Powering Progress with GovTech
| Lincoln International’s government technology (GovTech) market observations highlight the increasing preference of government agencies for integrated software solutions, driven by the need for efficiency, reliability, and coordination. There is significant growth potential in the GovTech market, fueled by cloud migration, federal support and strategic M&A activities, with valuations showing resilience and upward trends.
In this series, Lincoln International delves into the GovTech market, exploring its innovative solutions, trends, opportunities and positive impact on public sector operations. |
Summary
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GovTech
- Lincoln International launches a GovTech series where our experts will explore the sector's trends and opportunities.
- Connect with a Senior Professional
Volume Two: Trends Driving GovTech
In the second volume of the GovTech series, Lincoln’s experts explain how the sector represents a large, underserved market in the software industry with significant growth drivers fueling adoption and spending.
GovTech is a Large and Growing Market Ripe for Disruption
The public sector represents one of the most well-funded, yet underpenetrated, markets in software. This can be attributed to outdated systems, bureaucratic hurdles, long procurement cycles and resistance to change. The GovTech market is highly fragmented, with few providers of scale, and plenty of whitespace for innovators to capture significant market share. Further, multiple tailwinds continue to accelerate spend in new solutions, yielding a significant opportunity for vendors, acquirers and private equity (PE) firms.
Forecasted Global Government Software Market Size1
Government’s Accelerating Investment in the Cloud2
GovTech is an expansive market early in the software adoption curve with multiple trends driving continued growth in the near term.
~80% |
Approximately 80% of on-prem ERP adopters are likely to migrate to a cloud-based solution in the next three to five years. |
|---|---|
50%+ |
Over 50% of government IT leaders are developing cloud migration strategies for operational efficiency. |
10%+ |
Cloud vendors for cities, counties and towns are experiencing 10%+ growth in Software-as-a-Service subscriptions. |
$500B+
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Federal support for cloud technology is at an all-time high, with $500 billion+ allocated for state and local digital infrastructure. |
$1B+ |
Grants totaling $1 billion+ awarded to state and local governments to provide technical assistance & support to regional communities as part of the Build Back Better Regional Challenge, matched by $300 million in private funding. |
50% |
Some localities now have substantial “rainy day funds,” reaching up to 50% of annual operating expenditures, indicating significant purchasing capacity. |
Predictions for the GovTech Market3
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| By 2025, 75% of governments will expand the adoption of cloud solutions to 50%+ of total spend. | By 2026, 78%+ of government CIOs will increase investments to produce positive citizen experiences as a critical business outcome. | By 2026, 60%+ of government organizations will prioritize investing in business process automation, up from 35% in 2022. |
GovTech Has Compelling Tailwinds Increasing Adoption and Spend
Strong market forces and strategic initiatives are propelling GovTech cloud adoption and investment.
Intensifying Demand for Purpose-Built Solutions
| Under-digitization in local governments drives the need for modern cloud-native solutions.
50% of local governments still rely on outdated or homegrown systems, representing a ~$20 billion market segment that requires modernization to enhance efficiency and provide purpose-built functionality |
| Federal stimulus money (e.g., ARPA) supports stable budgets for local governments.
Massive amounts of funding are contributing to local government’s continued digitalization movement. |
| Desire for increased transparency and efficiency resulting in the adoption of purpose-built software.
Public sector employees are demanding better efficiency and transparency, while citizens are seeking increased visibility into government operations, spending and revenue. |
| Labor shortages fueled by an aging workforce are incentivizing governments to leverage software to increase efficiency and productivity.
Government agencies are constantly looking for new ways of doing more with less amidst challenging labor markets. |
| COVID-19 and cyber threats drive governments toward secure, cloud-based solutions.
The shift to work-from-home due to COVID-19 and the increased threat of cyber-attacks are compelling governments to adopt fast, secure and effective cloud-based solutions. |
| Demand by citizens for modern, accessible and resilient solutions is accelerating.
Consumer expectations for easy-to-use, digital-first solutions have extended to all facets of daily life, including paying bills and accessing public resources. |
Sources:
(1) Verified Market Reports; includes spend related to the creation, application, and upkeep of software solutions specifically designed to satisfy the particular requirements and needs of governmental bodies at all levels, including local, state and federal governments
(2) Gartner
(3) Deloitte; Technology Business Research; NYS Office of the Controller; WhiteHouse.gov; Eda.gov
Volume One: Integrated Solutions
In the first volume of this series, our experts explore why government agencies prefer integrated solutions as well as value-creation opportunities for vendors, acquirers and private equity (PE) firms.
Government Agencies Prefer Integrated Solutions
Government decision-makers are pushing toward consolidating their technology needs across jurisdictions, departments and agencies, providing an excellent opportunity for a full-suite government software player to capture significant market share.
Government agencies rely on a myriad of systems to facilitate daily operations. Each of these systems can be sold as standalone point solutions, but many government agencies prefer to consume them from a single, consolidated vendor.
Below is a look at an illustrative government agency tech stack. These systems monitor the back-office details for revenue-generating segments and can integrate with payment processing solutions to enable real-time reconciliation and increased data accuracy.
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Benefits of an Integrated Platform
Government agencies’ preference for one platform makes purchasing from an existing vendor favorable, faster, and much easier, driving a fertile cross-sell strategy.
| Ease of Use: By providing one centralized portal for all back-office functionality, integrated platforms reduce the potential for user errors, simplify training and decrease the investment required for support / maintenance. |
| Efficiency: Agencies are often resource-constrained, especially when it comes to IT personnel / budgets. Using one vendor simplifies procurement, maintenance, training, integration, etc. and reduces the total cost of ownership. |
| Power of Integrated Apps: Real-time reconciliation across applications provides a better customer experience, reducing / eliminating highly manual / time-intensive reconciliation processes and increasing data accuracy across all functions. |
| Common Buying Center: The selection process for small government agencies is centralized around a single decision-maker, reducing the need for interdepartmental buy-in (e.g., budgetary, compliance, trust) when acquiring additional solutions. |
Massive Value Creation Opportunity for GovTech Vendors, Strategic Acquirers and PE Firms
The potential for value creation driven by cross-selling, mergers and acquisitions (M&A) and organic growth is massive, proven and highly actionable as the industry is in the early innings of digitization and software adoption.
| Cross-Selling Prospects: A natural cross-sell opportunity exists for any vendor that has multiple solutions, given customer preferences for an integrated platform. |
| Opportunity for Accretive M&A: Because cross-sell drives revenue synergies on top of cost synergies, more M&A targets are likely to be accretive. |
| Higher Retention Profiles: Customers who purchase multiple solutions from the same vendor tend to be stickier than those who purchase one solution. |
| Attractive Unit Economics: The cost of acquisition for smaller annual contract value customers can be more economically viable for Software-as-a-Service vendors because cross-selling of additional solutions can make them more profitable over time. |
What is the Opportunity for Vendors, Strategic Acquirers and PE Firms?
The attractive buying behavior of government agencies makes this a market particularly ripe for value creation via cross-selling, accretive M&A and organic growth.
| Factor Customer Preference into Valuation: For add-ons, feel more comfortable underwriting revenue synergies. For platforms, consider how add-ons can be more accretive than in commercial end markets. |
| Prioritize Growth Strategies Accordingly: Pursue add-on M&A more aggressively. Payments have proven to be a particularly successful cross-sell / growth opportunity. |
| Building vs. Buying: Consider creating instead of acquiring a product suite. As local government is less digitized, they have fewer product requirements. New product development efforts may not be so costly or long. |
| Avoid Common Pitfalls: Integrate products to reduce the burden on customers. Focus on the ideal customer profile / buying center as cross-selling is more successful when to the same buyer / type of customer. |
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