August 31, 2001 By Tod Newcombe
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
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