Government has been slower to adopt cloud-based, digital tools, and many rightly blame poor technology administration. (Indeed, a study showed that 97% of all significant federal IT projects fail.) On the other hand, the staggering pace of growth in SaaS GovTech companies suggests the market has changed — or at least is. Why? Three trends have been fundamentally changing the buyer landscape in government technology over the last ten years: new leadership, personnel turnover, and SaaS experience.
Together, these suggest that this demand-side shift will drive more significant ARR for an industry that has already seen 110% growth over the ten years (from $52.8B to $111).
A New Brand of IT Manager
Historically, the IT department was considered a secondary administrative function. In cities, that meant an IT group (a manager and a few analysts/engineers) would report into an Operations Director, then a General Manager, and finally a city manager, or city council. As the role of technology has elevated throughout society, the same has happened structurally within government. After the White House in 2009 by appointing the first Chief Technology Officer and Chief Information Officer, states and cities — that could — followed suit. Various senior technology roles — CIO, CTO, Chief Innovation Officer, Chief Digital Officer, etc — now exist in over 40 of the 50 of the largest cities, and in every single state. Along with those roles came the elevation of the IT departments to “cabinet-level” meaning that at the very least technology was more publicly visible as a priority for the government. Also, it promises to enable smarter and broader use of technology as the interdepartmental connections grow deeper — and the operational leaders (e.g. GM of Buildings) better understand technology themselves.
These reinforcing trends — new IT roles, elevated departments, and technical operational leadership — should open up the previously entrenched, legacy-dominated government technology market to new players on the outside, just like on the inside.
Empty Seats, Open Opportunities
During a budget crisis, typically governments first start with “cuts” to back office operations: HR, facilities, and IT. Through research, however, it seems that these “cuts” are not as deep as they seem. Indeed, some were furloughed or took the option for early retirement. But overall, the size of IT departments in terms of budget headcount did not seriously change year-to-year (or at least that is the expectation at this writing). The jobs are there even if the positions are not filled. We see the same in 2008, when a contraction in local government IT was expected but never occurred. For various reasons, civil service requirements, labor relations, and departmental self-interest ensure those positions remain: on the last, the political fear of losing a headcount permanently outweighs the administrative hassle of, say, leaving it unfilled for a few years. For instance, the Los Angeles IT department is at roughly 60% capacity — with many, many open jobs. At the same time, hiring technology talent is difficult for even the most financially generous tech companies, and the skills needed to maintain the legacy systems are fleeting. And these often require heavy customizations in bespoke languages. As those system fade away, many CIOs shared active efforts to rewrite or reframe existing job descriptions away from “developers” or “engineers” towards “managers” and “architects” — jobs with an eye towards integrating a host of cloud systems not deeply customizing one.
Digital Services, not Tech Support
The fear coming into the pandemic within local government was profound. Local governments live off their businesses, and are responsible for the majority of public health: the nightmare scenario of no revenue and unprecedented expense. The reality, fortunately, was not so bleak — in fact, most report the budget surpluses through the pandemic. And the federal and state recovery dollars continue to flow (unevenly, however) into local coffers.
That said, this budgetary windfall should not be seen as a free lunch for software vendors. Over the three dozen local government leaders spoken to over the last 6 weeks, none specified that recovery funds were being allocated for IT “capital projects.” Many did, however, find money during the pandemic for rapid deployments. Across the board, governments were forced to adopt and support new digital tools — primarily productivity tools for remote work — and many even rapidly integrated quick deploy SaaS solutions to enhance the digital experience for or engagement with residents. (A few even reported more substantial, yet rapid deployments of ZenDesk.) So even the staff that had not turned over within their departments began having to adapt. IT was not just fixing printers, but backing up Dropboxes; not just restarting desktops, but provisioning Zoom licenses. IT departments are increasingly digital service providers for every departments. In sum, for local government, digital became the norm for IT in 2021 moving forward.