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Software technology has impacted all aspects of our day-to-day lives—our places of work adopt new productivity tools to change how we collaborate and execute tasks. Schools leverage technology to reimagine new ways to educate and better connect students, educators, and parents. It stands to logic that State and Local Governments (SLGs) also understand the technology they have access to and are increasingly adopting those solutions to benefit their constituents, employees, and vendors. SLG entities have historically been slow to digitize, but they have started to catch onto the wave and have started to adopt GovTech solutions at an accelerated clip.
SLG GovTech in the Spotlight
SLG GovTech is experiencing a significant transformation and impact due to advancements in technology and the rapid adoption by government agencies. Its recent increase in visibility can be attributed to various forces and trends, including the following:
1. Covid Acceleration of GovTech Usage
Covid pulled forward demand for any number of technology platforms and ushered in an increasingly remote and digital world. SLG agencies were not immune to the change and saw a sharp increase in digital interactions with their constituents, vendors, and employees, increasing the need for more robust and updated software solutions.
2. Increased Demand for UX/UI and Modernization by Constituents
Constituents interacting with SLG agencies through digital portals (e.g., paying parking tickets, purchasing licenses, paying taxes/bills) became accustomed to sleek and modern interfaces they use in their other day-to-day activities.
3. Additional Focus on Data Security and Compliance
As focus on data security and compliance intensifies, SLG agencies are increasingly looking for solutions that will insulate their risk exposure, reducing the burden on their internal IT resources.
Trends in SLG GovTech for Investor Consideration
As the adoption for SLG GovTech continues to accelerate, private equity investors may see additional opportunities to enter the space. For the investors considering GovTech investments, below are some trends that Stax has observed in the marketplace for further consideration:
Agencies are underpenetrated by third-party SLG GovTech
Despite the recent acceleration in GovTech adoption, SLG agencies still appear to be underpenetrated. Many agencies, particularly in the “medium” size category (e.g., county-level government), continue to rely on outdated technology and manual methods, often involving Excel Spreadsheets or internal IT resources.
Depending on the systems in use, even larger agencies are often observed using homegrown software solutions that are cobbled together by internal IT teams or deployed by system integrators from over a decade ago.
While outdated technology, homegrown solutions, or even manual processes may suffice, agencies are increasingly discovering that by leveraging third-party solutions, they can improve workflow efficiency while simultaneously reducing their internal IT spend.
Investors should identify areas of SLG GovTech where outdated modes of problem solving are increasingly unviable. An example would be software that helps government entities stay compliant with regulations and local statutes (e.g., procurement software that helps track bidders and bidding processes–as well as documenting an audit trail–to ensure a fair process).
Agencies feel increased pressure to realize ROI and rationalize decision-making
In various Stax interviews, stakeholders from SLG agencies have increasingly cited budgetary constraints and the need to accomplish more with fewer resources as significant factors influencing their decision-making process. In response, vendors are re-positioning their offerings, re-imagining product capabilities, and even re-configuring their business model to better align with agency needs.
Broadly speaking, GovTech vendors can offer an enticing value proposition in two different ways for SLG agencies:
- Increasing Volume/Revenue
Adopting a more user-friendly platform to attract a wider user base or ease user platform engagement more effectively. In addition, this may increase revenue generation, often by accompanying lower operational costs as well.
A good example from Stax experience is when municipalities adopt software that can be utilized by constituents to pay for street parking from their phone. By making the process easier, those municipalities often saw an increase in payment adherence and a lift in revenue. Additionally, operational costs declined due to a reduced need for parking space monitoring and maintenance of pay stations.
- Cost-Neutral/Revenue-Generating
SLG agencies are often budget-conscious—and especially so when they need to ask for a large one-time investment to implement a new software solution. Instead of a traditional SaaS model, GovTech vendors may adopt alternative business models to be conscious of those budgetary realities and better accommodate agency needs.
For instance, outdoor recreation software used to sell constituents licenses or state park passes may be provided to SLG agencies at no upfront cost. However, a convenience fee is charged on a per-transaction basis for the software vendor. This model reduces the burden on agencies and turns a significant software cost into a cost-neutral operation. In some cases, it can even be revenue-generating for agencies to offset other operational costs.
Covid spend and transaction volume spike
As mentioned above, the role of GovTech has been pushed into the spotlight due to Covid pulling forward demand for increased digitization of government functions. State and local governments saw spend and transaction volume spike during Covid across multiple categories (e.g., departments of health and education spending).
For investors who are considering investing in SLG GovTech, it will be important to understand the degree to which transaction volume/spending is integral to a given GovTech vendor business model (e.g., whether the revenue model is transaction-based). Questions remain around whether the increased demand and spend in select categories is due to the Covid “shock” working its way through the system and if the current spend level/transaction volume has stabilized.
Relationship building between vendors and Agencies have outsized importance
SLG agencies tend to be more risk averse compared to their private sector counterparts. The relationship between vendors and agencies is more important and long-lasting than they would be in other industries. Agencies want to know the vendor they choose will be a reliable source of troubleshooting and support.
As a result, SLG decision makers, especially when it comes to choosing to implement a large-scale, complicated software platform, tend to prefer vendors who are mainstays at relevant conferences/industry conventions, who proactively form relationships with agencies, and who can point to a track record of success (“referenceability”) tend to fare better than those who do not.
As investors consider potential investment opportunities, understanding the importance and specific dynamics of “referenceability” and relationship building will be important when deciding whether to invest in an industry leader or an up-and-coming challenger.
Data Security comes to the forefront
In addition to being better solutions that require lower IT spend, third-party solutions often offer a level of data compliance and security that homegrowns solutions–or worse, manual solutions–cannot match.
For some constituent-facing software solutions where sensitive customer information may be involved, data security becomes paramount. For instance, parking ticket payment platform that collects payment methods and personal information would require stringent data security. Third-party solutions would be well-positioned to displace internally built platforms.
In many ways, the increase in adoption of SLG GovTech mirrors adoption of software products, services, and solutions in any number of other verticals or end markets, including healthcare, education, etc. Software solutions in government are helping enable new levels of productivity, connectivity, and oftentimes inclusivity.
However, as investors consider SLG GovTech assets, it will be important to understand and consider the market and the complexities and idiosyncrasies that arise with serving government agencies.
About Stax
Our consulting team at Stax has over 20+ years of experience in exploring assets to uncover future growth potential. Through our actionable, data-driven insights, we provide clients with the knowledge to transform their investments into capital across a variety of industries. To learn more about Stax visit www.stax.com or contact us here directly.
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