Editor's Note: The following is a guest post from UtiliWorks Consulting Senior Analyst Jon Madrid Mitchell and Senior Manager Kara Truschel.
Municipalities are regularly considering new, creative projects to enhance connectivity, resilience and the lives of their residents. But how does a city know it's ready for a project?
Whether or not a smart city project succeeds is largely a matter of performing appropriate due diligence and creating buy-in from stakeholders. As a matter of prudence, a city should justify the implementation of any technology system or public work initiative based on its institutional readiness, its strategic goals and the underlying business case of the project. The alignment of these elements is key to success.
Though recent developments in the Internet of Things (IoT) and smart city marketplace have provided new and exciting frontiers for those working in local governments, pressure from any number of parties — most of all technology vendors themselves — can lead municipalities down the path of undertaking projects that are ill-considered or outright useless from a practical standpoint.
Consider: A city may elect to implement a gunshot monitoring program on its streetlight network in an effort to reduce crime. While nominally a progressive and sound idea, the value proposition is negatively impacted if streetlights are less available in a city’s high-crime areas (which is often the case).
Projects must be thoughtfully planned and tailored to the unique operating environment and demography of the city they are implemented in. There is no better way of examining the feasibility of any given smart city project than with a business case that clearly outlines metrics of opportunity and projects realistic outcomes that can be tracked and measured.
As the saying goes, there are three kinds of lies: lies, damned lies, and statistics. Indeed, when developing a business case for major projects, this sentiment can be a difficult one to overcome.
Too often, mayors, city councils or other governing bodies sit through meetings where individual city departments or outside consultants present cost-benefit analyses for projects that seem too good to be true. In modeling these projects, engineers’ estimates and cost projections often fail to account for the unexpected, the nebulous nature of benefits identification and quantification makes their overestimation a concern, and lack of statistical rigor and uncertainty leads to unrealistic results.
As statistician George Box famously put it, "All models are wrong. Some are useful." There are many best practices to minimizing the error of a smart city business case while maximizing its usefulness and applicability.
Though the urban development framework of smart cities is well-established, the industry surrounding it is still relatively nascent, as developments in edge computing and economies of scale in IoT device manufacturing have only recently made smart city concepts technologically and commercially viable.
The marketplace is fragmented and filled with companies that have competing philosophies, technologies and business models. Some of these companies are heavily entrenched in traditional telecommunications, while others are tech startups eager to disrupt the market. Because equilibrium has not yet been established in this ecosystem, attaining comprehensive, accurate costs to model capital and operational outlays can be difficult. To complicate matters, many vendors tout public-private partnership design and financing structures that may lead to inequity in public service, or may erode substantial value from the city.
In any of these cases, the city should exert thorough effort to explore the pros and cons of diverging solutions. An understanding of all components underpinning these solutions is necessary to uncover "hidden" costs related to technology implementation. Many cities have found success issuing Request for Information (RFI) solicitations or by engaging consultants with deeper technical background and experience in actual implementation.
In addition to the purely technological costs associated with a project, the following should also be considered:
- To help plan for resource allocation, investigate the underlying internal cost of staff for implementation, even if these costs won’t be included financially in the cost-benefit analysis.
- Assess the need to hire an outside consultant to manage program implementation, community outreach and education and business process re-design. This can ensure delays and budgetary overruns do not derail projections made as part of the business case.
- Establish and provision the additional workload and budget needed for ongoing program operation and maintenance, post-implementation.
- Budget for easily overlooked items such as professional services, software integration, shipping costs, hardware and software maintenance, debt servicing (if applicable), taxes (if applicable) and a comfortable level of contingency.
Because many smart city technologies are unproven or have a limited track record, when identifying benefits to quantify in a cost-benefit analysis, it is imperative these benefits describe specific areas of improvement and provide concrete performance metrics.
An often-overlooked opportunity for many cities is using the business case beyond its value proposition as a framework to validate the ongoing effectiveness of the program it captures. By mapping out the specific assumptions used in the business case — for instance, a centralized transit signal priority system decreasing average transit time for emergency vehicles — the city can objectively track the success of the project, bolstering its messaging to stakeholders. In cases where these metrics cannot be readily tracked, testimonials or focus groups can also be used to document efficacy. It takes time and energy to trace the anticipated benefits of a project through to completion, but the effort is worth it to understand the true impact of the project.
Recognize also that the dollars and cents of a cost-benefit analysis are not the only metrics by which a truly comprehensive business case will be judged. Inherently, smart city projects are politically affected initiatives. To properly sell a smart city program, the holistic benefits identified by the business case must align with, and be able to support, the larger electoral mandate(s) at play.
In the realm of smart cities, the real monies derived from a traditional cost-benefit analysis are only one part of the overall value stream.
Consider a project to implement parking sensors in high-use garages, allowing residents and visitors the ability to readily locate vacant parking spaces by use of a mobile application or digital signage. Of the immediate benefits, a city might realize additional revenue by bringing greater visibility to these vacant spaces. Other value streams may include: operational efficiencies through targeted parking violation enforcement; averted carbon emissions due to time savings in locating a parking space; or local economic stimulus by improved visitor throughput.
While you can ostensibly ascribe a monetary value to each of these kinds of benefits, it may be misleading to characterize or present them in the same manner as the immediate, hard-dollar monies from revenue enhancement. In these type of scenarios, the cost-benefit analysis may take on an iterative approach, where relative costs are compared to purely fiscal benefits; fiscal benefits, plus staffing-related efficiency gains; fiscal benefits, plus staffing-related efficiency gains, plus positive environmental impact; and so on, for however many different categories of benefits that may be identified.
Any given project may or may not break even on strictly financial terms, but the confluence of benefits from multiple vectors can induce material, positive valuation measures for the overall project.
Smart city projects may or may not make sense on a strictly dollar basis, but factoring in additional value — of, for example, saved staff time, lowered carbon emissions, or increased economic activity — makes many projects realize a positive return on investment.
In addition to the factors outlined, there are a number of other best practices that will ensure effective business case development:
- Identify what financial metrics will speak the loudest to the economic buyers for the project.
- Singular financial metrics are oftentimes misleading by themselves and can lead to perceived project failure should those specific targets not be met. It is preferable to qualify financial metrics over a range of sensitivities to produce best-case and worst-case scenarios.
- Smart city initiatives are wide-ranging and involve multiple disparate municipal units. It may be useful to allocate a proportion of costs and benefits to different departments or budgets, depending on the overarching structure of the program. By disaggregating information in this way, cities will be able to analyze the relative impacts on each organizational unit separately.
The age of smart cities is here, and the solution development market will grow increasingly complicated as more competitors enter and attempt to and establish themselves as leaders. The types of projects being developed in this classification can represent paradigm shifts in the way local governments do business and in the way citizens and businesses interact with each other and with the global community. In many cases, it may take only one failed project for social or political willpower to dissipate any hopes of a larger smart city governance initiative that may be planned.
When leveraged to inform stakeholders and provide metrics for success, a well-executed business case can become a pillar for developing support for other smart city projects, creating a positive feedback loop for other, related initiatives in a city.
With proper planning, a sound business case provides an opportunity for cities to create buy-in from all levels—from city staff and officials, to the broader community at-large. Whether or not a city is able to identify worthwhile projects and convince all relevant stakeholders that said projects will be beneficial will determine if that city can stay relevant in an increasingly technological and connected world.