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CSC in Turnaround Mode: Can Troubled Firm Dig Out of Current Hole?

Over the past few months, FIA has been examining how various vendors have been performing in the federal contracting marketplace, and detailing the steps these firms are taking to achieve success going forward.
In this week’s installment, we would like to shine the spotlight on Falls Church, Va.-based Computer Sciences Corp., which has been restructuring its operations over the past few months in an effort to turn things around.
A few weeks ago, CSC hired Gannett Co. Chief Financial Officer Paul Saleh to become its CFO after an extensive search to replace Mike Mancuso, who is expected to retire after the company files its annual report.
FIA Perspective:
CSC taking steps on road to recovery. On its earnings conference call last week, new CSC Chief Executive Mike Lawrie said the IT firm was in a "turnaround situation” and taking “immediate actions to begin to move in a different direction."
As part of its restructuring, Lawrie said CSC plans to cut expenses by $1 billion over the next 12 to 18 months, noting that it would take a look at selling "non-core" assets, and quickly assemble a new management team to help engineer the turnaround effort in the coming weeks.
Lawrie also mentioned that CSC is currently renegotiating the multibillion-dollar NHS contract, and expects to sign an interim agreement amending the terms of that agreement in the "not-too-distant future." He also noted that CSC has uncovered about 40 other underperforming contracts, and that it’s in the process of taking steps to remedy those issues as well. These troubled contracts represented about 20% of CSC’s total revenue in fiscal 2012, and generated an operating loss of $100 million to $200 million.  
On a more positive note, Lawrie said that CSC’s new business bookings were “very positive” at $19.3 billion for fiscal 2012, a 30% increase over fiscal 2011. This increase reflects income from 150 new commercial clients, as well as successful re-competes and a lot of new scope work. He also noted that CSC has more than $28 billion in its qualified pipeline, while touting increased opportunities in the areas of cloud services and cybersecurity.
Previously, Lawrie had predicted a “pretty significant turnaround effort” for the troubled company, while making plans to address profitability concerns and expanding CSC’s business into higher profit services. Lawrie is a former IBM executive who took over the reins at CSC in March.
CSC records major loss in 4Q. In the latest fourth quarter, CSC posted a net loss of $158 million, or $1.02 a share, swinging from a profit of $171 million, or $1.09 a shares, in the previous year’s comparable quarter. At the same time, the company’s revenues slipped 2.1% from a year ago to $4.1 billion.  
CSC attributed the company's issues in the latest quarter to the troubled NHS contract, and difficulty managing costs and "headwinds" in its business with the U.S. federal government and in Europe. As mentioned, CSC has had difficulties in managing the massive NHS contract, which involves implementing a system for managing digital medical records for Britain’s National Health Service.
At the end of the latest quarter, CSC had total backlog of about $26.4 billion.
Our Take:
Overall, it will be interesting to see if CSC can turn things around with the current restructuring plan they have in place, especially given the increasingly competitive and evolving federal market. While CSC is still a major player in the government IT market, we believe it will take the company some time to adjust to new management and address its numerous issues before it can once again succeed moving forward.

California governor proposes permanent funding for public safety in revised budget

Earlier this month, California Governor Brown released a revised budget proposal after the state’s deficit grew to $16 billion, an approximately $7 billion increase from the January 2012 projection. Brown said protecting education and public safety are his number one priorities.
Brown proposed a permanent funding source for the 2011 public safety realignment, which shifts criminal justice responsibilities from the state to localities. The realignment affects court security, lower-level offenders and parolees, mental health services, substance abuse treatment, and adult protective services.
Brown attributed the increased deficit to two things: lower tax revenues and federal courts blocking cost-cutting measures.
To combat the larger deficit, Brown proposes increasing revenues and making more spending cuts. Under an initiative on the November ballot, citizens will vote to increase income taxes on the highest earners by up to 3 percent for seven years, and also to increase the state sales tax by a quarter percent for four years. If the tax initiative is not approved, a series of deeper cuts will take effect January 1, 2013.
Analyst’s Take
A permanent funding source for the 2011 realignment would be a welcomed resource for localities, as it would provide them with stable, known, and reliable funding. A stable and known funding source would allow localities to plan into the future more effectively and hedge against the volatility of other funding sources. The 2011 California public safety realignment pushed more responsibilities to localities to increase levels of service, eliminate the duplication of effort, and increase flexibilities. With more responsibilities, local public safety agencies will likely need increased assistance from vendors providing cost-effective technologies and market expertise.

Big cuts to Illinois' Medicaid

Shortly after blogging about Illinois’ budget deficit, House lawmakers approved $1.6 billion in Medicaid cuts yesterday, adding a $1 per-pack cigarette tax to increase revenue. Reductions in eligibility, provider rates, and cutting/eliminating programs make up the approved cuts, with other parts of a $2.7 billion Medicaid reform package waiting to be passed. These reforms have been a mainstay in Illinois Medicaid Advisory Committee (MAC) discussions for the past year. The Department of Healthcare and Family Services (HFS), responsible for Medicaid, was underfunded by almost $2 billion this year, which combined with the end of an enhanced federal match. MAC estimates that at the end of this fiscal year, HFS will have about $1.8 billion in unpaid bills.
HFS utilized the Civic Federation to crunch budget numbers and create a five-year plan predicting outcomes if the state did not make any changes to its current Medicaid practices. This amounted to $22 billion in unpaid bills, meaning vendors would not be paid for a year. MAC looked at:
  • Reducing eligibility for children from 300 percent to 200 percent of the federal poverty level (FPL)
  • Reducing eligibility for family members enrolled in FamilyCare from 185 percent to 133 percent of the FPL
  • Reducing eligibility for state-only funded programs
Cutting optional services such as prescription drug coverage for adults represented a savings of $800 million. If all adult options were eliminated, project savings would be $1.9 billion. MAC is also looking into Medicaid utilization controls for further savings.

Illinois is currently procuring a phased Coordination Care Innovations Project, in which the state is looking to redesign its health care delivery system with a more patient-centered model to improve health outcomes, enhance patient access, and patient safety. The state is seeking a coordinate care system with emphasis on managing transitions between physical and mental health and substance abuse. The first-phase solicitation received 70 letters of intent to participate in the innovations project for adults. The next phase will be for care for children with complex health needs, and a separate solicitation for dual Medicare/Medicaid care integration.

Inmate Trust-Fund Contracts: Fast Awards, Long-term Potential

Procurement time frames can vary significantly depending on many factors including whether the project is a rebid of a current contract or a new purchase, as well as the size and type of the procuring agency or department. However, the primary driver in determining how long a procurement process will last is the type of technology being solicited. Complex system build outs like those involved in radio system procurements are often open for several months. Simpler purchases, particularly for commercial-off-the-shelf (COTS) products, can sometimes take only a matter of weeks.
Inmate trust fund or commissary accounts contain money that can be used to purchase items in a prison commissary and to make phone calls. The average inmate trust-fund account procurement is open for approximately 24 days from the time the solicitation is released to the time when proposals are due. While it is never out of the question, the majority of inmate trust-fund account procurements do not hold a pre-proposal conference; however, if a conference is held, it is usually held sometime during the second week of procurement. Due to the common nature of these types of contracts, it is unusual for a consultant to be hired prior to the purchase of a system.                                                                                                                           
Subscribers have access to the full article, here.

Ohio’s Blue Alert program to launch in early June

Earlier this year, the state of Ohio signed into law Senate Bill 258 to establish a Blue Alert warning system within the state. On June 8, the legislation will go into effect. Ohio joins 13 other states with Blue Alert programs in place, but with many states without programs, support for a national system has been generated to further the ensure the safety and security of officers.
The National Blue Alert Act was recently passed by the House of Representatives and endorsed by several law enforcement organizations including Concerns of Police Survivors (C.O.P.S), the Federal Law Enforcement Officers Association, the Fraternal Order of Police (FOP), the National Sheriffs’ Association, and the Sergeants Benevolent Association.
According to C.O.P.S., most statewide Blue Alert systems require four criteria for an alert to be issued:
  • A law enforcement officer must have been killed or seriously injured by an offender.
  • The investigating law enforcement agency must determine that the offender poses a serious risk or threat to the public and other law enforcement personnel.
  • A detailed description of the offender’s vehicle, vehicle tag, or partial tag must be available to broadcast to the public.
  • The investigating law enforcement agency must recommend activation of the Blue Alert to the state operations center.
Most Blue Alert systems are integrated with existing technology that is used by police departments and state highway patrol; therefore, it is not common for departments to procure any additional technology or equipment. For example, the state of Ohio will link its new Blue Alert program with existing capabilities in the Law Enforcement Automated Data System (LEADS), the Ohio Law Enforcement Gateway (OHLEG), and other systems used for Amber Alerts and warnings. 
Analyst’s Take
Since most Blue Alert systems are not publicly procured, agencies looking to get into the market should look for opportunities for upgrades to current warning systems and systems integration assistance that may be needed for the alerts to function. As Blue Alert programs gain popularity across the county, more states may look into pilot programs to test the systems as well as partnerships and additional ways for alerts to stream across neighboring states. Blue Alerts can be implemented at a very low cost for departments since most alerting is done via voice communication, and costs are further reduced when the alerts are integrated with existing Amber or Silver alerts.
For more information on Blue Alert warning systems, go here.

How Does Industry Fit into “Shared First?”

OMB’s release of the final Federal Information Technology Shared Services Strategy early this month, left many wondering about industry’s role in the initiative. As agencies identify shared services opportunities and begin to embrace the concept, OMB believes opportunities for industry will increase.
In an effort to reduce wasteful spending that results from building duplicative IT solutions, OMB is pressing agencies to adopt a business driven approach to shared IT services across government. Savings gained through implementation of shared services will allow agencies to invest in innovative mission systems. The Shared Services Strategy strives to facilitate a cultural shift when it comes to viewing federal IT portfolios and needs. 
During an AFFIRM panel discussion last week, Scott Bernard, the federal chief architect at OMB, stated that unlike the former line of business (LOB) shared services initiatives where public and private sector providers existed, OMB is not differentiating between the two. The strategy diagrams the basic shared service roles as follows:

The managing partner establishes and maintains an IT shared service and may be referred to as the program management office (PMO). The managing partner develops, implements, and maintains financial and service models as well as contracts with customers and suppliers. The customer is the federal agency or sub-organization that contracts with and pays a managing partner to receive an IT shared service. The supplier is a government or commercial organization that provides the actual IT shared service to customers. Statements of Work and Service Level Agreements are maintained between the managing partners and suppliers. Bernard stated, “It’s my opinion in many cases, not all, but in many cases the supplier role will be filled by an industry provider.”  
The Office of Federal Procurement Policy, in conjunction with federal CIO Steven VanRoekel, is working to develop contracting approaches or templates that give departments and agencies more flexibility to join or leave a shared service in order to more easily switch from poorly performing contractors.
Agencies will use the PortfolioStat sessions, comprehensive reviews of IT investment portfolios, to determine where shared services opportunities exist.
According to Andrew McMahon, the PortfolioStat lead for OMB, the administration is indifferent about who provides the shared services, and because of new technologies, there could be different levels of providers.   These technology innovations and differing levels of service and providers may present additional opportunities for vendors.
Agencies have four shared services deadlines this summer: 
  • May 31st - Agencies must submit to OMB a high level portfolio survey of their internal lines of business, where they can identify potential opportunities for consolidation to a shared service provider.
  • June 15th - Agencies must send to OMB a list of commodity IT areas ripe for consolidation.
  • June 29th – Agencies must submit a draft plan to consolidate commodity IT. 
Deltek predicts, as agencies embrace shared services, increased opportunities will emerge for contractors, especially those currently providing shared services.   But work may decline for those providing services to agencies who make a jump to a shared service model with another agency. Some agencies may be positioned to become providers of IT shared services for other agencies, which might further erode work available for the contracting community. Finance and human resources have been the first functions agencies have ported to a shared services model. Contractors can expect more shared services activity in these areas, as well as areas such as website and content management; e-mail, help desk, and collaboration; and infrastructure and asset management.


The Federal Digital Strategy: Innovating and Architecting for the Future

Last week, Federal CIO, Steven VanRoekel, and Federal CTO, Todd Park, announced that OMB had finally released the new federal digital strategy, entitled "Digital Government: Building a 21st Century Platform to Better Serve the American People." The strategy is a game-changer and fundamentally is about collaborating and architecting so that moving into the age of mobility is “done right.”
Earlier this year, VanRoekel announced that a coalition of agency executives (the cross-governmental Mobility Strategy and Web Reform Task Forces) were working on a new mobile strategy that would be released in mid-March. Most were looking for it to provide guidance on mobility for federal employees, especially guidance on BYOD. However, the strategy morphed into a broader and more important digital strategy that embraces the Internet and mobility—the way people increasingly communicate, work and live today—as a primary means for the federal government to receive information and more quickly delivering services to citizens at lower costs. The emphasis is on multi-modal delivery of information or making government information and services accessible to citizens anywhere, anytime, on any device.”   Doing so at lower cost is critical to the strategy as well, which emphasizes “innovating more with less” and sets the stage for innovators in the federal government and private sector to work together to propel the federal government forward and “leverage government data to improve the quality of services to the American people.”
The strategy recognizes the accomplishments of leading-edge agencies, but points out that innovation can create the same types of silos, or out-of-control growth (such as the proliferation of domain names and rouge websites) they have wrestled with in the past. Instead the strategy emphasizes coordination; “to keep up with the pace of change in technology, we need to securely architect our systems for interoperability and openness from conception. We need to have common standards and more rapidly share the lessons learned by early adopters.”
The strategy puts forth a conceptual architectural model for separating information creation (the information layer) from information presentation (the presentation layer). The idea is to create content once for reuse and presentation in a multitude of ways. The focus shifts to data availability and veracity and interoperability. This involves creating and tagging discrete pieces of data and opening up systems with web APIs so that the data can be securely shared, through a shared platform, mashed-up, and presented as content to end-users. This approach also supports open standards and device-agnostic security and privacy controls at the data level, so that agencies can concentrate on securing the data and not the device.
Shared Platform:
With a shared platform agencies can reduce costs through shared or streamlined development, using consistent standards in the creation and delivery information while ensuing security and privacy of data. The approach should be “customer-centric” taking an outside-in viewpoint of ease of use as a customer accessing federal sites and data.  A shared platform will enable agencies to speed adoption of new technologies, while also lowering costs and reducing duplication. GSA will establish a Digital Services Innovation Center to work with agencies on shared solutions and training to sup­port infrastructure and content needs that will focus on three initial strategy implementation actions:
  • Identify shared and open content management system (CMS) solutions and support implementation, through things like code sharing and modular development.
  • Help agencies develop web APIs by providing expert resources to enable developers, entrepreneurs, and other end users take advantage of government data and content.
  • Launch a shared mobile application devel­opment program, with the Federal CIO Council, that will help agencies develop secure, device-agnostic mobile appli­cations.
Also to support a shared platform, a Digital Services Advisory Group made up from members from the CIO Council will also be formed that will:
  • Help prioritize shared services needs for the Digital Services Innovation Center and work with them to determine the best shared solutions that leverage existing agency work and commercial options to the extent practical.
  • Foster the sharing of existing policies and best practices using online platforms and communities of practice to provide more struc­ture to existing ad-hoc collaboration efforts. For example, the Advisory Group will work with the Federal CIO Council to develop government-wide BYOD guidance.
  • Identify and recommend changes to help close gaps in policy and standards. For instance, revising policies governing identity and credential management for a mobile world or revising telework rules.
This approach is fundamentally different from the approach that most federal agencies have now as they piece together silos of information or applications as best they can and force their customer citizens to navigate the patchwork to deal with them. This should open many opportunities for vendors, initially in the area of consulting and planning but followed rapidly by actual implementations. Watch for agencies to move quickly as Obama also issued a directive for agencies to open data in two systems within one year. 



Hawaii embarking on several health-related initiatives

Deltek recently concluded its in-depth FY 2013 budget analysis, and found that much money is being devoted to health agencies across the nation. For example, Hawaii is looking to transform health care and the future of its citizens with the New Day Plan, which contains the following areas of focus:
1.Immediate job growth to a sustainable foundation – Creating jobs for people so that 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 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 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.
Hawaii has been embarking on several health-related projects across the state, including a significantly large one for its Med-Quest Division (MQD). MQD is responsible for all medical assistance programs, including Medicaid and the Children’s Health Insurance Program (CHIP). More than 95 percent of Medicaid recipients in Hawaii are enrolled in managed care plans. The Hawaii Department of Human Services (DHS), which is comprised of two organizations that provide public assistance programs to Hawaiians, is currently procuring for consulting services relating to its MQD project. The main objective of the project is to replace the state’s Medicaid eligibility information system. The new system is expected to support required provisions (e.g. health insurance exchange systems) of the Patient Protection and Affordable Care Act (PPACA) and is required to be in place by January 2014.
To learn more about health information technology initiatives and Hawaii’s New Day Plan go here. As always, be sure to follow Deltek’s Health Care and Social Services Team on Twitter @GovWin_HHS and LinkedIn!


FY 2014 IT Budget Preview – OMB Points to $5 Billion in Cuts

Uncertainty” is one of the words most frequently used to describe the current federal budget environment. And while this is clearly appropriate there are glimpses into what fed market watchers might expect in real terms over the next few years, both for overall budgets as well as for information technology (IT). In fact, OMB is telling us . . . and the bottom line could be billions of dollars in cuts.
As debate continues on appropriations and budgets for the upcoming federal fiscal year (FY) 2013, which starts in October, the (once-again) approaching federal debt-ceiling limit, and the specter of impending budget sequestration as established in last year’s Budget Control Act (BCA), OMB provided federal agencies with some new guidance on how they should be preparing their budget requests for the next fiscal year – FY 2014. Jeffrey Zients, Acting Director of OMB, reinforces the administration’s stated goals to cut waste, set priorities among programs, and make targeted investments in their priorities.
General Budget Guidance
In the memorandum, Zients outlines the broad guidance for agencies to follow in preparing their FY 2014 budgets (unless they have received different guidance from OMB), including:
  • Requests for 2014 should be 5 percent below the net discretionary agency total for 2014 in the 2013 budget; and
  • Budget submissions should include a detailed list of add-backs that bring overall agency budget back to a level that equals the 2014 discretionary level set in the 2013 budget. These are to be based on administration budget goals.
The guidance precludes the use of the following to achieve the 5 percent reduction:
  • Across-the-board cuts;
  • Reductions to mandatory spending;
  • Cost-shifting to other parts of the budget;
  • Reclassifications of existing discretionary spending to mandatory; or
  • New user fees to offset existing spending.
Information Technology Budget Guidance
The budget guidance specifically calls for agencies to look for ways to spend their IT dollars more efficiently. And unless an agency has received different guidance from OMB their 2014 budget submission should meet the following criteria:
  • Achieve an agency-wide 10 percent reduction in IT spending, compared to their average IT spending from FY 2010 through 2012;
  • Explain how they will achieve this reduction at the investment and account level; and
  • Propose areas to reinvest the savings into innovative IT solutions that would produce a positive return on investment within 18 months, demonstrably improve citizen services, or increase efficiencies.
Any significant IT budget cuts will continue to put pressure on agencies to make trade-off decisions and manage their IT dollar with increasing effectiveness. Taken at face value, the 10 percent reduction from the FY 2010-2012 average would have the following impacts on Executive Branch department and agencies. (See chart below.)

Bottom Line
Reductions of this magnitude will present a dramatic challenge to agencies on top of what they have had to deal with over the last few years. Also, this further solidifies the notion that gone are the days when agencies enjoyed the magnitude and regularity of increases in IT budgets that they saw over previous decade or more, when IT budgets generally increased on a year-to-year basis, some quite significantly.
Agencies will be challenged to find the savings at a very detailed account and program level. It may result in more program cancellations and more option years going unexercised. The challenge also falls upon solutions-providers in the market to prove they can provide the maximum return on investment. This favors current participants and puts new entrants or new solutions at a disadvantage if they do not have a proven track record to show. Agencies under this increased scrutiny will likely be even more risk-averse than usual. Yet, providers who bring to the table innovative IT solutions that can demonstrate positive short-term return on investment or markedly improve an agency’s efficiency or provision of citizen services will be best positioned to gain in this increasingly-competitive market.

IT contractors should look to state, local governments

First published in The Washington Post Capital Business

For government contractors, the news is not just getting worse, it’s getting old. We’ve been reading about the downturn in government spending for more than two years, and that doesn’t even take into account sequestration — the automatic cuts set for early next year.

But while federal agencies face significant budget challenges, state and local governments are actually about to begin a new wave of buying information technology products and services.

In fact, the state and local IT market (Deltek report) could see compound annual growth of 3.1 percent over the next five years.

For federal IT contractors worried about Washington’s budget crunch, the state and local market could be a welcome opportunity.

As tax receipts declined with the recession, many state, county and municipal governments as well as public school systems were forced to stop updating and replacing IT equipment and services.

Now, in most parts of the country, tax receipts have begun returning to pre-recession levels, and budget deficits are shrinking. IT directors may soon be looking to replace aging equipment, much of which has been used past its programmed replacement point.

Additionally, more than 20 states and several major cities in recent years have established streamlining efforts, from consolidating agencies and departments to re-engineering business processes and even outsourcing. All of these efforts require an IT investment.

In response to the recession, state and local governments made far more severe staffing cuts than the federal government. And even today, very few are hiring in significant numbers.

That may create another opening for contractors as states look to automate processes and improve performance without committing to new employees.

The state and local IT market represents about $56.4 billion in business opportunities today and will stand at more than $64.9 billion in five years, Deltek finds.

Selling to decision makers in this market requires a strategic shift from marketing to federal agencies. Talk of cutting-edge technologies, moving to the cloud and mobile technologies may not get their attention. But talk of streamlining, boosting productivity and building more robust networks able to survive a downturn are likely to get the attention of state and local IT buyers — and the same technologies will get them there.

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