Powering Progress with GovTech

Sep 2024

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

GovTech
Lincoln International launches a GovTech series where our experts will explore the sector's trends and opportunities.
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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.

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.