Using hybrid funding strategies to support the State of Arizona

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1 IBM Institute for Business Value Using hybrid funding strategies to support the State of Arizona In 1998, the State of Arizona wanted to ensure that its citizens, businesses and visitors reap the benefits of its cultural and traditional diversity by enhancing the sense of community and unity among its constituents. In searching for the solution to enable these benefits, representatives faced a critical question: How do you support and maintain unity and keep businesses, agencies and constituents abreast of all that is going on in the State of Arizona? By Maria T. Gresham, Ph.D. and Jeremy Andrulis

2 Contents 1 Introduction 2 The funding model 7 Benefits of the AAYS Portal funding model 8 Lessons learned 9 Conclusion 9 About the authors 10 References Introduction Arizona, the Grand Canyon State, is a melting pot of cultures and heritage. Across its vibrant landscape, diverse cultures and traditions blend with tall mountain ranges, swift rivers, grasslands, sand dunes and cactus forests. Building a strong sense of community within the state became the driving force to support a number of the State s e-government initiatives: 1 e-learning Improve access to educational tools that support learning and development by providing education and training over the Internet to schools and companies. e-government Provide greater access to government information and services by using Internet tools to deliver better customer service and enable more effective operations. Inclusion and connections Develop the right communications infrastructures for rural areas to help encourage enterprise and improve quality of life, and determine ways to ensure that everyone can participate in the digital economy through education, networks and connections. Economic development Provide greater opportunity for participation in economic growth, education and the community, by supporting the incubation and networking needs of entrepreneurs. Our goal is to use the portal to ensure every citizen has access to the government Craig Stender, Director of the Government Information Technology Agency (GITA) and Chief Information Officer for the State of Arizona, believes that one of the ways to keep the State connected is through the adoption of a portal. Our goal is to use the portal to [ensure that] every citizen has access to the government over the Internet Today, the portal Your Service (AAYS) is at the center of Arizona State Governor Jane Dee Hull s e-government initiative. Finding the solution to keeping Arizona connected was the first step. The second step consisted of making the portal a reality. Given the State s shrinking budget, the key question became: How can the State create and fund AAYS? Arizona s response was to adopt a hybrid funding model. This paper describes how the state of Arizona adopted a flexible, hybrid funding approach to implement and maintain its Internet portal. 1

3 Figure 1. Your Service, In short, supporting the risk of this effort was a critical characteristic of our collaborators. The funding model Getting started: Assessing the need, building the case, choosing the partner What we really wanted to do in 1998 was look at self-funded portal models, said Gene Martel, the State Web portal manager, responsible for the delivery of all contracted services. This decision was sparked by increasingly tight information technology (IT) budgets. The optimal type of funding model was determined based on initial benchmarking efforts of other state portals and funding methods. Benchmarking analysis showed that many other state and local governments were adopting transaction fee-based approaches to funding models. Additional analysis indicated that the benefits of this model included: High potential revenue stream Ongoing revenue source Lower upfront investment Lower implementation risk. 2

4 Furthermore, secondary analysis indicated that Arizona s agencies were interested in participating in the portal (for example, parks and recreations, and game and fish license agencies). These analyses also indicated that substantial costs would be associated with portal development (for example, infrastructure development). However, critical benefits would outweigh those costs: Greater and centralized customer access to government information and government services Agencies, businesses and constituents would have access to the information and services needed during and after nontraditional business hours. More-efficient operations The development of services through the portal would present an opportunity to streamline processes to support more-efficient operations. Arizona issued a Request for Proposals to help develop the portal. The state team wanted to establish a relationship with a vendor who could address the growing needs of their egovernment portal. IBM technology leadership, experience and ability to address future development needs put it at the forefront of other strong vendors. Furthermore, IBM presented a model that demonstrated its dedication to maintaining a long-term relationship with Arizona by presenting to the state the opportunity to share the risks and rewards of the portal s success. Funding the development of the portal Because Arizona wanted to develop a long-term vendor relationship, the state wanted a partner who would share the implementation costs and risks as well as the post-implementation benefits. IBM mitigated upfront costs by providing and supporting the enterprise portal infrastructure and application development resources. In exchange, IBM accepts transaction fees for e-government services provided through the portal. The benefit of this approach was that the agencies with tight budgets for IT investments were not charged for the development. These agencies had an opportunity to see the true benefits and use this knowledge to build the case for e-government and IT development specific to their needs. 3

5 Current funding methodology The State of Arizona has developed a hybrid funding model that is flexible enough to support the changing needs of the portal. After the portal had been developed, ongoing portal funding was derived from three sources: Subscription fees Annual subscription fees for baseline services targeted specifically at businesses and professionals requiring continued access to commercially valuable information. Convenience fees Add-on fees charged for commercially valuable information. Transaction fees Fees charged for services and activities such as license, title, registration and renewals that are absorbed by the government agency. Arizona s hybrid funding model is flexible because of the strategic approach adopted. Arizona continuously assesses its portal strategy, customer needs and funding requirements and addresses funding issues associated with these factors, as necessary. For example, in one particular instance, it was recognized that citizen transactions for the motor vehicle renewal service were extremely low because a convenience fee was charged. The convenience fee was eliminated in favor of an agency-paid transaction fee. 2 The result was an almost immediate tripling in transaction volumes. Figure 2 shows the history of the hybrid funding approach to support the portal. Description Amount charged Derived payment Transaction fee Fees charged for Fees ranging from transactions on services US$ Government agencies rendered using the portal per transaction Convenience fee Fees charged for the Approximately Constituents, expediency associated US$1-7 per use commercial entities with using the portal Subscription Fee for baseline services Fees range from Commercial entities for businesses and US$ and professionals professionals requiring per subscription continued access to information Figure 2. Summary of funding mechanisms used to support the changing needs of the portal 4

6 A methodical approach to funding means determining ways to address the needs of the customers while maintaining the financial viability of the portal. Taking a methodical approach to funding requirements A major challenge with this particular funding model is its connection to IT budgets. The state deficit for fiscal year 2003 is estimated at over US$1.5 billion. This deficit, coupled with the effects of the terrorist attacks on September 11, had a significant impact on how agencies plan to fund IT investments. Per Stender, Since agencies are facing budget crunching issues, they are looking at IT budgets and really looking at the return on investments. This budgetcrunch impacts the funding strategy. For Arizona, it influences the decision to increase fees and raise transaction rates. As Stender suggested, We want to make sure that the customers are getting value-add. We work to understand what the customer needs, for example, customized queries and more secure access to data. But we would like to get more online transactions that can be completely self-funded. We have to reassess rates. To ensure that future development activities meet the changing needs of the customers and result in financial support for the portal, Arizona takes a methodical approach to application and service development. Thus, Arizona makes a strategic assessment of the portal funding needs, its customers and its strategy in its methodical approach. Further, Arizona uses the Arizona legislation as a foundation for determining its approach to funding. 3 As Stender stated, We have developed a process to evaluate all government transactions. Some of the criteria are the number of transactions and public value, and we have a method to measure the transactions. We are trying to spread e-government as far as we can. While appropriationbased funding, in general, is desired, not all funding models are created equal for the State of Arizona. Further, Gene Martel, the state s portal manager allowed, We have a process that does due diligence. Some of our applications include a payment interface for vendor registration with the state businesses that want to do business with the state. The payment interface [allows us] to accept payments through the portal via the central payment component. We are also looking at a secure gateway, where we have business partners anyone with a special application requirement that would need a level of certification and authentication. 5

7 Looking to the future: Weigh up other funding options The expansion of AAYS requires continuous assessment of funding models and the benefits and drawbacks of those models. While almost any additional funding to support AAYS is welcomed, not all funding models are created equal for the state s needs. For example, Stender and Martel indicated that the appropriations funding model was the most favorable funding model. As Martel stated, It really is a better way to go. Having a legislation appropriation makes a lot more sense. Appropriations are preferable in securing funding to support the portal on an annual basis because it would be a part of the agency s budget. An appropriationbased model would also facilitate the ability to plan the implementation schedule because there is greater understanding of the financial support for each new and existing service. Unfortunately, because of the tight state and local government budgets, this is not the most probable option for the near future. Although appropriations were viewed as most beneficial, models involving advertisements were not considered feasible. Based on research from other states that have used advertising compared with the goals of AAYS, the potential payout from advertisements was not sufficient for the amount of work involved in soliciting those advertisements. The selection criteria for choosing advertisers for a government Web site is much more complicated than for a commercial enterprise, due to the differences in public opinion regarding certain businesses and the general perception of the role of government in support of certain advertisers. Thus, to eliminate the potential political, citizen and public interest backlash that may come from this model, it is not a preferred method. As an alternative, federal grants are now considered a viable option. This is especially true given the increased concern about homeland security and the role of e-government in this effort. 6

8 Benefits of the AAYS portal funding model Your Service does more than provide information about the state on a Web site. In its quest to keep Arizona connected, AAYS provides services and information required by state agencies, businesses and citizens. We ve launched the portal and have good information [about its success] and good information regarding other applications and services to be built, said Stender. For example, We have a customer feedback area. It is one source to gauge what the citizens want, stated Gene Martel. For example, a recent survey showed an increased interest in taxation and security issues. Thus, We use the portal to address taxation and homeland security. We are very sensitive to what the public wants. We also have a digital government survey where individuals can actually vote. It helps confirm the direction that we are taking, said Martel. Providing the applications that the agencies need and the services that the Arizona community wants were expected benefits. However, AAYS provided some additional benefits: Support for the state s e-government initiative Improvement in customer interaction with the state More cost-effective approaches to providing services. Providing agency services through the portal, as Martel stated, gives agencies an opportunity to realize process improvement. We look at the benefit of providing the service over the Internet and the process improvements needed to determine how their back-end processes would be impacted. All of a sudden, [the portal] serves as an opportunity to clean things up. For example, many agencies were quick to say that a signature requirement existed, without thoroughly thinking through this requirement. After process improvement assessments, it was learned that more often than not, there is not a statutory requirement for a paper signature. 7

9 Lessons learned Your Service has experienced great success, but not without providing the state with some valuable lessons for moving forward. With respect to the current funding model for AAYS, Craig Stender and Gene Martel provide 10 critical lessons: 4 Involve the State Treasurer department As Martel suggested, They establish banking relations for the benefit of the state. They are a tremendous resource for banking knowledge. Know the implications of the fees charged By Arizona Statute, You can ask for a convenience fee if the service is recreational in nature. If the service is necessary for you to conduct business, the fee must be absorbed by the agency, said Martel. A discount fee is what credit card companies will charge. The transaction fee is charged by the portal for a given transaction. Depending on the application or deliverable, this fee will be paid by the agency or passed on to the consumer. Understand the benefits and drawbacks of each potential payment option For example, Electronic check is actually a more attractive method for payment [than credit card]. You are only talking about twenty-five cents for a transaction. Now we are going to look at providing that as an option since discount fees are way too much, said Martel. Know what your customers are willing to pay As Stender suggested, Customers are really sensitive to costs that are viewed high above the regular price. With vehicle registration we initially charged a US$6.65 convenience fee. When we reduced the fee to zero, it went up 130 percent. 5 Advertise the e-government service For renewal-type transactions, the largest advertising impact comes from direct renewal insert and is the most cost-effective. Free press releases also work well. Handle electronic transactions in a similar manner Transactions handled over the phone or Web can utilize the same back end to update the host database. Provide change management to support the transformation Behavior patterns are hard to change. Citizens are used to the government having normal office hours. Changing that concept requires significant education and marketing to both the citizens and agencies. 8

10 Use customer suggestions for improvements of services Periodically reviewing suggestions and survey responses is the best way to improve online services. Think ahead about removing barriers to e-government transactions Signature requirements, supporting documentation or other factors will inhibit transactions from being considered for e-government. Address these issues early to determine if the requirements can be eliminated or technology can be used to support the requirement. Determine if partnering is necessary If the process changes require the cooperation of multiple agencies, begin the partnering process early. Conclusion In February, 2002, Governor Hull accepted the Digital State 2001 Award in recognition of Arizona s ranking among the top five states in the 2001 Digital State Survey. This is an improvement from Arizona s 17th place a year earlier. 6 Thus, state agencies are working hard to connect the citizens in the State of Arizona and to bring state government closer to the people. However, the concept of AAYS is as Stender suggests, still an on going process. The spirit, if you will, for the state is still there. Their methodical approach that includes the continuous assessment of the funding model helps supports the state s success and vision for the future. About the authors Dr. Maria Gresham is a Certified Business Transformation Consultant in IBM e-business Strategy and Change, Public Sector category. She helps clients manage enterprise-wide implementations, realize efficiency improvements and improve decision-making. You can reach Maria by at gresham1@us.ibm.com. Jeremy Andrulis is a management consultant with the IBM Institute for Business Value. He helps governments at all levels identify innovative strategies for successfully managing change. Contact Jeremy at andrulis@us.ibm.com. For additional information regarding the State of Arizona Portal Project, contact Scott Whitfield, Project Executive, Certified, IBM Global Services, Government Industry at scott_whitfield@us.ibm.com. 9

11 The IBM Institute for Business Value develops fact-based strategic insights for senior business executives around critical industry-specific and cross-industry issues. Clients in the Institute s member programs the IBM Business Value Alliance and the IBM Institute for Knowledge-Based Organizations benefit from access to in-depth consulting studies, a community of peers and dialogue with IBM strategic advisors. These programs help executives realize business value in an environment of rapid, technology-enabled competitive change. You may contact the authors or send an to bva@us.ibm.com for more information on these programs. To browse through other resources for business executives, we invite you to visit ibm.com/services/strategy Copyright IBM Corporation 2002 IBM Global Services Route 100 Somers, NY U.S.A. Produced in the United States of America All Rights Reserved IBM, the IBM logo and the e-business logo are trademarks or registered trademarks of International Business Machines Corporation in the United States, other countries, or both. Other company, product and service names may be trademarks or service marks of others. References 1 Arizona Department of Commerce, References in this publication to IBM products and services do not imply that IBM intends to make them available in all countries in which IBM operates. 2 This was one particular instance and is not a general approach to convenience fees. Arizona does use convenience fees. For example, convenience fees are charged to commercial entities and for some nonmandatory citizen transactions (for example, ordering a personalized license plate). 3 Arizona legislation, ARS35-142, section K states: Any state agency that contracts with an authorized agent for the electronic processing of transactions pursuant to title 41, chapter 23 may include a provision in the contract to allow the authorized agent to impose a convenience fee. If allowed, the convenience fee shall be charged to the cardholder in addition to the transaction amount See for more details. 4 Additional lessons learned by the State of Arizona are available on the American Association of Motor Vehicle Administrators (AAMVA) Web site at 5 This was one particular instance and is not the general approach taken towards convenience fees. Arizona uses the Arizona Statute ARS to determine its approach to portal fees. 6 Government Information Technology Agency, G