From Kafka to Clarity: How SaaS and AI Will Streamline Government Bureaucracy

In 1986, President Ronald Reagan famously quipped, ‘The nine most terrifying words in the English language are: “I’m from the government, and I’m here to help.”‘ Venture capitalists often feel equally wary when they hear, ‘I’m founding a technology company to help the government.’

Historically, selling technology to the government has been a daunting challenge. Slow-moving bureaucracy, complex regulations, and high distribution costs have typically kept investors at bay. It’s no surprise that VCs have been hesitant to venture into the public sector.

At Core, we are witnessing a significant shift in the way governments operate. Historically criticized for inefficiency, government institutions are now under mounting pressure that makes digital transformation not just desirable but inevitable. With the continued advancement of SaaS and AI, we see an unprecedented opportunity to modernize government operations, reducing costs while significantly enhancing the integrity, efficiency, and equity of public service delivery.

Governments Under Pressure: The Imperative of Doing More with Less

Governments today are being asked to deliver more services with fewer financial resources. State budgets are projected to shrink by over 6% in 2025. California, for example, faces a $30 billion shortfall, with Governor Gavin Newsom proposing $8.5 billion in spending cuts, including eliminating vacant positions.

The financial strain is hitting public employees hard, with many overworked and stretched thin by mandatory overtime. For instance, in some California counties, job vacancy rates have reached 30%, leading to severe understaffing and service delays.  With job eliminations, an increase in headcount is unlikely in the near term, making service delays and reliance on costly outside contractors almost inevitable.

At the same time, governments are under growing pressure to reduce waste, fraud, and abuse in public benefit programs. The pandemic highlighted vulnerabilities in outdated systems that allowed significant exploitation of these programs. For instance, the GAO estimates that during COVID-19, the government disbursed between $100 billion and $135 billion in fraudulent unemployment benefits, representing 11% to 15% of total benefits paid.

The Aging Workforce: A Looming Crisis

The resourcing issue is exacerbated by an aging workforce, further highlighting the urgent need for automation and AI to sustain service levels as retirements increase. Federal employees now have an average age of 47, while state and local government workers average 46 years. Compounding this challenge is the decreasing number of young workers entering the sector. In 2023, employees under 30 accounted for only 7% of the federal workforce, a troubling sign that younger talent is not being attracted to public service. State and local governments have a slightly better percentage of under 30-year-olds at 14%, which is still significantly lower than the 20% found in the private sector. With retirements expected to accelerate in the coming years, it is critical for government agencies to adopt automation and AI to maintain and improve the delivery of essential services.

The impact of workforce shortages is already being felt across multiple sectors, for example:

• Public Transit: 96% of transit agencies face staffing shortages, with 84% reporting a direct impact on service delivery (source: American Public Transit Association).

• Public Safety: LAPD staffing levels have dropped to their lowest in two decades, while overall government cybersecurity grapples with an estimated 40,000 unfilled positions.

• Public Utilities: The water crisis in Jackson, Mississippi, is a stark reminder of the risks associated with an understaffed public sector, where personnel shortages lead to critical service failures.

Cultural and Mindset Shift

While we see resource constraints as the primary driver of change, there are several factors contributing to a cultural change that is opening up the government to embracing new technologies to better serve its citizens:

• Rising Citizen Expectations: The demand for faster, more convenient public services is pushing governments to adopt modern solutions that can meet these new standards informed by consumer experience with market-leading private companies.

• Pandemic-Induced Shifts: The COVID-19 pandemic acted as a catalyst, forcing the rapid adoption of remote and self-service technologies and setting a foundation for continued digital innovation.

• Increased Tech Leadership in Government: The growing participation and influence of technology leaders in policymaking (including the creation of the United States Office of the CTO under the Obama administration) is helping to ensure that digital transformation remains a top priority.

AI and SaaS: The Future of Government Operations

While the public sector has traditionally lagged behind in automation (the Department of Defense, Department of Homeland Security, and Intelligence Agencies excepted), there is a growing recognition that technological innovation is now a necessity. Recent efforts to digitize citizen-facing services are just the beginning; the next phase will involve leveraging AI and SaaS to transform internal operations.

Local governments, with their more flexible procurement processes and less complex bureaucratic structures when compared with the Federal government, are poised to lead this transformation. For example, New York City uses AI to analyze data from traffic cameras and sensors to adjust traffic signals dynamically, improving traffic flow and reducing waiting times at intersections. Its adoption of cutting-edge technologies can serve as a blueprint for smart cities and a new paradigm for federal agencies to follow. 

Areas within the public sector areas where AI is poised to have an impact include:

• Transportation: AI solutions are improving traffic management and enhancing public transit systems. Cities are also experimenting with autonomous public transportation.  For example, Las Vegas has piloted AI-driven autonomous shuttle buses in its downtown area.

• Utilities: SaaS platforms are revolutionizing resource management, from detecting leaks in water utilities to forecasting demand and monitoring quality in both water and electric utilities. For example, the New York Power Authority uses AI to help balance supply and demand more effectively, improving grid reliability and reducing energy costs.

• Healthcare: AI-powered tools are streamlining patient care and public health efforts, while SaaS platforms are expanding telemedicine and enabling personalized healthcare.  In addition, AI is being used to improve Medicaid fraud detection and streamline claims processing.

• Public Safety: AI offers significant potential for improving public safety; however, it also raises ethical concerns.  Predictive policing, for example, which has led to improved outcomes in certain cities, has also been criticized for reinforcing socio-economic and racial biases in law enforcement. Safeguarding against these risks requires transparency in algorithm development and oversight to ensure AI serves the public good without perpetuating inequities.

The Financial Opportunity

In 2023, the U.S. federal government is estimated to have spent $21.6 billion on professional and special services, a notable increase from $18.6 billion the previous year. This rise is driven in part by staffing constraints and pressures to invest in modernization. While exact data is not easy to locate, it is believed that state and local governments have followed this growth trend.  This creates an enormous opportunity for SaaS companies to revolutionize government operations, offering solutions that provide far greater ROI than traditional consulting models.

In 2023, U.S. government spending on administrative services across federal, state, and local levels continued to increase, driven by agencies’ needs for modernization, technology upgrades, and improving operational efficiencies. In 2023, federal, state, and local governments incurred an estimated $40bn of administrative costs for social programs targeting low-income families.  

Leveraging technology can help to reduce these costs and contribute to closing budgetary gaps and/or create the opportunity to redirect savings into new programs that can benefit communities. With budgets tight and hiring challenges mounting, tech-driven solutions are no longer optional; they’re essential.  

Key Questions We’re Exploring at Core

We are focused on addressing the questions below to better understand the potential for leveraging AI and SaaS to serve critical governmental needs:

• Identifying Key Opportunities for Automation: 

  • What government workflows and sectors can benefit most from automation?  

  • Which areas of government generate large volumes of data where can AI help automate data analysis and decision-making?  For example, tax processing, environmental monitoring, and public health.

• Assessing Budget Availability and Procurement Efficiency:  

  • How do procurement processes and budget availability differ at the local, state, and federal levels, and what strategies can startups employ to navigate these processes effectively?  

  • What federal grants or stimulus packages are currently available to fund digital transformation efforts, and how can government agencies or startups best access these resources? 

  • How can procurement processes for technology products and services become more streamlined and transparent?

• Understanding criteria for government sales success: 

  • What compliance, cybersecurity, and other certification standards must be met to serve government sectors?  

  • What strategies can help startups compete for large contracts against larger incumbent service providers?

  • How can startups partner with established government contractors already embedded in serving the government?

• Ensuring equity and transparency

  • What best practices should be established to avoid algorithmic bias, ensure transparency, and promote fair outcomes in AI implementations, particularly in sectors like law enforcement or public health?

Why Digitizing Government Matters to Us

At Core, we have historically invested in companies that build healthier households. Now, we are looking more broadly at solutions that foster stronger communities.  Transforming government services is a highly leveraged way to benefit communities at large. The public sector is vital to the U.S. economy, delivering essential services that broadly impact our daily lives: healthcare, transportation, education, public safety, and water and power, in addition to other infrastructure services.

Building technology companies focused on the public sector is doing more than addressing a significant business opportunity–it is fulfilling a critical societal need. If you share our vision for leveraging SaaS and AI to revolutionize government services, let’s connect and drive the next wave of innovation together.