Tracking Taxpayer Capital: vs.


Tracking Taxpayer Capital: vs.

Private sector can step in to fill government's transparency gap

[This article was originally featured in Innovators in Action 2009.]

“Good afternoon, Ms. Flores, thank you for taking my call. I know how valuable your time is and this will only take a minute. I want to talk to you about a ground-floor stock investment opportunity.

This particular company has been around for a number of years, although certain aspects of the business remain opaque. But let me tell you what we do know: There isn’t really a historic track record of performance metrics on which you can rely. There have been consistent delays in delivery and more often than not the company has been significantly over budget on initiatives. They are almost always overleveraged and undercapitalized. That said, as part of this investment program, when they do run out of budget they will automatically debit your savings account to replenish their capital— but your ownership and return won’t change. They may also choose to redistribute some of your investment to other shareholders based on who they deem more worthy. The board of directors is typically re-elected independent of the company’s financial performance. And on average about 7% of your investment will be lost to fraud and waste right off the top. The minimum investment required is a third of your total annual income.

To what address can I send your investment prospectus?”

This scenario would obviously never play out in an efficient, market-driven economy. Yet, this is the very scenario that America was presented with in the passage of the American Recovery and Reinvestment Act of 2009 (ARRA). With the passage of ARRA, there has been a ground—swell of expectations for efficiency and responsibility put in motion by the current Administration’s statements about transparency, accountability, and efficacy of the largest spending bill in American or European history. Unfortunately, the federal government has failed to make use of the troves of available data to follow through on the commitment to bring change to spending transparency. And that is where my company, Onvia, and the private sector stepped in to fill the gap.

In the United States the balance sheet analytics conducted by a typical company in the private sector serve to guide decisions about future spending. Basic principles and historic performance of capital allocation, return on investments, efficacy, profit and loss are used as critical business intelligence to improve future performance. Without debating the merits or faults of Sarbanes-Oxley (SOX) regulation, suffice it to say that for publicly-traded companies SOX-level data informs both internal and external decisions for and about the company. Shareholders no longer tolerate a lack of transparency and technology ensures that they have thorough visibility at their fingertips.

Unlike corporate shareholders, taxpaying Americans have long tolerated a lack of transparency in how the government spends their capital. The level of data and the corresponding analytics that exist in the private sector rarely, if ever, exist in the public sector. When they are developed, they typically represent a discrete “point” solution crafted for a specific purpose. There is no comprehensive cradle-to-grave view of spending or its efficacy, much less for spending that begins at the federal level and filters through states and municipalities before reaching its destination. The audit process to root out fraud, waste and abuse is a latent view of events that provides no ability to change course but rather to only—in the best case—identify and prosecute the bad actors after the fact.

A shift toward intolerance of this lack of transparency, however, is being driven by the advance of technology, the internet, and the assumption that information is and should be easily accessible to taxpayers. The internet generation has a new set of expectations from its government.

Although the volume has been increasing across the spectrum of discussions about transparency and accountability in government, the government’s ability to provide this level of insight is severely encumbered. There is no prognostic dashboard with metrics, gauges, or dials on which the President’s Council of Economic Advisors works to plot the impact of federal spending at the regional level or convey those expected impacts to local leaders who can positively influence the outcome.

When looking for a comparable analog for the components required to track spending on a federal scale through to its local impact, it is helpful to consider both the “revenue side” and the “expense side” of the federal budget. On the revenue side, the Internal Revenue Service (IRS) tracks the flow of capital in granular detail: every citizen and entity in the country reports his income, number of dependents, profits and losses on investments, the home he owns and interest paid on his mortgage, and the taxes paid on the car he purchased, as examples. On the expense side where the purchase of goods and services occurs, the government marketplace is by far the largest vertical “industry.” Citizens, businesses, non-profit organizations, state and local agencies, and schools are all involved in spending. However, the level of transparency and tracking on the expense side pales in comparison to that on the revenue side. From a technology perspective the IRS is able to sift through massive amounts of data on the revenue side because it has established standardized forms for processing, invested in large data centers, and employs countless programmers. For the federal government, the expense side of the equation is just as complex as the revenue side; it just isn’t tracked and reported with the same veracity.

In order to achieve even an initial modicum of transparency in government, a basic set of data about spending is requisite. The mantra “If You Can’t Measure It, You Can’t Change It” is just as true in the public sector as it is in the private sector, and without this data neither government nor taxpayers will be able to hold government accountable for decisions.

Recovery Act Data

Since the passage of the ARRA, government, industry and taxpayers have turned the spotlight on the obligation and allocation of stimulus capital in particular and government spending in general. The difficulty of executing on the promised level of transparency in stimulus spending brought the oft-blurry line between the public sector and the private sector into full focus, and my company was thrust to the forefront of the dialogue about transparency, government data, accountability and innovation.

For more than a decade Onvia has invested in the development of proprietary technologies and processes that track the purchasing activities of federal, state and local government agencies. We aggregate this information for our clients: the small and medium businesses around the country that sell their goods and services to these sundry government agencies. We also partner with organizations such as local chambers of commerce to provide government contract visibility for their members. Our products contain information about government spending, built up from millions of goods and services transactions from across every vertical industry—from construction, engineering, and architecture to health care, energy, water, and information technology.

As draft versions of the ARRA were being published by the House and Senate at the beginning of 2009, we recognized that Recovery Act funds would be primarily distributed through existing programs—from federal agencies to states and municipalities—and ultimately end up in the hands of contractors and subcontractors who would create jobs in local communities. The expected beneficiaries were a diverse group of mostly small and medium businesses where economists agreed that, if anywhere, a “flywheel effect” of job creation would happen. Tracking these funds down to the local level is, however, stunted by a “transparency barrier” that exists between the federal government and state and local governments, exposed with the passage of the Recovery Act and with the speed at which the funds were intended to be disbursed.

With the transparency and accountability provisions in the final bill, we knew that we had a unique set of capabilities to track how stimulus funds would be spent, capabilities that the public sector would struggle to recreate even with the $84 million allotted in the legislation for the creation of the Administration’s website and board. When combined with the multiple bailouts, the stimulus legislation represented a historic shift of power to Washington D.C.; we believed that filling the visibility gaps in the flow of capital from D.C. out to the thousands of government agencies that perform various functions in the communities in which we all live was an important and neces—sary role. We decided to leverage our unique assets to provide as much visibility as possible, in as close to real-time as possible, into stimulus-funded projects for the broader business community, and to demonstrate what could be accomplished for far less than $84 million.

We launched the website at the end of March 2009 to accomplish several goals including: accelerating capital absorption in local economies and creating jobs, driving down the cost of goods and services purchased with taxpayer dollars by broadening the set of qualified vendors that bid on the projects, and reducing fraud and waste, all while demonstrating capabilities that already existed in the private sector. It took us less than four weeks to develop an initial version of and the initial version cost less than $10,000; in its final version today, with a greatly improved user interface, security platform and data warehouse, we have invested less than $100,000 total in the website. Compare that with the recently announced $18 million contract, awarded by the Recovery Accountability and Transparency Board, to redeploy Although the sites were developed with different intent and scope, the underlying premise and approach is almost identical; it’s hard to fathom what might warrant spending at two orders of magnitude greater.

As examples of government using data to hold itself accountable, 13 out of 15 of the most frequent recurring visitors to our website are federal agencies including the Department of Energy, the Department of Transportation, the Department of Labor, the Government Accountability Office, and the General Services Administration among others. In addition to federal agencies using the site to identify how states are spending stimulus funds, states are using the site to determine how counties and municipalities are using stimulus funds. We recently assisted the Department of Energy with a multi—billion dollar reporting error in their data which they uncovered by using our website.

The need to get capital moving in local economies, to create jobs as rapidly as possible, combined with an unprecedented level of spending, presented an opportunity for unprecedented waste and fraud. Earl Devaney, Chairman of the Recovery Accountability and Transparency Board, has estimated that $55 billion of taxpayer dollars may be lost to fraud, which is particularly true at the state and local level where the Administration has very limited visibility.

That number is half the GDP of New Zealand, Egypt and Iraq; about the same as the GDP of Vietnam, Luxembourg, and Ecuador; and five times the entire GDP of Afghanistan. According to figures from the World Bank and the International Monetary Fund, the fraud alone in our ARRA spending would represent the 60th largest economy in the world.

Eliminating the transparency barrier with only a 1 percent improvement in fraud would save the American taxpayers $550 million, or the equivalent of the annual salaries for more than 10,000 teachers. With the aggressive spending timeline, we predicted there was going to be little opportunity to stop waste before it began. Instead, investigations into fraud and waste would only happen after spending occurred.

With the availability of data, the website and our approach to the market via the website provide a good case study for analyzing the spectrum on which the public sector stops and the private sector starts in terms of providing transparency resources. The website also highlights the upside economic value of cost reduction and wealth creation in unleashing government data.

The Sleeping Giant: Standardized Formats

The economic and societal impacts of exposing government-wide data, like ARRA information, in standard formats are profound and have the potential to spawn a new era of innovation-driven economic activity. There are many challenges, however, with aggregating and presenting vast amounts of unstructured data in meaningful ways. The federal government has made an effort in recent years to open some of its data coffers, some successfully and some unsuccessfully. While there has been significant progress at the federal level as a result of the Coburn-Obama Act and for tracking and reporting, the process of obtaining quick, accurate information about federal spending remains difficult at best. The government has focused more on creating user interfaces, often struggling to do so, and less on simple, standard data formats that expose the core data in a way that it can be repurposed.

Add to this that much of the most interesting information is not in the coffers of the federal government but in the highly fragmented state, local and education marketplace—data about the communities in which we all live. For state and local levels of government, there is no ecosystem of interaction, no interoperability, and no single source of truth. There is no parent-child relationship between the federal, state, and local governments, and thus there is no comparable platform for state, local and education procurement. In actuality there are almost as many programs, rules, and platforms as there are agencies around the country—more than 89,000 in all.

The Role of Innovation in Government

History shows us that attempts at innovation fail more often than they succeed, and the bolder the innovation the greater the risk. In both the private sector and public sector this often leads to significant monetary losses, but the risk-reward framework could not be more different when comparing the private sector with the public sector.

The federal government has recently adopted the “innovation” buzzword as part of its agenda, and with the launch of its website it has started the process of exposing troves of as yet untapped datasets. But does exposing data mean the government should attempt to have an innovation agenda?

The government was purposefully built to change slowly and remain stable. Inherent in this structure is a culture of assuming as little risk as possible in decision making. The pillars of transparency and openness in government have historically discouraged innovation. The fear of public scrutiny creates a high level of risk-aversion and often undermines efforts of reform. In most cases there is little incentive to explore breakthrough solutions. Caution is rewarded, not risk, and process, regulation, rigidity and hierarchy are prized over innovation. For these reasons, one could argue that the government is not structurally capable of assuming risk and moving fast to capitalize on innovation.

Contrast that with the culture of Silicon Valley where failures are seen as a rite of passage or badge of honor. Risk is measured, discussed, and assumed with aplomb by informed inves—tors instead of obfuscated for taxpayers. In the private sector there is a Darwinian account—ability for losses and a financial incentive for gains; greed and fear serve as the two primary motivators of innovation in the capitalist system. Ideation, experimentation, and inventiveness are rewarded. Companies and divisions within companies are started, structured and staffed with a stated purpose, not retrofitted to match a long-standing, preexisting paradigm.

The historic innovations of government have been in areas where big challenges are met with significant force and a methodical, structured approach. You don’t have to go back as far as the Apollo space program to find good examples of where government has been successful at pro—mulgating data and innovations: the global-positioning satellite system (GPS), supercomputers, the human genome project, the internet, and the intellectual property marketplace, among others.

However, in all of these recent examples the real economic and societal value came not from the big transformational innovation in the government, but rather from the incremental innovations from private industry which followed. Innovation is a process through which economic value is extracted from knowledge and ideas. Innovation is only as good as the economic value it creates, and government data is a terrific starting point.

Going Forward

The Obama Administration has outlined an agenda for energy independence, education, climate change, healthcare, and Wall Street reform. As government spending increases in the coming months and years, the innovation, data and analytics related to these programs becomes hugely important. Instead of maintaining the status quo with existing paradigms and programs, these ambitious agenda items can, and should, all be heavily supported by free enterprise with proper incentives and new approaches that are not constrained by existing ones. If constituents want bold change, we collectively need to ensure that government is optimally leveraged when and where it can have the greatest benefit and incentives are provided for private sector innovation.

Looking ahead, the government should focus on accelerating the movement of its data and innovations into the hands of the private sector. To accomplish this a new framework is required in order to identify transformational innovations to which scarce taxpayer resources can be judiciously applied, as is a codified process to isolate the variables that will continue to spawn new opportunities. Precious taxpayer resources should be concentrated on the areas that have the highest propensity to be a catalyst for growth. The old approach may be insufficient to address the challenges that come with being competitive in a global market, but a new approach of focusing on the raw materials, like standardized data, of transformational innovation and allowing the private sector to create the finished product of incremental innovations will allow us to tap the entrepreneurial genius in the United States.

Lastly, the data and technology exist today to bring high-level scrutiny to government spending. Our elected officials, effectively our public sector board of directors entrusted with protecting our resources and interests, should certify finances and decisions no differently than those of us who are officers in publicly traded companies. Unleashing these troves of data will, over time, organically guide government to make the right choices and focus on the right things—the things that matter to us as shareholders in the American experience.

Eric Gillespie serves as senior vice president and chief information officer of Onvia. He leads marketing, human resources, products and services, as well as technology, content and research for the company. Prior to Onvia, Gillespie served as executive vice president and chief operating officer at The Patent Board. His experience also includes senior positions at Scient, Computer Sciences Corporation, and IBM. Gillespie’s views on creating value through innovation and technology have been featured on National Public Radio, The Economist,—The Wall Street Journal and the Washington Post among other leading publications, and in testimony before the U.S. Congress.

All views expressed in this article are those of the author and do not necessarily represent the views of Onvia.