July 11, 2011
Local governments continue to evaluate their short- and long-term objectives and the tools they need to achieve them. As they do, it is increasingly obvious that those tools include not only the technologies to transform their internal processes and external citizen programs and services. The business model – how the cities partner and purchase – is the most important enabler to a technology-driven government transformation. Governments no longer – if they ever really did – go out and purchase technology. Rather as governments increasingly turn to technology-driven solutions, they are pushing vendors to adopt business models that have long been popular in larger infrastructure-based public works projects – public private partnerships (PPPs).
The PPP model, however, has been a daunting proposition for many vendors. I’ve heard many technology vendor strategists state categorically:
“PPPs are not in our DNA.”
“We do them if we have to.”
“Our competitors are driving us in that direction.”
But more recently, particularly in the context of the smart city opportunities, tech vendor strategists are embracing alternative business models. They still, however, tend to avoid the term PPP – although the models chosen are all forms of “partnership” with the public entities they are serving. Here are four examples:
- Outcome-based contracts or performance contracts. These contracts are common in energy management and have becoming a popular business model in smart buildings projects as they allow government entities to undertake a project without capital outlay, a bond measure, or congressional appropriations in the case of a federal agency. Schneider Electric estimates that about 10% of their contracts are performance-based, and all of those are with public sector customers. This model is increasingly common for IT services and outsourcing providers, as often costs savings is the primary driver and the ultimate benefit. And, the rate of adoption and interest is noticeably higher in government than across other industries (See Figure).
- Transaction-based pricing. This model facilitates revenue generating projects. Vendors take a cut of fees collected through a new process. Accenture has recently provided a new system to license US Internal Revenue Service (IRS) tax preparers and is paid directly from the licensing fees. Telefónica has used a similar model with regional governments in Latin America as a means of facilitating new smart city projects in transportation and eGovernment.
- Joint ownership structures. Another model is to form an organization with ownership of a particular asset. Participants take an equity share sometimes with long-term revenue guarantees. Cisco has embraced this model for several projects in India – with their investment in Lavasa – and elsewhere in Asia. IBM's partnership with several local governments in the UK, SouthwestOne, illustrates the joint ownership model. Municipal broadband projects can also follow this model.
- Crowd or citizen-sourcing. Here, individual citizens and businesses leverage open government data to develop applications that fill a need but are not provided by the city or government agency. Such initiatives have generated a massive portfolio of mobile applications providing services like Barclays Bike Hire, a service providing bike rental availability in London and CrimeReports, which presents crime data from city police departments. Other applications enable citizen feedback such as Street Bump, a crowd-sourced application to report street conditions to the city. Nationwide programs such as Code for America work to connect cities and open government projects with citizen-developers. While not a classic PPP, technology vendors do participate as part of either philanthropic or long term business development programs.
As always, I’d love to get more examples and hear about experiences in crafting new business models to enable public sector projects.