Lotteries’ requirements are growing – operating models must change

I have originally written this text for, and Conor Porter has partly modified the text.

A company’s mission is to make a profit for its owners. That is also the case for lotteries, although they do not fully follow the way standard business companies operate. Responsible gaming and the restrictions that arise from gaming play a significant impact. Ultimately, lotteries also strive to achieve the biggest possible income flow for their owners and beneficiaries within their operation framework.

Companies that strive for results are constantly thinking about the best ways to run their operations. The goal is to keep up with developments or even be at the forefront. It is also a requirement to do the activity as efficiently as possible. Successful companies must also be better than their competitors in the same market in at least some areas.

Back in the early 2000s, lotteries did not think as described above. The companies have mainly been state-owned or at least have a monopoly position granted by them. That has reduced the pressure of business success and, in many cases, lotteries could be described as government offices rather than successful businesses. From an economic point of view, it is clear that a monopoly company always operates less efficiently than a company involved in the competition.

Most lotteries have not sought and still do not strive to be at the forefront of development. Companies have even had difficulty keeping up reasonably with the changing world around them. However, that has not hampered operations as long as the monopoly position has remained in practice and not just on paper. Attention has been paid to the efficiency of operations, but the starting point has been, above all, saving and not optimizing operations. Nor has the aim been to be the best operator in the market, even in some areas, as quite a few lotteries have been denied competing against anyone.

Of course, the situation is not the same everywhere. As I have already stated in my previous columns, the lotteries are a very heterogeneous group. There are still many state-owned companies among lotteries that are even part of the administration and operate like government offices. On the other hand, there are very business-oriented companies in the lottery world, some of which are owned by private equity investors or are even listed companies. The operating models of the state office and the listed company are not the same.

I do not mean that all lotteries should act as standard business companies do. Instead, I mean, each lotteries’ operating models can’t be the same because their goals are so different. Each company must find the most suitable operating methods for its operating environment and goals. The situation is such that there are no one-size-fits-all solutions.

One exciting area is outsourcing. How much and what companies should do themselves and what aspects they should outsource? It is not just a question of cost efficiency, although companies too often only think about that. By outsourcing operations, a company can achieve cost savings. Yet, it is also essential to focus on what can best improve the way you do business. Outsourcing often helps simplify management.

One of the most commonly outsourced things in the gambling world is technology. Lotteries have traditionally acquired all gambling-related technology from a single supplier. Operating models have differed quite a lot between European and US lotteries, for example. European companies have mostly bought the technology, while US lotteries have outsourced the entire gaming system to technology vendors as well. IGT, Scientific Games, and Intralot have dominated this area for a long time.

However, especially for more advanced lotteries, the situation has changed significantly. The development of digitalization and the expansion of the ​​operation of lotteries have mainly contributed to this. In addition to traditional scratch cards and lottery games in the retail channel, new product areas have emerged, such as sports betting, which is increasingly played on digital channels. That has changed not only the competitive situation but also the technical requirements.

While lotteries continue to operate draw-based games and scratch cards on a monopoly basis, and some companies also have a monopoly in other gaming areas, the shift to digital channels has further tightened competition. There are hundreds, if not thousands, of other gambling companies available to consumers on the internet and mobile world. Customers have also learned to demand better products and services from lotteries.

Traditional technology suppliers have excellently mastered the actual lottery gaming systems and related point-of-sale terminals. The structure of lottery games has been very similar for decades, which is why game development has been handled in collaboration with technology suppliers. However, the digital sales channel requirements and new product areas are different compared to traditional models. That has led to more technology companies entering the market, focusing on smaller specialty areas. Some companies have focused only on systems that operate on digital channels, others only on sports game solutions, and others only on game/content production.

The level of demand for many lotteries has increased with development. Advanced lotteries, in particular, want to take advantage of the best solutions in different areas, which is why buying everything from one technology supplier is no longer a viable model. Today, gambling systems in different product areas and sales channels may all come from different providers. That has caused a significant change in the IT-architecture. Everything no longer revolves around the lottery solution. Today, more and more companies have switched to a model where PAM is at the center of everything because customer data is the same for all game verticals and distribution channels.

So does outsourcing of technology make sense anymore? That is no longer possible for advanced and versatile gambling operators, so the issue is not valid for all lotteries. But the answer is not that simple. In the lottery sector, which still operates under strict state control and offers only traditional lottery products, it may make sense to continue all IT operations to a technology company and focus not only on administration but also on sales and marketing activities. The decision is made above all on what is most important to the company and its basis to achieve the most optimal profit level.

However, it is easy to predict that while the legal monopoly in lottery games may persist for a long time to come, the digitalization of the business will sooner or later drive all lotteries into a real competitive situation. In that world, traditional operating models will no longer succeed, but companies must understand and prepare for a huge change. That does not mean, for example, pushing responsibility out of the way of doing business, but changing companies’ processes, know-how, and management.