I have written this text for http://www.lotterydaily.com, and Nick Ware has partly edited it.
Almost all lottery companies have started their operations with a monopoly position. Because of this, the cost-effective operation has traditionally not been at the top of the companies’ priority list. Lotteries are usually owned by states, and the operating culture has been similar to state agencies. Instead of actively developing operations, the main focus has been securing operational operations continuity.
Over the years, the situation has changed for the better, but the background described above still affects the operation of lotteries. An inefficient corporate culture focused on protecting one’s position is not the best strategy to succeed in a competitive market, where you are faced with companies operating on purely commercial principles. I believe that lotteries have understood the need for change, but the risk is that they focus on fixing individual issues and not on changing the entire corporate culture and mindset.
It has been proven in economics that a monopoly always causes operational inefficiency. Unfortunately, lottery executives have typically refused to believe this. They have shown high productivity numbers to prove to stakeholders that lotteries are far more efficient than cash-minded private gambling companies. In this argumentation, it has been ‘forgotten’ to say that the numbers of a lotto operation with a 40-50% payout cannot be compared to the numbers of a casino operation with a 95% payout – at least not if it is a question of comparing the efficiency of the operation.
State ownership and state office-like operations have increased the bureaucracy of lotteries. This can be seen from the slowness of decision-making which, in turn, prevents timely and quick reactions to the changing situation. The slow rate of change in lotteries practically did not hinder productive operations as long as customers did not have other gambling options available. Today, customers are quick to vote with their feet if a company is unable to offer new products that other companies have. Lotteries’ luck is still the practical monopoly of lotto games, but on the other hand, this same reason slows down companies’ willingness to change – this can cause significant problems for lotteries in the long run.
Updating the strategy every five to ten years, and acting according to long-term plans, annual action plans, budgets, fixed organizations and job descriptions, etc., are no longer enough in today’s fast-paced business. Nevertheless, such an operating model is still prevalent in many lotteries. It may even sound funny when the explanation is that something cannot be done now because it is not in this year’s action plan, and no money has been allocated for it. However, the speed of reaction to changing situations should be completely different, but the bureaucratic operating model often prevents it.
On top of all that, due to their monopoly position, lotteries have had no reason to think about the impact of other companies’ activities on their own. Lotteries have not needed to try to stay at the forefront of development; often, such an operating model has even been perceived as irresponsible. So, the goal has not been to bring things to the market first, not to innovate new products and services, not to offer customers excellent service, or anything else to be at the forefront of development. Lotteries have mainly compared their operations to the operations and results of other lottery companies, although they have not represented the world’s most developed gambling companies.
Avoiding mistakes has been the general guideline for official behavior. Civil servants are rarely rewarded for successes, but instead, failures cause problems. This kind of corporate culture means it’s not worth investing in developing something new because you don’t get praise for it, only barking when you fail. Because of this, lotteries have often introduced new products and services only after they have been proven to work elsewhere. This operating model helps the companies to keep up with the development, but by no means to gain a competitive advantage compared to others.
Lotteries are used to doing everything themselves, and outsourcing operations have rarely been used, especially in Europe. In addition, lotteries are used to buy the technology they use for themselves. US lotteries have deviated from this significantly because almost all of them have outsourced their technology functions to large suppliers, and the contracts have been based on a revenue share model. In recent years, European lotteries have had to change their operating models because it has become more difficult to buy technology, as suppliers have no longer agreed to enter into agreements other than those based on revenue sharing.
As I have often stated before, lotteries today are a very heterogeneous group of companies whose operating methods and strategic choices differ from each other. Fortunately, an increasing number of lotteries have developed their operations, and the business operations of these companies already resemble real business enterprises. As operations develop, lotteries can succeed in competitive markets without the protection of a monopoly.
Modern companies know how to use external resources well, which helps avoid unnecessary increases in fixed costs. Such an operating model makes sense in sizeable one-off development projects. Typically, companies also use external help in big change situations, such as when legislation changes (transition from a monopoly to a license-based model) and business expansion (new product verticals alongside lottery games).
Based on my almost three years of consulting experience, it has been noticeable that lotteries use us, gambling industry consultants, much less than other gambling companies and technology suppliers. I think lotteries are not yet familiar enough with the services we can provide them. An exciting and valuable model for lotteries could be the consulting networks developed for the gambling industry, which can provide cost-effective and professional services for large development projects. An example of such a network is Way2Go, whose consultants focus on helping the lottery world. Using external help in significant change situations would undoubtedly improve the competitiveness of lotteries. Not all know-how should be acquired within the company.