EYE ON THE STATES

Here Come State and Local Internet Companies

Thomas Davies

Each wave of technological inno-vation creates oppor- tunities for information technology service companies in the state and local market.

These days, state and local governments are turning to private industry for Internet services and support. As with earlier technology innovations, state and local governments are looking for companies with the expertise to be of immediate assistance and, perhaps more importantly, with proven solutions and the willingness to take risks.

Many Internet-based service companies are coming to consider state and local a priority market.

There are strong indications these Internet companies are going to grow much more rapidly than first thought possible and will come from outside the mainstream IT services industry.

A good example of such a company is National Information Consortium (NIC) of Overland Park, Kan., which designs and operates Internet portals for state and local governments.

Its successful initial public offering in July propelled it into the national limelight with a market valuation of more than $1 billion.

A clear sign of NIC's commitment to the market opportunity is its stock trading symbol: EGOV. Its mission is to enable online interactions with government using portals that reduce costs and provide higher levels of service.

These portals, which are operating in Virginia, Kansas and Indiana, are used to apply for permits, file reports and gain access to government information.

Where are the traditional market leaders? Although not quite missing in action, they have their challenges. Perhaps their greatest challenge is being myopic about the market.

Some of these companies do not think there is much to get excited about. Sure, portals, the Internet and the World Wide Web are new. But selling online access to public records has been around for more than 10 years, and the hype has always exceeded the reality.

These companies feel the buzz about government e-malls is more the result of wishful marketing by industry and government rather than an immediate or profitable business opportunity.

But companies such as NIC and Science Applications International Corp., which are acquiring or building e-purchasing solutions for government, are betting they are wrong.

Another challenge for traditional market leaders is to avoid the waiting pattern: Some will wait for government buyers to establish large budgets for e-government; wait for completion of year 2000 compliance; wait for someone to develop a compelling business case; wait for communications to roll out an advertising campaign; and wait for a request for proposals to come out that fits their preconceptions about how Internet business should be procured.

A third challenge for companies is to not become preoccupied with defending their base business in state and local government. The state and local buying herd has begun to move. It is not waiting for its traditional suppliers to bring to market solutions that fit old business models. The buyers see the future and are betting on companies they believe can get them there.

A fourth challenge is figuring out who the competition is today and who it will be in the future. Many companies in state and local government have not faced true innovators for some time.

The emerging Internet services companies represent new ways of doing business, not just new technologies. Some of them will be transaction based; others will rely on fixed-price contracts. Some will propose shared savings; others will be glad to assume all the risk in return for higher profit potential. Either way, there is going to be plenty of room in the market for competing business models.

The Internet already is creating new winners and losers in the state and local government IT market.

Those companies who are up to the challenge will thrive in the Internet era. They bring in fresh leadership, build capabilities, form alliances, launch sales and marketing campaigns and design solutions.

In a time of market innovation, the winners will be those who aggressively pursue the opportunity and take the necessary risks. The rewards will be apparent when these companies go public with extremely high market caps or are acquired by others at a premium price.


Thomas Davies is senior vice president for Internet services at Federal Sources Inc. in McLean, Va.

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