Cloud Economics: A Federal Perspective

Written by Sandeep Shilawat, Cloud and IT Modernization Strategist, ManTech.

Originally published by Forbes.

Migration to the cloud ecosystem has had a profound impact on all aspects of business, as the cloud provides many benefits and gives an enterprise a strategic advantage. The application of cloud computing to mainstream technologies has changed business models dramatically, causing organizations to experiment as never before. Today, technology has become a vital part of every business’s strategy and cloud has become a fundamental launchpad for digital transformation.

From an industry perspective, cloud computing has led commercial businesses to innovate faster and for less money by lowering the entry barrier and decreasing time to market. Digital transformation has created a wave of disruption across the business enterprise, including even traditional back-office functions like operations and finance.

Federal agencies, on the other hand, have been more cautious in their cloud adoption, often through no fault of their own. Constraints such as procurement vehicles, budgeting methodologies and the overall structures of a highly regulated market dramatically change the dynamics. The federal market has a different budgeting cycle, often driven by policies and regulations. While constraints associated with regulatory changes have slowed federal cloud adoption, the economic benefits of cloud also must be viewed differently.

Federal agencies seek the same benefits and advantages as commercial enterprises do. According to a VM Ware Federal Cloud Readiness Report, roughly half of the IT leaders surveyed are focusing their IT investments on the cloud, but more than half of federal agencies remain at the very early stages of adoption. While the “Cloud First” policy has existed since 2010, the new “Cloud Smart” policy may alleviate challenges many agencies face with cloud adoption in terms of budget allocations.

New cloud deployment models and investment by many cloud service providers (CSP) and scaled agile frameworks (SAFe) have enabled custom-built configurations for government execution. Yet there have been few incentives in federal budgeting to capitalize on these advancements.

Economic Benefits Of Cloud Adoption

Cloud adoption inevitably reduces variable costs for infrastructure, resulting in an increased return on investment. Without tools to account for these variable costs, however, federal contracts have to develop localized ways to track those savings. In short, the economic benefits of cloud adoption may lead to additional paperwork in a federal contract.

A key economic benefit of cloud computing for commercial companies is moving from capital expense (CAPEX) to operational expense (OPEX). The cloud model for IT allows a utility-like IT leasing model that results in companies avoiding large capital investments up front and moving those expenses to short-term operational expenses — not to mention the capital depreciation and ability to take advantage of infrastructure advancements (Moore’s law). This enables companies to manage their budgets in an agile fashion and allows them to react to rapidly changing market conditions.

This characteristic of cloud, moving from CAPEX to OPEX, was a big driver for commercial companies to move to the cloud. Federal agencies do not have similar incentives due to the “color of money” being based on different appropriation categories.

In fact, counterintuitively, CSPs have developed mechanisms to deal with allocated budgeting and issues with variable costs that involved moving away from pure OPEX models to models that look more like CAPEX. The issue is even more evident in large federal agencies that are trying to keep pace with the industry by embracing new and innovative cloud solutions. Many are still hampered by existing congressional appropriation laws that restrict the movement of funds across different categories.

Challenges For Federal Agencies

There should be a mechanism in the federal budgeting process to enable the program managers to reuse the cost savings resulting from a successful cloud adoption/implementation. This would increase the motivation for those advocating for smart cloud adoption as they will see benefits locally. Also, there should be incentives for systems integrators, CSPs and the contracting community to inject innovation that results in cost savings.

A more common issue that agencies face has to do with migration bubbles. It is an art to account for all hardware and software end-of-life events and consider them in a cloud migration business case. Incremental and slow adoption of cloud in the federal government has led to multiple short-term issues regarding technical debt and software licenses. Due to the overlap of operations and maintenance of on-premise systems with newly migrated cloud systems, federal CIOs tend to see what is commonly referred to as a “migration bubble.” This is defined loosely as the peak time and money necessary to migrate to the cloud, which can provide significant savings, but increases as the migration takes place.

The issues federal contracts are dealing with necessitate a long-term macro view and some beneficial regulatory changes. In the short run, however, diligently written business cases for programs may help minimize some of the challenges.

Recommendations

The success of cloud programs should be measured by key performance indicators that include measuring the technical debt elimination rate and the change of pace of innovation associated with the program. Reaping and measuring economic benefits of the cloud in the federal government is complex and requires industry partnership. CSPs and systems integrators have developed expertise in working through the common challenges with affordability in mind to support agency missions, regardless of complexity.