Saber’s business is customizing its core software products for state and local agencies and providing the relevant consulting and support services. It operates in five different sectors: election services, such as election management and voter registration services provided to secretaries of state; health and human services, including social services such as child support and child welfare systems, plus health care programs; unemployment insurance, in which Saber provides systems and consulting services for benefits administration or tax collection; pension administration, one of its oldest markets and where it builds systems for employee and teacher retirement; and motor vehicles, providing licensing, title and registration, inventory, and point-of-sale systems for state motor vehicle departments.
Saber acquired Covansys’ state and local practice in June 2006 for $40m. This was a $76m business for Covansys, so the deal kept up Saber’s feverish growth. With 2002 sales of just $5.8m, Saber posted 2006 revenue of $57.8m. And this year it is projecting revenue of more than $120m, according to Sanjay Menon, Saber’s vice president for marketing and revenue capture. He said that the business was split relatively evenly between its five market segments, with an almost equal number of its 900 total employees dedicated to each unit.
Menon said Saber’s business model breaks with many of the other state and local contractors on the market. In the past companies have focused on doing custom work for governments, but we’ve found there’s much more value in actually delivering IT solutions and doing some customization–say 20%, he told Computer Business Review. Our products are built for functional areas, not specific jurisdictions.
Saber works with 35 states and has some 100 agencies on its client list. All of the company’s contracts are fixed-price projects, typically between two and five years, Menon said. There’s a lot of consulting-type work that takes place in the course of a normal implementation project, but strictly speaking, about 95% of Saber’s revenue comes from customizing and implementing its software systems, and the other 5% from more traditionally defined consulting services.
In most cases, agencies will want to support their Saber systems on their own, and the company hands over the code to its customers so they can maintain and modify it as needed. But Menon said Saber can also handle maintenance and hosting duties for its applications.
Over at EDS, the company said that Saber provides a complimentary business to its existing state and local government work. EDS is probably best known on this level for its large Medicaid business, in which it provides program administration, claims processing and other services for states. EDS said the Saber deal would bring a whole new set of state and local services to its US government portfolio.
Analyst group Input puts the overall state and local IT services market at approximately $50bn, growing at an 8% annualized rate. Saber’s Menon highlighted just a few of these opportunities in its own business. The motor vehicles space, for example, has seen strong growth in the last year, driven by an increasing interest among states in REAL ID, the effort to create national standards for state licenses.
In the unemployment insurance segment, Menon said that the market was evolving from a period three to five years ago in which states were setting up benefits systems to deal with the large number of layoffs during that time. Now there’s a need to fill the coffers back up, he said, so the tax side of the equation is becoming more important.
A lot of the state and local market is cyclical, and Menon thinks now is a pressing time for IT spending. Most agencies are still running legacy applications built on mainframe systems, and these are quickly nearing the end of their lives, he said. Not only are states under continued pressure to provide more services with less money, but they’re now looking to replatform a lot of their systems and business processes. These conditions should make for a robust outsourcing market in the near future.
EDS expects to close the acquisition of Saber before the end of the year. The deal shouldn’t materially impact earnings this year, but it should add to free cash flow in 2008, EDS said. Saber CEO Nitin Khanna and COO and president Karan Khanna will together retain the 7% remaining stake in the company. Privately owned Saber is backed by private equity group Accel-KKR.
