GUEST OPINION

E-Gov Attracts New Players to Public-Sector Market

by Thomas Meagher

The advent of the Internet has profoundly influenced our lives, particularly from an investment standpoint. "Old economy" stocks in cyclical industries rapidly fell out of favor as investors abandoned these companies for faster-growing firms specializing in delivering goods and services through cyberspace.

Though investors recently have cooled their ardor for Internet-based shares, an electronic presence will be part and parcel of every company's arsenal of competitive practices from now on.

To this end, government agencies, like their commercial counterparts, find themselves driven to get online. And while governments are turning to American Management Systems Inc., Andersen Consulting, IBM Corp. and other traditional systems integrators to move their services and operations online, electronic government also has attracted an entirely different set of players to this marketplace.

The move by governments toward online purchasing has made it easier for vendors to enter the public sector. Many of these vendors, however are choosing to pursue this market through alliances, rather than become government contractors themselves.

American Management Systems and its Buysense.com alliance, which includes Ariba Inc., Siebel Systems Inc., Freemarkets Inc. and govWorks Inc., are an example of many e-government vendors ? particularly those with a sky-high market valuation ? that will attack the government purchasing segment. Another strategic approach being employed, in this case by National Information Consortium Inc., seeks to bring all of these capabilities in house through targeted acquisitions.

Online marketplace developers likewise have begun springing up everywhere. Some of the better known names in the government sector include Digital Commerce Corp. (FedCenter.com), Procurenet, Demandstar, Onvia (Globe-1.com), World Wide Technology Inc. (FedBuy.com) and VerticalNet (GovCon.com). A number
of players, such as Epylon Inc., eschoolmall.com, Simplexis Inc., Way2Bid and Kawama.com, have emerged to serve the needs of the educational procurement marketplace.

However, government entities themselves have been up front in developing
e-commerce initiatives. These include the Joint Electronic Commerce Office (responsible for managing the Defense Department's eMall site) as well as the General Services Administration with its Advantage and Buyers.gov sites.

Given that many of these sites provide similar services, we would expect to see consolidation begin as the competitive shakeout commences.

Much of what we have discussed to this point has really had a business-to-government orientation. The move toward citizen-to-government online services should be equally profound.

Our sense is that large systems integrators were caught off guard, were unaware of or simply ignored this move toward e-government. This opened opportunities for new entrants into the market, specifically those in Internet enablement.

Perhaps the best example is National Information Consortium. NIC focuses on developing a one-stop government portal that provides a single point of presence on the Web for all government agencies, and permits businesses and citizens to conduct transactions and process information requests 24 hours a day, seven days a week.

Other privately held names that provide similar services in this sector include eGovnet, ezgov, GovConnect (a subsidiary of publicly held Renaissance Solutions), govWorks, Hansen Technologies, Link2Gov and Tidemark Systems (27 percent owned by NIC). We also have seen the emergence of single-application vendors, such as Accela.com, NetClerk and PermitsNow
.com, that lets building contractors file permits electronically.

Many of these companies are pursuing alliances as the preferred vehicle of choice. We mentioned earlier the BuySense.com partnership; other notable alliances include Hansen and Arthur Andersen; IBM and ezgov, and KPMG and Link2Gov. These alliances provide the new players with the contracts, contacts and sales forces of the legacy vendors.

NIC, with its acquisitions of eFed (public-sector electronic procurement) and SDR Technologies (Internet enablement) as well as its investments in Tidemark Systems (local government software and solutions) and eFilings (online Uniform Commercial Code searches), has adopted the one-stop shopping model toward serving its clients.

Governments face the same stark choices that commercial organizations face in the Internet age: Change or be left behind to wither and die. Governments need to lower costs and deliver better service just as their commercial counterparts do. It should be interesting to watch.

Tom Meagher is vice president of equity research for BB&T Capital Markets of Scott & Stringfellow Inc., Richmond, Va.

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