BUSINESS ASSESSMENT: Ohio Lottery: Identifying Opportunities, Generating Growth Prepared for Ohio Department of Administrative Services September 28, 2016 Executive Summary The Ohio Lottery (“Lottery”) is a strong performer that regularly ranks among the top third of lotteries in the United States in key measures such as per-capita average weekly sales, in which it outperformed all but 11 of the nation’s 45 lotteries last year. That strong track record can be further improved, as the Lottery can accelerate its growth and streamline its operations by implementing a series of recommendations. The recommendations made in this report are not expected to require additional budget appropriations in the current fiscal year. Some recommendations require statutory approval prior to the Lottery fully effectuating them. The potential for any additional appropriation would be dependent upon the manner in which the Lottery decides to act on the recommendation, and if it decides to repurpose its current appropriation. We anticipate that the recommendations requiring changes to current policy and practice can be implemented by relying on the Lottery’s current budget, its existing management and staff talent pool. Furthermore, unless specifically noted otherwise, Spectrum does not anticipate its recommendations will create immediate needs for changes to existing contracts, nor will such changes impact existing staffing at the Lottery. A. Lottery Restructuring Our core recommendation: The Ohio Lottery should be reconfigured into a quasi-public corporation, similar to lotteries in Georgia and Connecticut. This central recommendation comports with a similar recommendation made by the Ohio Auditor in 2010. The Ohio Lottery is presently established as a state agency, making it subject to numerous generic governmental requirements that often hinder the Lottery’s business practices. Restructuring the Lottery as a quasi-public corporation – in which the executive and legislative branches of government still have approvals of key appointments and budgets – recognizes that a lottery, unlike other agencies of state government, is charged with generating revenue and developing effective marketing practices under an efficient organizational structure. Such a structure would afford more flexibility in areas ranging from procurement to hiring, as well as some exemptions to administrative rule-making requirements imposed on other state agencies. Appropriate models can be found at lotteries in Georgia and Connecticut, which are characterized by the following: Business Assessment: Ohio Lottery ii Centralized management and oversight Autonomy by empowering the Lottery Commission as a Board of Directors and delegating certain authority to the Executive Director to allow for greater discretion in making changes to get concepts to market in a shorter period. Oversight, transparency and accountability. These three principles are consistent with the 2010 findings of the Ohio Auditor. An alternative would be to have the Office of the Governor and the Ohio General Assembly grant more authority to the Ohio Lottery Commission (“Commission”), with appointment powers resting with the Governor while the Lottery budget would still be subject to legislative oversight. This alternative would result in a management model similar to the Massachusetts Lottery model, in which the lottery is set up as a state agency under the direction of a commission that oversees and approves all significant policy matters and purchases, while delegating day-to-day operations to the Lottery Executive Director. Any change to the Ohio Lottery management structure should require that the internal auditor report directly to the chair of the Commission, to improve oversight of daily operations. The Lottery presently operates under an inefficient management structure, inhibiting its ability to react quickly to changing market conditions while impeding its ability to develop and execute a strategy to maximize sales. This structure is one key reason why the Lottery – which is generally a strong performer – has missed opportunities to grow revenue. Lottery management must satisfy a variety of governmental entities under a system in which each has some level of control and oversight over Lottery operations. Such entities include the Ohio Department of Administrative Services, the General Assembly and its Joint Committee on Agency Rule Review and the Lottery Commission. This reporting structure makes it difficult for Lottery management to develop specific strategic goals it can set for itself. The oversight structure leads to a very real sense that the Lottery management is not in control of its own future, which impacts the Lottery’s culture, permeating through the organization and impeding efforts to implement changes or make improvements. Lottery senior staff, along with some vendors, recognize that the Ohio Lottery is slow to change or to bring any new initiatives quickly to market. Clearly, the Lottery’s structural issues, coupled with a sense of not being in command of its course, results in underperforming sales. Business Assessment: Ohio Lottery iii B. Comprehensive Strategic Planning Any change to the management structure should be developed with one core goal in mind: to ensure that the Lottery develops an ongoing, achievable strategic plan. Past plans have not focused on a measurable, finely tuned vision, supported by data analysis and key tracking measures. Any strategic plan needs to consider the following: The Lottery has historically not relied on accessible, real-time data to measure the success or failure of Lottery promotions and initiatives. Indeed, multiple vendors have complained about the difficulty of receiving such real-time data. o This can be corrected through a combined effort that leverages the talents and knowledge of key vendor Intralot, along with the Lottery’s own Information Technology and Finance departments. The Lottery should use sales data, up-to-date customer segmentation studies, and focus groups in advance of launching any marketing initiative or product line. The Lottery is presently overly reliant on vendors and outside stakeholders – along with the data they present – and does not perform the requisite in-house analysis to determine if any proposed initiative or new product will generate net sales increases, or to what extent it might cannibalize the existing portfolio. The analysis of data needs to be fully leveraged to assist in developing strategic goals and the overall vision for the Lottery. More importantly, data analysis needs be the principal means of measuring progress toward meeting those goals. The increased, enhanced use of data analysis should tie in to other initiatives, including improved marketing. Related to that, we recommend: o The Marketing Department should review the past and current effectiveness of its programs by leveraging available data to better target market segments and grow the overall customer base. o Revenue data should be analyzed to determine the return on investment (“ROI”) for numerous types of machines in retailer locations, as well as to conduct periodic segmentation studies. o All promotions and initiatives should require pre- and post-implementation ROI analysis to develop and review both projected and actual revenue, with the goal of establishing any lessons learned in each instance. Business Assessment: Ohio Lottery iv C. Staffing Review, Reconfiguration In examining staffing at the Ohio Lottery, we note that some job descriptions date back to 2005 and clearly need re-examination. Our recommendation is that the Lottery needs to develop bright lines that provide clarity for the job duties of senior staff while creating a sensible workflow for all inter-related functions and operations. With that in mind, we recommend: Establishing a management structure that is guided by sales. The current structure makes distinctions between revenue-generating and non-revenue generating areas. This does not make sense in an organization where all units and all employees contribute to the bottom line. Revamping performance reviews for management and establish stronger quantifiable, performance goals, particularly for senior staff. Improving communication among senior staff and throughout the Lottery’s structure. The Lottery is presently burdened by excessive bottlenecks and logjams that prevent and discourage effective decision-making. D. Vendor Management Ohio Lottery senior staff needs to manage and challenge its vendors more effectively. Staff members are too prone to accept vendor recommendations rather than challenge and examine them. We recommend examining whether the Lottery should de-bundle services rather than be too dependent on one vendor for multiple areas. This would provide multiple options for each type of good and service, and would provide Ohio staff more leverage when dealing with vendors. We also note that allowing vendors to maintain long-term contracts without re-bidding is an ineffective management practice. E. Marketing, Sales Initiatives Our recommendations include the following: Ohio retailers are activating an estimated 65 percent of new releases within the critical first week of a game’s debut, while lottery retailers in other states routinely activate 90 percent or more during this initial period, which represents a game’s peak potential for generating revenue. Rectifying this situation is a vital component to increasing sales and generating more revenue. To overcome this issue, several things