Cal CIO See Untapped Opportunities For VARs, State Govs

"We currently have 10 state contracts over $10 million, but we have 11,500 under $500,000," said J. Clark Kelso, CIO for the State of California and Gov. Arnold Schwarzenegger's special adviser on information technology.

Kelso made his remarks Oct. 11 in Sacramento, Calif., the first stop on GovernmentVAR's State and Local Roadshow. The event brings together key executives from government solution providers and state CIOs to discuss issues and opportunities for VARs to win state and local IT contracts.

Kelso said that the state has dozens of legacy IT systems that it can no longer maintain because the managers who designed or service the systems have either retired or will do so in the near future. He said 50 percent of the state's current IT workers will be eligible to retire in the next five years, and that 75 percent of his top IT managers are eligible for retirement today.

"We've run out of time on legacy applications, and we can't continue to maintain them," he explained. "We've been reliant on a small handful of individuals, and they have retired or are planning to retire. Many of these systems are nonmanageable, not because they are broken, but because we don't have people around that know how to keep them running."

Kelso said that some of the former public CIOs are forming consulting companies to work with the state, and VARs might benefit by partnering with them. "That may be a way to get access, when otherwise it's difficult to get access to [state] CIOs," he said, adding that he will return the phone calls of former CIOs that he knows. "Hook up with a small business of these ex-CIOs. They will have access, no question about it."

But some VARs think the relationship is too cozy. VARs attending the Roadshow said that current state CIOs sometimes tend to do business with their former colleagues and exclude other solution providers from the process.

"Really making sure that these [contracts] are really open is a problem," Kelso admitted. "We have to do something on all of those contracts because that's where the 9,000 to 10,000 contracts are. They are up to $400,000, and we have to do a better job in opening those up to competition so that [state CIOs] are willing to take on, or look seriously at, a new provider. But I'm confident that's not happening."

One government VAR, who asked not to be identified, charged that state IT employees line up businesses before they retire and sometimes write specs for projects just prior to their departure. "Basically they write the bid for themselves," he said. "They know exactly what the specs are, and they have subcontractors all lined up before leaving."

In a panel discussion following Kelso's keynote, Bob Nitrio, president of Ranvest Associates, an Orangevale, Calif.-based solution provider, said being registered as a small business has been of little help in gaining access to state business despite mandates guaranteeing a portion of state contracts go to small businesses. "We've won zero jobs with the state because of our small-business status," he said.

Brady Flaherty, a principal in Altos Technology Group, a Sacramento, Calif.-based solution provider focusing on Hewlett-Packard enterprise solutions, said his strategy is to partner with ISVs to gain access to state business. "We don't chase RFPs," he said. "We partner with ISVs to build the nuts and bolts of the application infrastructure that they don't want to do."

Kelso noted that despite the projected worker shortfall, California has launched a broad 21st century initiative to update the state's IT systems. Kelso acknowledged that the state is looking at a projected shortfall of $5 billion to $6 billion for fiscal 2008, which may slow down some of these large IT projects, such as the $1.5 billion Fi$Cal project to update the executive branch ERP systems.

Despite the shortfall, the broad IT mandate -- coupled with the fact that 50 percent of the state's IT workforce is eligible to retire over the next five years -- creates a potential boom for VARs.

Kelso said many state departments are buying into the broad theme of modernizing their IT systems, but they don't necessarily entail giant contracts that would be beyond the scope of smaller solution providers.

"Many departments have much smaller projects," he said. "What [VARs] want to be doing is exploring what departments are doing to improve their business management systems. I would encourage you to approach these departments if [their projects] are in your area of expertise."

He cited document management, Web development and LAN/WAN services, to name a few. And one growth area for solution providers is in advising the state on consolidation and virtualization of servers, he said.

"We are behind [in consolidation and virtualization]; we haven't done much of it," Kelso admitted. But the state commissioned a study that showed that it could save $21 million annually by consolidating and virtualizing its servers, he said.

"I have that number. The departments have heard me talk about it, and we are starting to look at having requirements for consolidation and virtualization," Kelso said.

He added that some departments have seen the handwriting on the wall and are already undergoing consolidation projects in anticipation of a state mandate.

"This is a good opportunity to talk to any department that has any type of server population to see how they can get a 15 to 20 reduction in number of servers and to virtualize the ones they already have," he said.

Kelso added that many of these smaller contracts are "chopped up into smaller pieces" and come out of discretionary department funds that often don't show up on an IT budget or an RFP. As a result, there are thousands of contracts that may have a duration of 30 to 90 days that are being let on a regular basis.

"I encourage you to stop and talk to [the departmental] CIO to see how to get some of these things moving," Kelso said.

One area Kelso warned solution providers to stay away from, however, was computer hardware and peripherals.

"We've driven almost everything out of the margins on PCs, laptops, printers, peripherals and certain servers," he said.

He noted that later this fall and early next year, the state has an IT hardware contract it plans to let with an estimated value of $170 million. "Whoever wins this will get a lot of revenue, but the margins are going to be razor-thin," he said. "The big vendors, if they want to play, are going to have to cut their margins down to virtually nothing. And every other state is doing what we're doing in California."