Government Technology in the 21st Century
Note: This is not investment advice.
According to a recent Pew Research Center study, only 20% of Americans currently express trust in their government, compared to 73% in 1958 and 40% at the turn of the century. This is a troubling datapoint for the future of our Republic. Trust is a critical part of any highly functioning and sustainable society, ensuring social cohesion during both good and bad times while fostering economic and social progress. In its absence, we are susceptible to social unrest, polarizing division, and ultimately, failure.
There are a myriad of reasons why this is the case, but there is no question that people’s everyday experience with government can be frustrating. We believe inefficiencies and a bad user experience during interactions with government agencies have contributed to the distrust. It’s no secret that the U.S. government needs to upgrade or replace many of the legacy software systems currently in use. I believe it’s a problem that, when correctly addressed, could create notable movement toward rebuilding the broken trust between citizens and government.
During my time as the Speaker of the Florida House of Representatives, I experienced firsthand the frustrations of antiquated software systems. The state of Florida utilized the Florida Accounting Information Resource Subsystem (FLAIR), a 30-year-old system, to manage its multi-billion-dollar state budget until 2018. FLAIR rarely functioned properly and was constantly under repair. This outdated system was the financial backbone of the third largest state in the country. Maintaining legacy systems such as FLAIR is often more costly than implementing new technologies that improve outcomes for all involved.
Not only does technological inefficiency affect the public, but the next generation of government employees are demanding new technology solutions more akin to what they utilize in their everyday lives. The existing government stack is riddled with inefficiencies and makes it more difficult for government employees to do their jobs well. Further, this antiquated solution set creates a less desirable work environment which may attract fewer qualified individuals to the government workforce. In total, this creates a systemic problem that negatively impacts the citizen experience.
Though not a magic bullet, upgrading government technology (“GovTech”) is a necessary step toward restoring America’s trust in government. By simplifying and optimizing the core technologies at the center of the daily interactions between individuals and government, whether in person or online, citizens will develop greater confidence in government institutions. New software must be easier to use, more reliable, and create a better experience for both government employees and the general public to initiate movement in the right direction.
A New Age of Government Technology
GovTech is poised for a generational paradigm shift from outdated, on-premises, and disparate systems to cloud-based software tools that create greater efficiencies, connectivity, and outcomes for all stakeholders. Boston Consulting Group's 2021 Digital Acceleration Index study ranked the public sector last out of 10 industries in terms of digitization. New, robust technologies that are designed to address these obvious needs will stand to benefit greatly.
Less than 20% of government IT systems are currently deployed in the cloud. Migration to cloud-based platforms offers cost-effective alternatives to legacy systems — no more maintaining expensive, outdated equipment — while improving scalability and interoperability across applications and jurisdictions. Cloud-based solutions have the potential to improve accessibility, ease of use, and scalability, which can increase productivity exponentially. Migration to these solutions will enable governments to provide greater transparency by sharing decisions, budgets, initiatives, and data with their constituents in real-time. Capitalizing on this opportunity, Weatherford Capital has partnered with best-in-class, cloud-native GovTech companies OpenGov, PayIt, and SOMA Global.
Projected Growth
Other investors have certainly begun to take notice of the opportunity to invest in GovTech. In 2021 alone, transaction volume across GovTech was over $14B. (1) The government cloud technology market is projected to grow from $22.9B in 2020 to $59.7B in 2026, representing a 17.4% compound annual growth rate. (2) There are very few $20B industries growing more than 15% each year.
Financial sponsors and strategic acquirers are eager to invest in the next generation of software solutions that are modernizing government. Additionally, investors believe that GovTech provides stability in uncertain times because government funding is already appropriated. In other words, the budget dollars are already set aside for necessary upgrades, they simply need to be allocated. GovTech’s resiliency speaks for itself, with the public peer set retaining ~60% more of their trading multiples vs. large-cap SaaS companies from peak-to-trough. (3)
Weatherford Capital GovTech Outlook
Weatherford Capital is highly convicted to continue investing in GovTech to help bring greater transparency and efficiency to governments and constituents. We will continue to focus on companies that are primed to disrupt homegrown systems and manual processes through well-designed technological solutions. Government cloud adoption, in particular, sits at an important inflection point. Current estimates denote 450,000 software systems across 90,000 state and local government agencies. (4,5) As of 2018, approximately 33% of these systems were 17+ years old. (6)
Weatherford Capital is focused on accomplishing more together with our partners through investment strategies that also make a positive impact on the world. As governments continue to digitize services and modernize systems, citizens’ experiences will improve, as will the credibility of governments. We have the opportunity to invest in technologies that can shape the way American citizens interact with our government. These investments can directly impact our government institutions' ability to rebuild trust and pave the way for us to progress as a nation together.
— Will Weatherford
Footnotes
GovTech Biz
Government Cloud Market Growth, Trends, COVID-19, and Forecasts (2020 to 2026). Source: Mordor Intelligence
Source: Capital IQ Market Intelligence. Market data as of each quarter end period beginning on March 31, 2019 through August 29, 2022. The large-cap SaaS peer set is based on SaaS companies in excess of $10 billion in market capitalization compiled by Weatherford Capital. Calculation is based on the peak and trough Enterprise Value / LTM multiples for each comp group through the observed period.
Tyler Technologies
Census of Governments
GovTech Biz
