Changing Faces

Dot-coms are developing new business models, strengthening old ones and forming alliances as they battle for profit in the public sector.

by / August 31, 2001 0
The rise and fall of the dot-coms has been grist for the mill in the media for some time now. But so far, only one dot-com has had its story told on film. "Startup.com" is about govWorks, an Internet firm built to serve the budding electronic government market, and one of the casualties of the cyber revolution.

Kaleil Isaza Tuzman and Tom Herman started GovWorks to improve interactions and services between local governments and citizens or, as one movie critic put it, so that we could pay our parking tickets in our underwear from the comfort of our home. GovWorks was based on the convenience fee business model -- build the citys Web site for free, then load it with information and a few transactions. A fee was then collected and passed on to the firm every time someone paid for a ticket or permit.

With some Internet analysts claiming that the online government market was 10 times larger than the $100 billion online health-care market, investors were eager to pour money into dot-com firms. Despite the fact that the self-funding, convenience-fee model historically had mixed success in the public sector, Internet firms sprang forth, eager to grab a piece of the pie. At one point, there were dozens of e-government related vendors in the state and local marketplace where virtually none had existed before.

But that was in 2000. Today, the landscape has changed significantly. GovWorks and its $50 million are no more and its 200 employees have moved on. Former CEO Tuzman is now in the business of helping fellow dot-coms that have gone bankrupt. A number of other dot-coms serving the government market have also folded, while others struggle to stay alive.

One big problem with the business model of many startups was their relentless focus on the Internet for service delivery. "If you simply provide one channel [for service delivery] and if adoption is low, which it always is in the beginning - basically what youve done is make more work as opposed to less work," said Linda K. Morse, managing director of govONE Solutions, a firm providing payment applications to state and federal agencies.

Morse, who worked for govWorks prior to joining govONE, also pointed out that many dot-coms underestimated the cost for building the necessary infrastructure to deliver the kinds of solutions they were proposing to state and local governments. "It is extraordinarily expensive to build the kind of operational infrastructure we have at govONE for processing payments," she added. To make matters worse, dot-coms suffered from government bureaucracy as contracts slowly made their way through the approval process. For some, the time lag proved to be too much.


Out of the Fire
One survivor is TekInsight, an electronic-government software and services firm. Its business model has been and remains software development and services to government based on a life-cycle approach. "We never looked at the transaction fee model," said Kyle Tager, TekInsights senior vice president for electronic government. "I have a problem with charging citizens for services they already pay for through taxes. But more importantly, studies have shown low penetration rates when you charge transaction fees for public services."

Poor results from the transaction fee model have forced other dot-com firms, such as Digital Commerce and EzGov, to change how they do business. Digital Commerce now relies on membership fees for its business-to-government procurement sites, FedCenter.com and StateGovCenter.com. EzGov.com also has shifted back to the traditional business model of software development.

These strategic changes dont surprise Mark Struckman, director of research programs at the Center for Digital Government, e.Republics knowledge-management and research division. "Companies are modifying their business models, replacing fee-for-services with more traditional approaches, such as software development," he said. "The problem companies like govWorks ran into is that citizens dont like fee-for-services when it comes to dealing with government."

But Struckman isnt calling the transaction fee model dead just yet. "Its still alive for such things as business and corporate filings," he said. In fact, one of the earliest and most successful proponents of the fee-based model continues to grow. National Information Consortium (NIC) now serves 13 states and four local governments. But NICs portal business, while still its mainstay and from which the company obtains its fee-based revenue, is now buttressed by procurement services and Internet-based products. Convenience fees no longer dominate NICs business model as they did in the past.


Dueling Models
While e-government is still in its infancy, already a number of state and local governments have looked at the current crop of solutions from Internet firms and have found them less than desirable. Few are emphasizing privacy, security and data integration, all of which are considered crucial to an enterprise strategy for online services in the public sector. Government officials are also recognizing the importance of customer service as it relates to e-government. Its one thing to offer a plethora of electronic services, but if it still takes 20 minutes of phone tag -- or its equivalent on the Web -- to get an answer to a question, then government has done little to improve its relationship with its citizens.

Similar concerns in the private sector have led vendors to develop dueling strategies to strengthen enterprise applications and Internet infrastructure so that e-business can flourish. Struckman and others see the same trend occurring in the public sector. One strategy is to offer customers a complete package of software thats tightly integrated for managing everything from financials, manufacturing, sales force, logistics, e-commerce and suppliers. The leading player in this field is Oracle.

The other strategy emphasizes a best-of-breed approach, in which a vendor brings together a number of business software applications, including its own. For example, EzGov recently announced strategic partnerships with EDS and PricewaterhouseCoopers, as well as IBM, a leader in the best-of-breed approach, to offer business and technology solutions to the government sector.

Meanwhile, Oracle has begun offering the public sector its version of a tightly integrated suite of e-business software, including its databases, Internet infrastructure software and applications for enterprise resource planning, customer relationship management and procurement.

Also changing is the fact that the next business model for Internet companies serving the government market has to make money. The shrinking venture capital market is forcing the remaining dot-coms to find a distinct and reliable path to profitability. Some analysts believe this pressure will lead larger, well-established firms to make more acquisitions, should the market remain in turmoil.

Already, TekInsight has merged with DynCorp Management Resources, an IT and outsourcing services firm serving the state government market. Meanwhile, it has established numerous alliances with large firms, such as Hewlett Packard, Cisco, Microsoft, Sun Microsystems and IBM. Last September, GovConnect acquired Renaissance Government Solutions, a public sector consulting firm. In the past 12 months, NIC has acquired SDR Technologies and Intelligent Decision Technologies and has made investments in E-filing.com, Tidemark Computer Systems, and e-Government Solutions Limited.

The business model that works is the one that understands the government market and delivers the best value. That means understanding the constraints on information sharing that currently exist within government. It means devising ways for governments to invest in new technology while recognizing the public sectors fiduciary responsibility to its taxpayers. Revenue sharing is one possibility e-gov firms may consider with their government customers, according to Struckman.

Ultimately, dot-com success in the public sector may boil down to who has the best talent to match solutions with the diverse needs of state and local governments. "A lot of our success comes from our employees, many of whom came from local government," explained TekInsights Tager.