionaires do not have to pay one dollar more in taxes." The Republicans have outright refused to raise any taxes and defiantly refuse passing any portion of the governor's budget that attempts to do so. As momma used to say, "It takes two to tango."

To keep all parties informed, the Minnesota Department of Administration Commissioner Spencer Cronk, who oversees state procurements, released a public notice about a contingency plan concerning all contractors, vendors, and grantees with a contractual relationship with the state on June 3, 2011. Cronk also advised all state agencies to communicate directly with any vendors beforehand and inform them of what to expect should the state government shut down. The Materials Management Division (MMD) has tried to keep a handle on widespread panic by communicating with vendors early and often. The MMD has been posting information for vendors on its website for the worst case scenario since late May.

Since the state failed to authorize appropriations prior to the July 1st deadline, the suspension of work activities and state payment has taken effect for all current "noncritical" contracts. However, the MMD hopes for a quick resolve so that it may salvage vendor relationships and get back to business. In the meantime, the state has pushed the message that cancellation and termination clauses will not be invoked by the state at this time. Vendors who opt to terminate their contracts during this limbo period may have to start the solicitation process all over again once the shutdown is resolved. If you suspend your contract for the interim, the most hassle a vendor is likely to face is an amendment to the existing contract.

For "critical" functions and health and safety services, a judge's injunction authorizes a very limited amount of public funds to be disbursed after June 30, 2011. So where do IT services fall into this definition of critical? According to the state, because master professional and technical service contracts are based on work orders, these contracts will continue to exist without suspension. However, the work orders issued under those master contracts will be reviewed on an ad-hoc basis to determine if the services requested are considered critical and eligible for emergency funding.

What you can expect to shut down:

  • Any department without reserves to carry them through the crisis, which means most state offices will have to shut down when their reserves run dry
  • State road construction
  • State parks
  • Highway rest stops
  • Social services – job training
  • Social services – homelessness prevention
  • Professional licensing
  • Between 20,000 and 23,000 state employees will go home with no pay, but with health benefits extended

What you can expect to remain open:

  • Per judge's injunction, basic health and safety service
  • Universities
  • Prisons
  • Nursing homes
  • Care for individuals in custodial relationships with the state
  • State police

Chris' Take

Egos, dogma, and ideology aside, the state has a budget deficit to solve (to the tune of $3.6 billion) that will require real solutions (currently solutions leave a gap of $1.4 billion between them). Did I mention that the people have already taken to the streets in protest in Minnesota? Anybody remember Wisconsin earlier this year? This is not ending well.

There are only a few ways to do this with budget math: increase real revenues (e.g., increase taxes or fees), increase projected revenue (e.g., budget analysts can project that the state will actually have the funds available when it is time to use them), borrow (e.g., loans from the feds or bond referenda), decrease expenses (e.g., downsize or outsource government), or shut down the government. Unless this shutdown results in more efficient government providing greater service and business opportunities in the state, this is a lose-lose situation. As one CNN interviewee (a state employee) said, "It is a sad commentary on politics. It has turned into a sport rather than working to solve a problem." Some might call this a political blood sport. The end sum is that political blood baths are usually bad for business prospects.

Short term - Projects will shut down. Procurement ends. Hiring ends. State workers will not have paychecks to pay their bills. Services simply will not happen.

Longer term – Massive political capital expenditures that will likely result in some political realignment in the state (look to see who best markets this in the political sphere). Some projects may need to be rebid. Some projects may lose funding and never receive new funding. Some companies will drop out of the Minnesota market due to lost contracts or frustration with the market. This competition downsizing will open future opportunities. As government is downsized, look for increased IT efficiency measures, including some possible outsourcing opportunities; Minnesota will be ripe for it if the ship is not easily righted.

Democrat win – Taxes on wealthier individuals (0.3 percent of the population) will increase. Cuts will not be as deep. Republicans are currently refusing any conciliation on tax increases. Business and projects will mostly continue as projected.

Republican win – No new taxes. Deep cuts to K-12 education, higher education, public safety, mass transit, and social services.

Future business prospects – Minnesota's economy ranks strongly for business as projected by recent GovWin analysis, which rates the state at least a B (no states are currently higher than B+ in this recession). The shutdown could damage that as companies and citizens take their business elsewhere (California is a recent example). However, this could easily be good news for the IT business community. In such a quandary, there will likely be proposals in next year's budget (FY 2013 and beyond) for IT projects geared toward efficiency. I would also expect some discussion on privatization of certain segments of state business. Contractors can take advantage of this by meeting prospects in the government to educate them on available solutions and collaborate on possible partnerships or joint ventures.

Randi's Take

While Minnesota's forthright and transparent approach during this difficult time is commendable, no matter how well the state handles this crisis, contractually it could end up costing them heavily. If the state shutdown is short lived, most vendors are expected to stay on board. However, if this situation is drawn out, I can imagine most of the pressure will be put on small to medium-sized vendors who won't be able to stay afloat without payment. More prominent vendors with substantive cash reserves will be able to pay their employees and keep the lights on if the state legislature and governor prolong the budget battle. No matter how you look at it, this is a bad situation for the state and its contractors.

To learn more about the state of Minnesota, go to its GovWin State Profile

To learn more about Minnesota's Biennium Budget, go to its GovWin Budget Profile

Follow Chris Cotner on Twitter

Follow Randi Powell on Twitter

Source: GovWin, Governor Dayton's Press Release [June 30, 2011], Minnesota Materials Management Division website [July 1, 2011]

IT Implications of Rahm Emanuel's Victory in Chicago

Rahm Emanuel's victory in this Tuesday's election for mayor of Chicago, bodes well for IT vendors. His campaign agenda was filled with items in the Community Development, Economic Development/Regulation, General Government Services, and Justice/Public Safety verticals. His victory, along with Mayor Gray's (2010) in Washington, D.C., proves that IT remains a key area of investment for America's major cities despite the economic downturn. As with the election of Gov. Quinn (2010), the spotlight is on procurement reform and ethics for government as the state and city seek to reverse their historic (and somewhat overblown) reputations for corruption.

Below are a sample of the agenda items culled from mayor-elect Emanuel's campaign platform with the most direct IT implications.

Community Development

Help all building owners by expediting the development of an online one-stop-shop for building owners.

Make the zoning and business license process more transparent.

Create an online portal to track zoning decisions

Economic Development/Regulation

Cut bureaucratic red tape and streamline business permitting, regulation and inspections.

Make it easier to work with the City establishing an on-line, one stop for businesses.

General Government Services

Overhaul Chicago's broken procurement process.

Make Chicago's contracting process fair and efficient to save $20 million

Open city budget data to public review.

Create an online database of lobbyist activity.

Rein in no-bid contracts and increase transparency.

Crack down on abuse of minority-and women-owned business status.

Enhance compliance with the Freedom of Information Act.

Make all TIF information available for taxpayer scrutiny and move TIFs "on budget."

Justice/Public Safety

Integrate child intervention programs across departments.

Increase efforts to trace weapons that are used in crimes and push to publicly release that information.

To help cops on the beat, Rahm secured funding for CLEAR – a computerized information system that improves information sharing between criminal justice agencies at the local, state and federal level.

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