EYE ON THE STATES

The Coming E-Gov Shakeout

Thomas Davies

By Thomas R. Davies

Some industry experts are predicting that up to 90 percent of all Internet companies will not survive. The recent announcement that govWorks ? one of the most prominent dot-com companies focused on the government market ? filed for bankruptcy is a sure sign that the shakeout has found its way to electronic government.

The govWorks announcement signals the end of one stage of the e-gov market and beginning of a new one. Many e-gov companies still do not have positive cash flow, working solutions or customers that can give references. Without access to cash, more companies will suffer fates similar to govWorks.

Like previous generations of technology, such as the mainframe and client-server, the Internet gave birth to start-ups targeting the government market. The past few years have mirrored these earlier times when equally talented companies, with exciting visions and new ideas, began focusing on state and local buyers.

One major difference has been the speed with which e-gov companies have formed and their strategies for building business.

In two and a half years, govWorks raised more than $48 million in financing and once had 250 employees. By historical standards, a new solutions company targeting state and local government would take up to 10 years to reach a similar size and command an equal market presence. The easy availability of cash over the past few years has allowed many e-gov companies to jump-start building their business and marketing their services.

But the easy access to cash also had its downside. First, it tempted too many e-gov companies to take short cuts. Encouraged by outside investors with little or no experience in state and local government, these companies ramped up too quickly and attempted to buy their way into the market. Good public relations often enabled them to command market attention and credibility, but without a proven track record.

Unfortunately, too many e-gov companies were late in discovering that state and local buyers don't purchase concepts and promises, they purchase working solutions.

A second failure was e-gov companies' belief they could win business quickly. They severely underestimated the length of the sales cycle in state and local government. They did not foresee that these governments would move slower than commercial markets in implementing Internet-based services.

Compounding this problem was the strategy of establishing expensive national sales organizations, which were to build sales pipelines that would justify the high valuations needed to keep investors satisfied. As a result of these miscalculations, they have not been able to close business fast enough to support their cash burn rates.

Another misstep for many e-gov companies was their belief that state and local buyers would pay top dollar for Internet solutions. They failed to realize that while e-gov was a leading priority for many top state government officials, it didn't mean the officials were willing to pay a premium to achieve it. While the profit margins of state and local companies often exceed those of the federal IT companies, they rarely match those of commercial markets.

E-gov companies aren't the first ? and probably won't be the last ? to stumble because they failed to accurately read the true intent of their state and local customers.

It is unfortunate that this period in the evolution of e-gov companies has come to an end. The rate at which new companies were being formed, bringing exciting innovations, ideas and possibilities to state and local governments, was unprecedented.

For the first time in a generation, some of the best and brightest young talent has been focused on radically improving the way citizens receive services from government. There was a missionary zeal driven by the feeling that they could truly make a difference in helping restore the faith of citizens in the efficacy of government ? and make lots of money at the same time.

E-gov companies now have only one goal: survival. To ensure it is among the survivors, a company needs to win real customers, ones who are willing to pay in cash.

E-gov companies should find a niche, such as a unique capability or a specialized market focus, that has tangible barriers to entry. This will require tough decisions to forgo some future opportunities in order to capture more immediate ones. But with the right leadership, companies and investors will be able to accept that growth at any price is not a viable business strategy.

E-gov companies also should begin looking for merger and acquisition opportunities. Better to do so now than wait until the choices won't be nearly as good. These companies need to find established businesses that have a global state and local presence, superior sales skills, a solid customer base and a need for e-gov capabilities and products.

E-gov companies should consider diversifying into other vertical markets. Building a viable business based solely on state and local government is very difficult. The number of independent companies that have done so, and achieved annual revenue in excess of $50 million, is much smaller than most would imagine. Some of the more successful ones serve markets outside of state and local, such as utilities, insurance and health care.

E-gov companies need to recognize, accept and respond to the new market realities. This next period in the evolution of e-gov in state and local government will exhibit few of the market dynamics of the past five years. If earlier eras are any guide, those e-gov companies that do survive are likely to become an important part of the future state and local landscape.

Thomas Davies is senior vice president at Current Analysis, a next-generation business intelligence and analysis company in Sterling, Va. His e-mail address is tdavies@currentanalysis.com.

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