National Information Consortium Weathers Financial Downturn

Company to Stick With Self-Funding Approach<@VM>National Information Consortium Inc.

Jim Dodd

By William Welsh, Staff Writer

National Information Consortium Inc. does not intend to abandon its self-funding formula for bringing government services online, despite recent financial difficulties and suggestions by competitors and analysts that governments are rejecting this business model, President and Chief Executive Officer Jim Dodd said.

The first warning sign of financial difficulties at NIC came in September when the company announced anticipated third-quarter shortfalls were forcing a massive restructuring that would produce a $1 million pre-tax charge in the third quarter, and a loss of between 24 cents and 25 cents per share.

In October NIC announced it probably would not have positive earnings until 2002 instead of 2001, as originally forecasted.

NIC, which went public in July 1999, made its mark by building government portals and electronic service applications at no cost to government customers. Under this approach, the company generates revenue to pay for the online applications by charging transaction fees on a small percentage of business-to-government services.

State and local governments embraced NIC's self-funding model for bringing government services online because it offered a virtually no-cost solution at a time when many officials regarded e-government initiatives as too risky to justify large expenditures.

But as e-government has increased in popularity and become more widespread, public officials are more willing to consider funding these programs using tax dollars.

"The self-funded model is gradually fading away," said Ed Trimble, president and CEO of Atlanta-based EzGov Inc.

EzGov and competitor govWorks Inc. of New York both launched under the self-funding model, planning to make money primarily by charging fees to citizens and companies that transact government business over the Internet. But both companies have moved away from this approach.

The problem is that transaction fees drive customers away, said Kaliel Isaza-Tuzman, CEO and founder of govWorks, at a New York e-government conference.

"The self-funding model doesn't make sense, because it inhibits use. It's not getting traffic," said Tuzman, who now describes govWorks as a software tools company that helps bring government operations and services to the Internet.

Although the self-funding approach worked well in the beginning stages of
e-government, public officials are realizing that to bring strategic services online, they may have to allocate funds and treat these electronic projects more like traditional IT purchases, Trimble said.

Dodd doesn't agree. "The pool of people who are interested in the self-funding model is as large as it has ever been," he said, adding that NIC is willing to provide whatever funding mechanism a state or local government wants to use.

Perhaps as evidence for Dodd's contention, the New York City Board of Education and the Florida Department of Business and Professional Regulation are pursuing self-funding approaches for large-scale e-government projects.

NIC has contracts and partnerships with 23 states, 81 cities and counties and seven federal agencies. These portal partnerships may not generate substantial revenue for the company until 2001, said officials with the Overland Park, Kan., company.
  This waiting period is normal, said Tom Davies, senior vice president with Current Analysis Inc., a market intelligence firm in Sterling, Va.

  "Most transaction-based models don't generate huge profits in the first six to 12 months, but the profits come in the out years," said Davies. "[Companies] gain financial strength when they have dozens of these contracts that are in their fourth or fifth years."

  NIC is wise to offer a variety of funding models, Davies said. "NIC can't stake its future simply on self-funded models," he said. "E-government is going to require a variety of models."

  Meanwhile, a number of large systems integrators are entering or expanding their presence in the e-government marketplace, said Thomas Meagher, vice president of equity research at BB&T Capital Markets, Richmond, Va. They include American Management Systems Inc. of Fairfax, Va.; Andersen Consulting and KPMG Consulting of McLean, Va.

These companies can more easily afford to make the upfront investment that a self-funded portal requires, and ride out the waiting period associated with it, said Meagher, who questioned the wisdom of a small integrator such as NIC pursuing the self-funded model.

"It is OK to be involved in self-funding if you have deep pockets, but if you are a small integrator, how can you go without revenue for one or two years?" he asked.

On top of this, NIC has had a tough time digesting its acquisitions, Davies said.

When NIC acquired NIC Commerce and NIC Technologies, it was willing to let these companies operate with quasi-independent status and pursue the plans they had established for themselves as private companies, said Dodd. But when these companies didn't expand their client base fast enough to achieve projected growth and earnings, the parent company had to step in and take over, he said.

Referring to the acquisitions, Dodd said, "That is heavy lifting, and it is hard for any enterprise to do that with an outside company. ... We would like to have been able to 'digest' them over an 18-month period, but we weren't afforded that luxury."

As for the revenue shortfalls, Dodd attributes these to the slowness with which state and local governments are recovering from the financial and emotional drain of year 2000, as well as to the unpredictable nature of government decision making and implementation cycles.

Dodd's assessment of a post-Y2K malaise is particularly valid, said Meagher. "[Chief information officers] have said that e-government is coming, but it is taking longer than expected," he said.

While it awaits the revenue stream generated by its portal work, NIC is anticipating other opportunities that may arise from strategic partnerships it has formed with America Online of Dulles, Va., and Deloitte Consulting of New York.

These partnerships are particularly advantageous for the smaller partner that can leverage the larger partner's sales force, said Meagher. For its part, NIC is mentioning Deloitte as an affiliate on all of its bids, said Dodd.

The trouble NIC has had digesting its acquisitions hasn't stopped the company from making more, though. The company in September acquired Intelligent Decision Technologies Ltd. of Longmont, Colo. Through this acquisition, NIC will operate a multistate portal for the transportation industry that would provide online registration, permitting and tax filing.

Dodd said that NIC could provide this kind of service to a dozen other sectors. Because governments don't offer these services online, NIC is not compromising its existing partnerships with governments, he said.

NIC stock closed at $3 a share Oct. 27, with a 52-week high of $78 and low of $2. All five analyst firms following NIC have a hold rating on its stock.

Although the stock price reflects the company's prospects and performance, it has no bearing on its ability to survive, said Davies, who contends that NIC's overall cash position remains strong.

NIC raised $109 million in its initial public offering in July 1999, and the company has about $51 million in available cash and marketable securities, said Steve Kovzan, NIC's vice president of financial operations. Company officials have said in public statements that they believe this is more than enough to fund the company to profitability.

NIC has learned a hard lesson this year about life as a public company that other privately held e-government companies have yet to experience, said Dodd. This lesson is it's difficult to predict with any high degree of certainty the revenue that will be generated in a market that is still evolving.

Despite the turmoil, the investment community continues to believe strongly in e-government, and NIC's strategy for pursuing the market, he said.

Reflecting on the difficulty that NIC has had forecasting revenue, Dodd said: "It is all part of the process of creating a growing, thriving, long-term enterprise in the midst of a huge transformation."Web Site: www.nicusa.com

Business: Electronic services and solutions for federal, state and local government

Headquarters: Overland Park, Kan.

President and Chief Executive: James Dodd

Number of Employees: 350

1999 Revenue: $57 million

Ticker: EGOV on Nasdaq

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