$1 spent on state government tech saves $3.50, study finds

New technology helps to expand government services, but overall, IT helps reduce spending

The federal and state governments, in political contests, are routinely accused of being too big and bloated. But a new study says that IT spending reduces state government expenditures, even as new technologies help expand the role of government.

Researchers at three universities found that IT investments are making government more efficient, productive and transparent, leading to a reduction in state expenditures.

State government CIOs will say that of course IT investments bring financial gains. But such analysis is usually based on the impact of specific projects, such as a data center consolidation.

Measuring IT's impact on government spending is not easy because while new technologies can reduce spending, technological advancements lead to an expansion of government services. These are services that could increase public safety, disease surveillance and traffic management, among others.

In a paper titled Do CIO IT Budgets Explain Bigger or Smaller Governments? -- Theory and Evidence from U.S. State Governments, the researchers looked at IT's impact on overall state budgets and quantified the results with the help of data compiled by the National Association of State CIOs. The paper was written by Min-Seok Pang, assistant professor at the Fox School of Business, Temple University; Ali Tafti, an assistant professor at the College of Business Administration, University of Illinois at Chicago; and M.S. Krishnan, a professor at the Stephen Ross School of Business, University of Michigan.

"I was surprised with the magnitude of the impact," said Pang, referring to IT's effect on state budgets. The paper has been accepted for publication in an upcoming issue of Management Science.

An upshot of the study is that "a one dollar increase in the IT budget of a state CIO is associated with a $3.5 reduction in total state government expenditures."

Technology development has caused economic activities "to become more complex and sophisticated, requiring more government intervention," the paper states. It points, for instance, to the establishment of the Office of Cybersecurity and Communications in 2006 and the Consumer Financial Protection Bureau in 2011, among others, as examples of this trend.

IT spending helps to make government smaller through automation, as well as by improving the productivity and monitoring of administrative processes. IT improvements also help to reduce the transaction costs of working with private sector partners.

Conversely, state CIOs' IT budgets make government bigger by meeting the unmet, emerging needs of the public, and expanding government's reach. Government growth "is a persistent and prevalent phenomenon in many industrialized nations," but "our empirical analysis strongly supports the hypothesis that more IT investments by state CIOs are associated with lower state government spending," the study found.

Copyright © 2014 IDG Communications, Inc.

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