Indirect Return on Investment

Link to specific savings information

By showing companies how e-government can improve their bottom line, CIOs can help business and themselves.
By William D. Eggers
August 2003
Donna Klein is an accountant at J. Cleo Thompson & James Cleo Thompson Jr., a small Texas oil and gas producer with 20 full-time employees. As part of her job, she has the unenviable task of filling out all the government paperwork that allows the firm to conduct business without running afoul of the law. To do her job well, Klein has learned something she was never taught in accounting class: the art of navigating government red tape. Each month she completes 11 different forms for four separate state agencies -- and that doesn't include the federal paperwork. "I spend about one week each month just doing government paperwork and reporting," she said.

One report is for the West Texas Operations of the University of Texas (UT) System's University Lands Accounting Office. The reports are required of all oil companies that operate oil and gas leases on Permanent University Fund lands in West Texas. Under the old paper-based system, Klein spent three workdays each month filing reports and amendments to the University Lands office. Not anymore.

Thanks to two new Web-enabled systems -- the Electronic Reporting System (ERS) and Electronic Customer Accounts Receivable (e-CARE) -- companies can submit reports and payments online. Klein now spends only four hours per month completing the reports. This translates to only 48 hours each year, compared to 288 hours before -- one-sixth the time. This saves J. Cleo Thompson about $12,000 per year -- a significant sum for the small company.

The online system has also given Klein peace of mind. "I can anticipate the next report and go on vacation without having to worry about missing a payment," she said.

The UT's cost savings from Web-enablement amounts to just over $300,000 per year. While the University Lands office hasn't officially calculated industry savings, an informal calculation clearly shows they dwarf UT's savings. Extrapolating the $12,000 in savings realized by J. Cleo Thompson to the other 225 oil and gas companies that now file electronically yields $2.7 million. The actual savings is likely to be much higher, because many companies have more leases than J. Cleo Thompson and therefore would have to devote more effort to government paperwork.

The UT Lands Office story illustrates two important points. First, the cost benefits to citizens and businesses from e-government will often be greater than the benefits to government itself. And second, government rarely even tries to quantify such benefits.

Measuring Constituent Value
In the 1990s -- when government budgets were flush with cash and e-government was in its formative years -- CIOs typically weren't required to make the business case for IT in a rigorous, meticulous way. Policy-makers launched e-government programs because they knew viscerally that providing around-the-clock service to citizens was the right thing to do.

Those days are long over.

With governments at all levels struggling with huge budget deficits, robust business cases have become de rigueur for all new IT outlays. While a few efforts have yielded impressive results -- Iowa's ROI methodology, for example -- most government ROI and business case methodologies suffer from at least one major flaw: a failure to measure real and quantifiable benefits to citizens and businesses from e-government investments. According to an Office of Management and Budget official, for example, only a tiny fraction of the hundreds of e-government business cases the agency reviewed this year even attempted to calculate the potential benefits to businesses and citizens.

This represents a significant hole in the business case analysis because information technology's ROI can't just be measured by direct return -- by doing things more efficiently for its own sake, or even to generate cost efficiencies. Both should play a central role in calculating the ROI, but neither is sufficient because government competes not for its own benefit, but for the benefit of stakeholders with different needs and priorities. The value of a government investment must be measured not only by its direct return to government, but also by its return to the citizens government represents and the businesses citizens work for and invest in.

In addition to being the right thing to do, quantifying the value of e-government to constituents can help politically because it helps IT leaders build a more powerful, multi-faceted case for e-government. Politicians' eyes tend to glaze over when discussions turn to the internal benefits of technology projects. Demonstrating the value of digitization as an economic development tool, on the other hand, would resonate with them because it helps an important constituency: the business community.

This gives CIOs an opportunity to enlist a new ally in the fight to fund e-government projects. The business community has long fought to prevent new regulations or eliminate existing ones. However, when it comes to promoting e-government -- a potentially powerful means of reducing compliance costs -- business has been absent from the debate. Why? Because most companies don't have the slightest conception of how e-government would affect their bottom line. No one in government has ever tried to make this case to them. One federal agency is trying to change that.

Reducing the Burden
Every year the federal government introduces 4,000 regulatory changes. Lacking in-house lawyers to help them navigate the regulations, small businesses are the hardest hit by the regulatory tsunami. They spend about $500 billion a year, or $7,000 per employee complying with federal government regulations, according to the Small Business Administration (SBA). "The smaller the business, the greater the relative time to comply," said Ron Miller, the SBA's assistant administrator for e-government.

The SBA's main job is to advocate the interests of small businesses. A big part of that mission is to reduce the compliance burden on small businesses. The agency realizes e-government has a critical role to play in achieving this objective. "We believe we can save small businesses significant amounts of money that they are now devoting to compliance by building tools to make the current regulatory burden less onerous," Miller said.

Toward that end, the SBA built a Web site called (also called the Business Compliance One Stop). The site helps small businesses find, understand and comply with regulations by providing resource guides on 39 business topics; answers to common questions; links to over 20,000 state and local government sites; information on the latest legal and regulatory changes; personalized compliance assistance tools; and various online transactions, such as registering for an employer identification number (EIN).

The site features 30 expert adviser programs, each of which provide customized compliance assistance for various Department of Labor and Occupational Safety and Health Administration (OSHA) regulations. Based on answers to dynamic questions, the expert advisers explain exactly what needs to be done to comply with a particular regulation. For example, in 10 to 15 minutes, the Hazard Awareness Advisor can interview a restaurant owner, analyze her workplace based on her answers, and write a customized, five- to 20-page report on probable hazards. Typically such a report would require a knowledgeable professional one-day to visit the business, and another day or two to write the report. Savings to small businesses from this adviser alone amount to between $40 million and $83 million per year, according to OSHA.

Overall, SBA estimates already saves businesses about $526 million per year by reducing time and money spent finding the applicable regulations, understanding their meaning and then complying with them.

The next phase of the SBA's electronic compliance assistance project will go a step further by providing industry-specific compliance capabilities. The test pilot is the heavily regulated trucking industry. Today a trucker might have to fill out up to 38 forms from federal and state agencies just to operate a rig. This costs the average trucker about $500 in lost time, according to the Owner-Operator Independent Drivers Association.

The SBA is working with the industry and the U.S. Department of Transportation to streamline this process by standardizing federal and state information collection requirements and using interactive electronic forms, expert advisers or wizards. The goal is to allow truckers to submit all necessary information once, which would reduce the time each trucker spent on government paperwork by 40 percent, according to the SBA, saving truckers approximately $335 million annually. The trucking portal should be up in 2004. Other industry portals -- including health care, chemicals, food and mining -- are planned. Cumulative projected savings to industry, according to the SBA: Between $1.5 billion and $2 billion.

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Speeding the Time to Market
Few areas better demonstrate the potentially powerful effects e-government can have on reducing compliance costs than the U.S. Food and Drug Administration's (FDA) drug and medical device approval process. No manufacturer can market a drug or medical device, alter its manufacturing processes, or propose a new use for it without FDA approval. The current approval process averages more than 400 days, over twice the statutory limit of 180 days (this is about a 100 percent improvement from just a few years ago). This is important because every day their products are kept off the market, medical device manufacturers and pharmaceutical companies lose anywhere from $1 million to $4 million.

While IT alone can't fix this problem, it can greatly improve it. "A standardized electronic reporting and submission process would increase our efficiency, enhance our ability to review safety data, and help us communicate better with drug and medical device companies," said Dr. Randy Levin, associate director for information management in the FDA's Center for Drug Evaluation and Research.

One way technology can do so is through e-submissions -- moving application submissions and follow-up reporting into an electronic framework. The FDA receives hundreds of applications for new drugs and medical devices annually -- each containing about 500,000 pages of information -- and thousands of phone-book-size post-marketing safety reports. For paper applications, an FDA reviewer spends at least two weeks just examining a single segment of the clinical trial data portion of the submission because she has to manually wade through volumes of statistics. Electronic filing cuts this process to two days because the computer does most of the work (not to mention saving a bundle on printing and mailing costs). The FDA has made some progress in moving to e-filing: the average number of paper volumes has dropped by half, and about three-fourths of drug applications now have at least one electronic component. Only a small fraction of applications, however, are submitted entirely electronically.

Also critical to a faster approval process is improving collaboration and communications between the FDA, and drug and medical companies. Getting the FDA and a manufacturer to agree on a label for a drug or medical device can be extremely time consuming because each tiny label is packed with scientific and intellectual content. Often the label goes back and forth 100 times before both sides agree on its wording. This process is typically conducted by mail, fax and phone. "Nothing kills more time than getting a single question answered," said Jim Benson, former vice president of AdvaMed, the trade association of medical device manufacturers. "Days or weeks might pass as the FDA or the company waits for an answer to a simple question." AdvaMed is pushing for an access-protected secure chat room where a company could submit part or all of the application online, allowing companies and FDA reviewers to converse in real time. "It would save an enormous amount of time," Benson said.

Better knowledge sharing could hasten the label approval process, and could help avoid many delays later in the process caused by a lack of shared understanding of protocols and review processes. Recognizing this, the FDA has begun several projects to speed and improve information exchange between industry and FDA reviewers, ranging from secure e-mail to creating a shared electronic repository where companies would submit their applications to a trusted third party who would host the secure site.

Some experts believe end-to-end digitization of all FDA processes could cut the average new drug approval time by one-third to one-half. According to Tuft University's Center for the Study of Drug Development, a 25 percent reduction in application approval time would reduce the average costs of developing each new drug by $100 million, which would mean billions for the entire pharmaceutical industry.

The Stealth Revolution
E-government isn't typically the first thing that comes to politicians' minds when they're debating what government can do to promote economic development and create a favorable business climate. It's never going to grab headlines or engender fierce opposition (or defense) from impassioned interest groups. But that doesn't make it any less potent as an economic development weapon.

By minimizing time and effort to comply with government red tape and complete government transactions, e-government can positively impact private-sector productivity. This is good for business, and ultimately good for the government treasury. "Savings to businesses can be reinvested," Miller said. "Reinvestments can lead to productivity enhancements and job creation which, in turn, can increase revenues to government coffers." It's time for CIOs to communicate this message to their bosses.

Jeannie Rhee contributed extensive research assistance to this article.

William D. Eggers
Contributing Writer
Director for Deloitte Research and Senior Fellow at the Manhattan Institute.
e.Republic, Inc.