- The Washington Times - Monday, December 27, 1999

The PeopleSoft executives were talking tough.

In New Orleans for their annual conference last summer, representatives of the California-based commercial software company were full of plans for moving in on their rivals.

They talked openly of competing for business with consulting companies such as American Management Systems of Fairfax, Va., a dominant federal government contractor for 30 years.

"I talked with the [PeopleSoft, Inc.] CFO and asked him, 'What does this mean for companies like AMS?' " said Chris Desautelle, vice president for equity research at Baltimore-based Legg Mason Wood Walker. "He said, 'Frankly, it means we're going to go after their business.' "

And that's exactly what AMS executives and observers of the federal information technology market say has been happening recently.

Commercial vendors of enterprise resource planning (ERP) software, such as PeopleSoft, Oracle Corp. and SAP AG, increasingly are vying to enter the government market, threatening longtime federal contractors, such as AMS.

"People that have off-the-shelf, proven, commercial products are definitely a threat to my members, the AMS's of the world," said Bert Concklin, president of the Professional Services Council, an Arlington-based trade association that represents high-tech government contractors.

But the federal government information-technology market, a $25 billion to $35 billion business, has always been hyper-competitive, Mr. Concklin added. "Added competition, while it is definitely not trivial, is not a shock or surprise."

It is to AMS executives, who say they do bookkeeping for about 85 percent of the federal government, excluding the Department of Defense.

"They're household names," Zipora Brown, vice president for management systems and technology at AMS, said of her new competitors. "That makes our job tougher. We've been the silent giant in some ways for a long time. The new competition absolutely is a threat," she said.

Meanwhile, PeopleSoft is expanding its consulting and government business because of customer demand, said Laura Glass, director of federal industry strategy at the company, which employs 350 people at its Bethesda, Md. office.

The competition

AMS, one of the world's largest consulting firms, was founded in 1970 and is well-known in high-tech and government circles as a defense and federal financial management contractor.

The company employs more than 4,000 workers in the Washington region housed in seven buildings in Fairfax and one in Bethesda. About one-quarter of the company's revenues derive from its work with 65 federal government agencies, and about half its total revenues are from local, state and federal government and education, according to company information.

The company prides itself on its knowledge of the federal government and its ever-changing financial and accounting regulations. AMS creates its software applications specifically for the federal government market and does not sell them to the commercial market, Miss Brown said. Its "best of breed" approach offers applications for a given set of tasks instead of for all of an agency's functions.

"We don't have the best human resources system. We don't have the best inventory system. We don't claim to," Miss Brown said. "We will work with them to find the best."

Observers say the company's main competition comes from PeopleSoft and California-based Oracle, both so-called ERP companies whose products were certified this fall for federal agency use under the federal government's new Joint Financial Management Improvement Program, along with AMS and some others.

Those software companies traditionally have sold solutions for the commercial and manufacturing sectors that integrate financial management and other functions, such as personnel, procurement and inventory management. Now they're trying to adapt those products to the federal marketplace, arguing that what works for business can make government more efficient, too.

Oracle, which employs more than 2,000 people in the Washington region, has been in the federal government market for a quarter-century, but is known mostly for its databases. This year, the company founded Oracle Service Industries, headquartered in Reston, to focus on the market that includes the federal government, state and local governments and higher education, among others.

Last year, the company's applications business grew 150 percent in the federal marketplace, and this quarter, one-third of all licensing revenue is in federal applications, said Steven R. Perkins, senior vice president and general manager for the federal division of Oracle Service Industries.

"That's pretty aggressive growth," Mr. Perkins said. "The momentum's there for us."

Changing market

The market is changing and expanding dramatically, say vendors, agency officials, consultants and analysts. That's due to a convergence of factors, including:

Demands from the Clinton administration and Congress that federal agencies improve financial accountability, including legal and regulatory changes that have cut red tape and made it easier for vendors to enter the market.

Public demand that government operate more like business, both in terms of efficiency and customer service.

A need to update antiquated financial and other administrative software, much of which is 20 years old or more.

Fast-paced changes in technology, which allow agencies to cut costs while improving service, along with widespread interest in creating e-government by making more services available through the World Wide Web.

At the same time, the commercial market for across-the-board solutions has slowed dramatically, forcing those vendors to look for new business.

"The ERP market started out focusing on the very largest organizations manufacturing companies, huge conglomerates that could realize economies of scale from the efficiency ERPs offer," said Payton Smith, manager of strategic studies at McLean-based Federal Sources Inc. "That market is pretty well saturated at this point, which is why they're targeting new markets."

And the government market looks promising. Miss Glass of PeopleSoft cites an Office of Management and Budget report that estimates 87 percent of all financial systems in government will need to be replaced in the next five years, in order to meet new accounting and reporting standards.

For AMS, it's not a question of losing existing business, but of not getting future business, Mr. Smith said.

Bigger not always better

Commercial ERP vendors do not have much federal government market penetration because their major advantage one large system can handle all administrative functions can be a disadvantage for government agencies, whose appropriations cycles do not favor multiyear contracts for expensive installations, observers and participants say.

Instead, most agencies look to make changes piece by piece.

Further, commercial business models come out of manufacturing, while government's focus is on providing services, not profit and loss, they say.

"ERPs have been touted as a much broader implementation, that could cover financial, procurement and personnel, but that's where the biggest problem ends up being," said Dick Comerford, deputy director of the Department of Interior's National Business Center, which acts as a consultant for about 90 federal government agencies, including the U.S. Patent and Trademark Office and the U.S. House of Representatives.

"There is enough trauma with any of these implementations by itself. The best thing is to make it smaller, rather than bigger," he said.

Mr. Comerford said his agency has implemented 16 federal financial systems since 1987. While he would encourage clients to look at all options, thus far he has never recommended a commercial ERP application.

But some agencies are beginning to be drawn to the commercial vendors' knowledge of the Internet and promise of one solution.

The Department of Transportation is in the midst of unveiling new e-government services powered by an Oracle application that will allow truckers to pay fines over the Web, let carriers register on line for certificates of operation and handle credit card payments, said David Kleinberg, DOT's deputy chief financial officer.

It also is implementing Oracle's financial package, which will integrate with its current accounting system and with the on-line payment system.

"Our software costs too much," Mr. Kleinberg said. "Congress, the president and everyone else is saying, 'Buy commercial off-the-shelf software.' "

Such software is significantly less expensive, he said. DOT is spending $15 million and about $5 million in licensing fees for the package. That's less than it would cost to modify the existing, 20-year-old homegrown accounting system for just a one-time change to meet new financial reporting standards.

Commercial vendors such as Oracle can provide frequent updates, as long as the software is not customized. Further, with technology changing so quickly it's nearly impossible to evaluate any given package, so it's important to buy from an experienced company that will keep up with the competition, Mr. Kleinberg said.

Fighting back

AMS executives say they're fighting back. Earlier this month, the company announced a partnership with Ariba Inc. of California that will allow agencies to handle government purchases over the Internet.

It is AMS's first foray into e-procurement, a move some say shows the company expanding its products to include areas that have typically been part of ERP packages.

In the last year, the company also has entered the defense financial practice, hiring about 100 people to help improve financial management within the Department of Defense, said Roger W. Scearce, vice president for DOD financial enterprise solutions. Mr. Scearce joined AMS in April just weeks after he retired as deputy director of the Defense Finance and Accounting Service.

Meanwhile, the commercial software companies are making their ERP packages more palatable to government by offering separate modules, so an agency can implement just an accounting package, for example.

In essence, the two models are converging, said Mr. Comerford of the National Business Center. Soon, the distinction between ERP and "best of breed" will be insignificant. It will be a company's track record, its successes at government implementations and its knowledge of the market that will be critical.

Miss Brown of AMS agreed: "We all go to the same conferences. We all read the same tea leaves. It's just a matter of how do you play your strengths, and who do you choose as partners?"

SPECIAL TO THE WASHINGTON TIMES

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