Smarter Government Spending: Enabling the future of government through digital innovation

By: Neveen Awad, Heidi Kim, Crosby Kapp

Imagine if interacting with government services was as easy as ordering groceries online. As technology propels the private sector to new heights, can it do the same for governments?

In the private sector, technology often drives better services at lower costs. It’s tempting to assume that governments can achieve similar benefits by adopting these existing solutions. However, integrating technology in the public sector is not as straightforward as it may seem. Government IT projects are notorious for budget overruns, with costs averaging 27% above initial estimates, and one in six projects surpassing budgets by 200%. Additionally, 98% of government IT projects over $10 million encounter implementation challenges, which further inflate costs and complicate transitions.

The social costs of inefficient technology in government are alarming. Service disruptions, slow responses, and errors that lead to rework can prevent citizens from accessing vital services. Whether it’s a malfunctioning welfare website that delays benefits, or flawed electronic health records that slow down care, these issues create real hardship for the most vulnerable populations, often in ways hard to measure financially.

Why Public Sector Technology Integration is Complex

Public sector technology integration faces unique challenges distinct from the private sector:

·       Regulatory Burdens: More stringent security and data privacy requirements make implementation and updates difficult

·       Bureaucratic Delays: Complex procurement processes slow down tech adoption, delaying accessing to the latest tools and forcing agencies into large, one-time implementations instead of enabling iterative testing and evolving requirements

·       Budget constraints: Limited funding often restricts the launch and scaling of pilots, slowing testing of innovative solutions

·       Social justice considerations:  The need to maintain diverse channels and consistent services for vulnerable populations can limit the delivery of innovative citizen-facing digital services

·       Legacy systems: Outdated technologies deeply integrated into operations make system upgrades and large-scale transformations challenging

·       Talent shortage: A lack of specialized technology professionals, often drawn to more lucrative private sector opportunities, limits innovation

Despite these obstacles, enhancing government services through technology is crucial. BCG’s 2024 Digital Government Citizen Survey shows that 77% of Americans expect government digital services to match those of top private sector companies. Without strong technology capabilities, governments risk losing legitimacy as citizens' expectations evolve. More services might shift to the private sector, which may not always align with the public interest. Governments lagging in technology also risk diminishing their ability to leverage data for better decision-making.

How should governments at different stages of maturity approach technology adoption?

The key decision is selecting the right technology for different needs and policy objectives. Options range from automation and digitization, which streamline repetitive tasks, to AI and generative AI (GenAI), which help staff make faster, more informed decisions. This requires understanding employee and constituents needs and designing tools that align with them.

Successful adoption also requires a strategic approach. Governments should prioritize high-value rollouts that deliver quick wins while freeing up resources for larger transformations. This minimizes cost overruns and ensures sustainable integration.

This article explores practical use cases and roll-out considerations for different public sector technologies – the “what” and “why” of choosing between options, as well as the “how” of accelerating digital transformation. With a strong technology strategy and careful implementation, governments can avoid common IT project failures, saving 10-20% in costs while minimizing negative social impacts.

Pathway to Efficiency: Automation and Digitization

Governments often rely on staff to handle highly predictable and repetitive tasks. By investing in automation and digitization, these manual processes can be replaced with faster, cheaper digital channels, freeing up employee’s time for more valuable tasks. This shift is especially important as governments face challenges in attracting and retaining employees.

Many routine tasks, such as data entry, paperwork processing, and manual payments, require minimal human insight. Shifting these activities to technology can allow employees to support constituents in more value-added services. For example, Robotic Process Automation (RPA) — software programs designed to execute specific multi-step tasks — can streamline manual processes by mimicking human interactions with computers. While RPA automates straightforward tasks, emerging tools like Generative AI are beginning to complement and even surpass RPA capabilities, handling more complex processes that require pattern recognition or content generation.

Beyond simple automation, governments at all stages of technological maturity can improve digital interactions with citizens, enhancing service delivery while cutting costs.

At the individual interaction level, shifting more services online can lead to significant savings. For example, BCG found that a State’s Department of Public Safety processes 50% of transactions online at $2 each, compared to $30 for in-person transactions. With better online platforms and more digital features, even a 10% increase in digital transactions could generate 15-20% in savings. Online services also increase convenience, especially for citizens who no longer need to take time off work, arrange childcare, or travel long distances to access essential services.

At a systemic level, governments can implement more integrated digital solutions to enhance the user experience. In another US state, BCG helped reduce driver's license service backlogs by creating a new state agency and launching 7 digital products, including digital disability placards, online reinstatements, and a REAL ID Checklist. This initiative also developed a repeatable process for identifying, launching, and sustaining new pilots. This effort reduced processing times by 50%, saved 20-30% in costs, and positioned the state to handle 80% of future driver's license demands online.

Journey into New Frontiers: AI and GenAI

As governments look for new ways to drive efficiencies, opportunities for AI and GenAI are emerging. In the private sector, AI and GenAI have driven significant efficiencies: 15% cost savings in procurement through rapid spend data analysis, a 50% reduction in customer service time, and major time and cost savings in drug development. While implementing these technologies in the public sector may seem daunting, there are immediate opportunities with large cost-saving potential.

AI is already transforming decision-making in regulatory tasks, enabling humans to focus on more complex decisions. For example, a European regulatory agency improved its wind turbine permit application process with AI, developed in collaboration with BCG. By training AI to interpret relevant laws and application specifics, while adopting a human-in-the-loop approach to resolve complex cases, the agency reduced the time required for compliance checks by 95%.

In procurement, GenAI has proven effective in cutting costs by streamlining data analysis. For instance, BCG's GenAI tools identified savings of up to 15% on procurement costs, achieved at just 10% of the cost of traditional human analysis. These tools quickly assess extensive datasets, thereby enhancing decision-making for smart purchasing.

Knowledge management is another area ripe for AI integration. Governments often struggle with document management, making it difficult for both employees and constituents to access important information. GenAI-powered virtual assistance and search engines can dramatically improve how government agencies access data and transfer knowledge between employees. BCG is developing a proof-of-concept GenAI chatbot for a state’s taxation call center to help staff answer resident questions quickly by drawing on thousands of policy documents. For residents, this will lead to faster, more accurate responses and lower likelihood of being transferred across agents.

Moreover, GenAI is revolutionizing cost management in the public sector by optimizing data handling. For example, in predictive maintenance, GenAI analyzes various data types — like video, IoT data, and historical records — to provide accurate maintenance recommendations. A European rail company saw a reduction of 15-20% in annual maintenance costs using this approach.

Beyond front-end government process, GenAI also significantly impacts IT infrastructure management by decoding complex mainframe codes, crucial for migrating legacy systems to more modern cloud-based environments. This not only facilitates a smoother, faster technology transition but also minimizes errors along the way. Furthermore, GenAI improves data governance practices by automating tasks like data cleansing, validation, and lineage tracking, ensuring data integrity and compliance.

These examples of "quick wins" —targeted, impactful improvements that drive value in specific government services or experiences – highlight the immediate potential of GenAI to streamline operations, reduce costs, and enhance service delivery across various sectors. From decision assistance and procurement to knowledge management and data handling — these wins not only deliver tangible results but also strengthen the case for broader GenAI adoption in government. By focusing on high-priority areas with clear, measurable outcomes, governments can achieve substantial improvements quickly, paving the way for even greater transformations ahead.

Crossroads of Innovation: How Different Technologies Come Together

Ideally, governments would adopt a layered, comprehensive technology strategy that integrates automation and digitization, AI, and GenAI to boost efficiency and service quality.

Take state governments managing Medicaid enrollment post-COVID-19 as an example. During the pandemic, states could not remove individuals from Medicaid due to increased federal funding and the public health crisis. With that funding now gone, states must verify eligibility for those covered since March 2020. This predominantly manual process has led to significant backlogs and delays. As of January 2024, only 40% of enrollees had their renewals processed, and 14 million people lost coverage due to ineligibility or paperwork issues.

To improve this process, states could automate straightforward steps using simple if/then programming, while AI could handle complex cases and flag potential rejections for human review. GenAI could further refine the process by enhancing machine learning models with unstructured data and personalizing communications to residents about their Medicaid status.

This integrated approach would speed up eligibility verification, cut errors, and reduce administrative strain, delivering better outcomes for Medicaid beneficiaries and significant cost savings. Studies suggest that even minor delays in healthcare access can increase costs by 2% — costs ultimately borne by the government, in the case of Medicaid. By adopting a full-spectrum tech strategy, governments can provide faster, more reliable services, improving access for vulnerable populations and reducing bureaucratic obstacles.

Speed into the Future: Next Steps to Accelerate the Technology Journey

State and local governments are recognizing the need for accelerating technological advancement in their operations. For example, Georgia is launching an innovation lab to connect tech vendors with agency challenges, developing an AI governance framework, and training state employees on AI. In April 2024, Colorado announced grants for digital government projects, prioritizing those focused on traditionally underserved communities. In May 2024, California began a 6-month GenAI trial with five companies to tackle common operational challenges in state agencies.

Despite these efforts, untapped value remains. Governments should focus on digital and AI use cases in high-spend areas where tech can quickly reduce costs and show results. Starting with pilots that provide immediate savings can help fund larger, long-term transformations.

For safe and effective AI adoption, governments must incorporate Responsible AI principles and develop robust technology governance frameworks. Since AI relies on high-quality data, efforts should focus on minimizing biases in training data to prevent biased AI outcomes. Embracing responsible AI practices will be essential to building trust and achieving meaningful results.

Ensuring a Strong Start

How can governments fully embrace technology? Traditional government IT often struggle, focusing too heavily on short-term costs. This can lead to “technical debt,” where initial savings are eventually overshadowed by the cost of fixing outdated systems or temporary solutions.

Each government agency starts its digital journey from a different place, and technology projects can be costly. But to make new technologies sustainable in the public sector, we prioritize solutions that unlock immediate savings to help fund long-term goals. Our approach considers the unique challenges of government technology adoption, offering solutions that are easy to maintain, require minimal technical skills, and meet strict standards for security, accuracy, and traceability. We also provide training to help government employees adjust to new tools.

BCG brings together expertise in public sector and digital consulting, supported by AI, data analytics and digital specialists from BCG X, our technology and business unit. These capabilities converge at BCG’s Center for Digital Government, a multidisciplinary team of over 350 experts dedicated to unlocking the potential of digital for greater public value. Our comprehensive range of expertise is designed to meet governments at their unique starting point, whether it’s crafting digital roadmaps, building new digital products and services, transforming core technologies, or exploring AI and analytics.

The need for governments to embrace digital transformation is urgent: constituents increasingly expect government services to be digital, integrated, customized, and as seamless as those offered by the private sector. For governments to stay flexible, responsive, and effective they must act now, adopting a thoughtful, long-term technology strategy to avoid common pitfalls and fully realize technology’s potential in public service.

This is the fifth and final article in our “Smarter Government Spending” series on cost-efficiency in state and local government. Read the full report here to learn how governments can recoup 10% or more of costs through a variety of short- and long-term tactics.

About the Authors

Neveen Awad is a Managing Director and Partner in BCG’s Detroit office and an executive leader on our technology and digital advantage practice area. She has extensive experience in digital and technology driven transformations at both the federal and state levels.

Heidi Kim is a Managing Director and Partner in BCG’s technology build and design division, BCG X. She leads BCG’s tech and digital work for state & local governments, and she has helped design and launch numerous products and digitally enabled services across the public and private sector.

Crosby Kapp leads the NAMR knowledge team for the BCG Center for Digital Government. She has experience with a range of digital and tech topics in public sector, with a focus on the topics of digital government service delivery, citizen experience, and digital identity.

The authors would like to thank Tiffany Fan, Lauren Capp, Liam Chai, Yilin Chen and David Zuluaga Martinez, for their contributions to this article.