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How Government Can Unlock Economic Benefits from Open Data

Everybody understands how open data makes government more transparent. But the economic value is less clear.

Zillow, the fast-growing online real estate marketplace, couldn’t exist without public data. More specifically, it probably couldn’t exist without online public data relating to real estate sales information. The nation has more than 3,000 counties, each with its own registry of deeds where routine but vital data are recorded on every transaction involving the sale of homes, businesses and land. Until recently, much of that information resided in paper documents stored in filing cabinets. But as that information has moved online, its value has increased, making it possible for firms like Zillow to use the data in new ways, creating its popular “zestimate” forecast on home values.

Zillow is a prime example of how open data creates economic value. The Seattle-based company has grown rapidly since its launch in 2006, generating more than $78 million in revenue in its last financial quarter and employing more than 500 workers. But real estate firms aren’t the only businesses benefiting from data collected and published by government. 

GovLab, a research laboratory run by New York University, publishes the Open Data 500, a list of companies that benefit from open data produced by the federal government. The list contains more than 15 categories of businesses, ranging from health care and education to energy, finance, legal and the environment. And the data flows from all the major agencies, including NASA, Defense, Transportation, Homeland Security and Labor.

Firms listed in the Open Data 500 just scratch the surface in terms of economic benefit. In April, the consulting firm McKinsey estimated open data’s economic potential at more than $3 trillion in additional value in the global economy. At the front of that economic windfall is government, which is “ideally positioned to extract value from open data and help others do the same,” according to McKinsey. “We believe government can spur value creation at all levels of society.”

In order for that to happen, government has a multi-part role to play — becoming a provider of open data; a catalyst to the users, coders and developers; a user of its own data; and policymaker, keeping risks in check while ensuring that all levels of society and business have an opportunity to use open data, according to McKinsey. All of these parts require government to do things it has managed to do with just mixed results so far. For example, providing data requires governments to not just disseminate, but to also update and standardize it. Government must also decide which data to publish. Not all data is necessarily high-value information, and besides, it’s costly to produce. So governments must decide which data sets provide the most value — not an easy undertaking. 

Zillow’s road to success underscores the challenges that lie ahead if local government is going to grab its share of open data’s economic bonanza. One of the company’s biggest hurdles was to create a system that could integrate government data from thousands of databases in county government. “There’s no standard format, which is very frustrating,” Stan Humphries, Zillow’s chief economist, told “It’s up to us to figure out 3,000 different ways to ingest data and make sense of it.”

Open Data: From transparency to economic potential

The term “open data” first appeared in 1995, but the idea can be traced back further to when states like California, with its Public Records Act, which passed in 1968, required municipalities to disclose government records to the public. Fast-forward to the turn of the 21st century and the open source movement, with its emphasis on openness, participation and collaboration, began to spread to the public sector. The idea of having a public platform for software code began to catch on as a way to lower the cost of doing the business of government. 


All In: Which Local Governments Have Formal Open Data Policies?

According to 2014 surveys from the Center for Digital Government, open government, transparency and open data rank high on the priority lists of public-sector CIOs — No. 1 for cities and No. 7 for counties. Toward that end, many jurisdictions have established open data portals over the past few years. The cities and counties below have formalized their commitment with an official open data policy.

  • Amherst, N.Y.
  • Austin, Texas
  • Bloomington, Ill.
  • Boston 
  • Chattanooga, Tenn.
  • Chicago 
  • Cincinnati 
  • Cook County, Ill. 
  • Hartford, Conn.
  • Honolulu
  • Houston 
  • Howard County, Md.
  • Jackson, Miss.
  • Kansas City, Mo.
  • Lexington-Fayette County, Ky. 
  • Los Angeles
  • Louisville/Jefferson County, Ky.
  • Madison, Wis.
  • Memphis, Tenn.
  • Minneapolis 
  • Montgomery County, Md.
  • Nashville and Davidson County, Tenn.    
  • New York City 
  • Oakland, Calif.
  • Philadelphia
  • Pittsburgh 
  • Portland, Ore.
  • Providence, R.I.  
  • Raleigh, N.C.
  • Sacramento, Calif.
  • Salt Lake City 
  • San Francisco 
  • San Mateo County, Calif.
  • South Bend, Ind.
  • Tulsa, Okla.
  • Washington, D.C.
  • West Sacramento, Calif.
  • Williamsville, N.Y. 
Source: Sunlight Foundation

A handful of public IT leaders like former Massachusetts CIO Peter Quinn led the sometimes lonely charge to get government and industry to accept this more open concept. But as Simon Chignard explained in the ParisTech Review, the idea of opening data and sharing it publicly didn’t gain traction until people like Tim O’Reilly with his Government 2.0 initiative, and Lawrence Lessig, the founder of Creative Commons licenses, popularized the ideas based on the free dissemination of knowledge.

Once these principles — free software coupled with collaborative sources of public information — began to circulate more widely and were linked with the idea of greater transparency in government, the open data movement began to take root.

In 2009, President Obama’s administration launched, under the direction of then-CIO Vivek Kundra. Transparency was a key reason behind, but so too was the idea of freeing up government data so that businesses and other organizations could exploit it for economic and social benefit. With the federal government paving the way, it wasn’t long before states and localities began unlocking data for the public.

“We’re moving from a discussion about open data for government transparency to open data having economic and social benefit,” said Daniel Castro, director of the Center for Data Innovation, a Washington-based think tank. Policies are also shifting as the discussion changes, according to Castro. Policies designed for government transparency have become policies for economic development. “The question now becomes: How do we modernize for that new goal?”

Modernizing means taking an innovative approach to open data. “That’s different from saying we’re responsive to customer requests,” said Castro. “Government has to ask itself, ‘Is it not just making data available, but is it in useful formats that businesses can get value from?’”

Right now, many local governments are in the early stages of the open data movement. Transparency is the concept that drives many initiatives, and hackathons are the medium for public consumption of open data. But to get to the next level, where open data carries economic value, requires a more rigorous set of expectations. According to Castro and others, local governments have to provide reliable data over the long term. 

“Companies need to know they can trust government to deliver the data and that it will be there five years from now,” he said. “If there’s a budget shortfall, businesses need to know that the data won’t be shut off.”

Governments that have succeeded in turning open data into an economic benefit are not only reliable, but also achieve a series of benchmarks that set them apart from others. These are the “trend setters,” a term used in a report published by Capgemini Consulting, which analyzed the open data policies and practices in 23 countries (including the U.S.) and found that the best results came from governments — the United Kingdom, France, Canada, Australia, the U.S. — that were in it for the long term, rather than for short-term political gain.

Dinand Tinholt, a vice president at Capgemini and author of the report, Open Data Economy, agreed with Castro that reliable, frequently updated data is crucial to becoming an open data trend setter. “The single biggest complaint we hear from users of open data is that government doesn’t update its data sets,” he said. To avoid that problem, Tinholt said governments must think of themselves as a “reliable supply chain partner” for businesses.

Besides reliability and a long-term commitment, trend-setting governments share the following traits when it comes to open data:

  • Release extensive amounts of data sets (“but they should be the best data sets,” said Tinholt);
  • Have significant capabilities to make information easier to source and to generate dialogs;
  • Publish data with significant breadth and granularity;
  • Have a high level of user participation; and

  • Share quality data with users, ensuring increased uptake and an active user community.
With only 22 percent of the countries analyzed by Capgemini categorized as trend setters, however, much more work needs to be done by governments if they want to unleash the economic potential of open data. “Government is not good at seeing where the value lies in the data,” Tinholt said. “Their perspective is often based on politics or law.”


Should All Government Data be Free?

Ask any open data advocate what the most important criteria governments need to follow when launching an open data initiative, and invariably the phrase “free access to data” is mentioned. On the surface, it makes total sense if an entire community of citizens, developers, organizations and businesses are going to collaborate, share and unlock value from public data. After all, the data was collected using taxpayer dollars, so why shouldn’t it be free?

Most governments around the world provide free access to data, allowing citizens to view the information, but not necessarily download it, according to a report by Capgemini Consulting. “Government data is a public resource and should be free or available at minimum cost,” said Stefaan Verhulst, co-founder of GovLab at New York University.

But views change if the open data is to be used for commercial purposes. If government collects data that is of high value to a particular industry or company, should it still be free? “If that’s the case, then it doesn’t always make sense that everybody else should be subsidizing that,” said Daniel Castro, director of the Center for Data Innovation.

Castro suggests that governments need some leeway to “innovate on the business model in terms of cost recovery, because over the long term, open data needs to be sustainable.”

Research organizations and consulting firms recommend that governments consider cost recovery models for commercial uses of open data, but that the charges be kept minimal. Lower costs can increase usage, while also generating the revenue necessary to sustain a government’s open data initiative. Capgemini reported that the Austrian government agency in charge of geographic information lowered its fees by 97 percent, which resulted in a 7,000 percent growth in demand for certain products, increasing overall revenue by 46 percent in fees paid to the government.


But that perspective is shifting as more governments discover different uses for open data, measure the results to find out who is actually benefiting and become reliable data providers. For the private sector, the economic benefits of open data could be enormous: new business opportunities; reduced costs by not having to invest in the conversion of raw government data; better decision-making based on more accurate information; and a more skilled workforce.
For government, the benefits of open data can be just as rewarding. According to Capgemini, they include: more tax revenue through expanded economic activity, higher revenue through the sale of high-value information to specific companies, reduced transactional costs and increased service efficiency through linked data.

McKinsey, which released a report on the economic benefits of open data in April 2014, found similar benefits as well as others, like the ability to spur on private-sector innovation; create thriving “ecosystems” of data users, coders and developers; and overcome internal barriers to using data from other parts of government.

McKinsey took a detailed look at the impact of open data in three key economic sectors that heavily involve government and found that open data already is making substantial improvements to education, transportation and health care. For example, in Boston, open data changed the methodology for public school assignments, improving what had been a contentious issue for parents, neighborhoods and schools. In Europe, open data helped school administrators forecast when certain supplies and services will be required, driving down costs by as much as 24 percent. 

In Duluth, Minn., open data helped city residents decide if the local bus offers a better alternative to driving. The result: Bus ridership is up 12 percent, traffic congestion is down and the cost of transportation has dropped for many passengers. In 2012, San Francisco opened up access to real-time transit data, resulting in 22 percent fewer 311 calls, saving the city $1 million. 

In health care, open data has been shown to help patients manage their own health and avoid illness, as well as get better treatment. Open data also has been linked to reductions in lifestyle illnesses, such as hypertension and diabetes.

Read part II -- How to Unlock Economic Benefits from Open Data -- here.

With more than 20 years of experience covering state and local government, Tod previously was the editor of Public CIO, e.Republic’s award-winning publication for information technology executives in the public sector. He is now a senior editor for Government Technology and a columnist at Governing magazine.