Xerox is buying Affiliated Computer Services (ACS) for $6.4 billion. Why?

Partly because ACS does a lot of work for government entities, processing Medicare benefits and all kinds of other stuff. Big businesses — including Xerox and ACS competitor IBM, which is running ads all over political TV shows to push its own smart-government-through-data stuff — think that big government is a growth center in the next few years, for two reasons:

1. The stimulus bill offered lots of opportunities for this kind of thing, contracting private companies to move to electronic medical records, etc.

2. As government entities try to save money, they may turn more to outsourcing.

Government outsourcing of service administration can be beneficial in cost-cutting and better service, although not always, as Indiana’s attempt to contract its social-services administrative work to a consortium jointly owned by IBM and ACS has demonstrated.

A further move toward consolidation so that other contractors can compete fairly with the big guys may not be helpful, from government entities’ perspective.

The deeper the bidding pool (meaning more competing companies), the better — which is why the type of collaboration seen in the Indiana deal, likely to become more common, may not be so great.

In the private toll-road industry, a few huge international companies dominated the bids a few years ago, helping contribute to a bubble-and-bust herd mentality and a limited bid selection for governments.

If services outsourcing also becomes dominated by a few big companies, it may be harder for government entities to tell whether their taxpayers getting a good deal.

The market may be working — but local and state governments have to be vigilant that this particular market works for taxpayers, too.