Why cloud calls for a new investment model

As agencies migrate more services to the cloud, they may need a new approach to funding.

Part of state agencies’ struggle to move to the cloud includes identifying funding for procurements and migrations. Traditional approaches may not work for modern, complex IT infrastructure like the cloud, which already sparks concerns about security, workforce skills and agility.

“You need funding to get there, so obviously it [has] a big role, but I think what’s interesting is that funding hasn’t changed,” said Thomas Beck, a principal at Deloitte. “The funding model in no state that I know of has significantly changed. They’re still on annual cycles, and although there is the CapEx/OpEx discussion, they have not bent the curve on their funding cycles. They still fund the same way.”

Unsurprisingly, agencies are looking to maximize their budgets. One way to do it is to look outside the state- or municipality-specific general fund to other sources such as grants and federal funding. Agencies could prioritize investments that would attract such outside funding and use it to form a backbone for a digital and cloud-based platform, Beck said.

A blend of OpEx, or operational expenditures, and CapEx, capital expenditures, is also necessary, he added, but the mix depends on who’s doing the funding, he added. For instance, large states with a central IT department overseeing all agencies are most likely to have current CapEx spending that looks much like past expenditures.

“They’re now buying from a cloud vendor rather than a managed hosting vendor, but it’s still looks a lot the same,” Beck said. “I think if they’re going to achieve the benefits of cloud, they’re going to need a new approach. I think right now I would say they’re getting along for the most part because the investments they’re making in cloud are still tied to big and early moves.”

Those investments include email systems and lift-and-shift migrations. Agencies haven’t gotten to the point of reaping the true benefits of the cloud, such as elasticity and agility. “They’re treating their systems the same way they have for the past 20 to 30 years,” he said. “They haven’t gotten to the point where they [ask], ‘Do we need a different way to fund things?’”

A major funding generator for state and local governments is the sale of bonds, which often have legislation tied to them specifying how the money can be used. “CapEx implies anything that can be funded through the sale of bonds,” Don Sunderland, deputy commissioner for data management and integration said at the New York City Department of IT and Telecommunications November 2018 Open Group panel discussion. “What’s happened is that the CapEx model has become less usable as we’ve moved to the cloud approach because capital expenditures disappear when you buy services, instead of licenses, on the data center servers that you procure and own.”

That has created tension between new cloud architectures and traditional data centers, which Sunderland said are more easily funded through CapEx.

On the other hand, smaller states and agencies are changing the way they buy IT and looking at OpEx that they can adjust. Historically, officials at agencies of all sizes have focused on big applications and data centers. Now, they have new buying options such as the National Association of State Procurement Officers’ (NASPO) ValuePoint, a cooperative purchasing program they can subscribe to for buying cloud products.

Some states are using their own cloud contract vehicles -- blanket purchase agreements that they could exercise and pass down to constituent agencies -- although this tends to be more at the central IT level, Beck said.

The best setup, he said, is one with a coordinated strategy, strong executive leadership and a policy in place that makes buying cloud easy.

“You’d have that leadership at the state level and then you’d have a contract and platform vehicle put in place, which is where these innovative contracting deals would come in,” Beck said.  “Either a NAPSO contract or a [General Services Administration]  contract or a state-specific contract -- that basically indicates to the marketplace, ‘We are open for business in the cloud. We are going to the cloud.’”

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