The increasing availability of commercial cloud service offerings, combined with emerging hybrid cloud models, will challenge the value proposition of shared service organisations.
However, this may well represent an opportunity for government CIOs looking to provide new capabilities to their business users more quickly or identifying other options to support corporate and legacy systems.
With both IT and operational budgets remaining under pressure, government organisations continue to pursue further efficiencies by reducing duplications and overlaps.
It is becoming clear that after many years of reducing IT budgets using the blunt instrument of efficiency dividends, there is little left to give in the absence of examining more strategic options.
In Australia, the recommendations in the National Commission of Audit report issued earlier this year called for the federal government to take a more progressive stance towards the use of cloud services.
The report criticised the slow adoption of cloud services in government agencies and recommended the introduction of a mandatory 'cloud first' policy for all low risk, generic technology services, and establishing a whole-of-government cloud computing provider panel.
The policy in place under the previous Labor government was a cloud first policy in all but name. The requirement to seek the approval of two government ministers prior to implementing a cloud was acting as a significant disincentive to agencies considering cloud.
The relatively small number and value of cloud contracts entered into by federal agencies under the previous panel was, in part, a consequence of this conflict.
The recent decision to remove the dual ministerial sign-off, and the Department of Finance’s tender to create a new whole-of-government cloud services panel, demonstrates that a serious effort is being made to overcome the hurdles that were getting in the way of wider deployment of cloud services.
Gartner predicts that by 2017, public cloud offerings will grow to account for more than 25 per cent of government business services in domains other than national defence and security.
In contrast, the Commission of Audit’s recommendations on shared services appear to demonstrate a sudden change of heart and a degree of wishful thinking.
In the 30 days between the release of the draft report in February 2014 and the final report in March, the commissioners have gone from holding a cautious view on shared services to one that supports pursuing this approach.
This stands in stark contrast to the outcome of Queensland’s recent decision on shared services, and suggests a desire to pursue a particular ideology in spite of the evidence.
Shared service and cloud on a collision course
One approach to gaining efficiencies is to pursue the consolidation of assets, resources, business processes and services that are (or should be) common across different agencies.
The other approach is for individual agencies to rely on external service providers that can leverage assets and resources for a variety of clients.
In recent years, public and community cloud services been recognised as a valid alternative to more classical shared services arrangements.
Government IT strategies in many jurisdictions include both approaches through a combination of mandates, positive actions and choices.
For example, the Canadian federal government has established a central shared service centre, which has taken over IT infrastructure, staff and budget from all federal departments.
The United Kingdom is similarly pursuing its ‘G-Cloud’ strategy, with an increasing number of suppliers and services available through its CloudStore.
Government agencies often act as shared service providers to other agencies. We are now also seeing some of these providers – acting as a broker — integrating the services of an external cloud provider into their own offering.
Consolidation and externalisation via the cloud can be seen as complementary. Government agencies incorporating them into existing service offerings are, in some sense, simply leveraging another already optimised shared service.
Here, cloud services can be considered for highly commoditised services, with low to moderate security levels. They can also help with application requirements that need to be deployed quickly.
Typically, this might be in the form of software-as-a-service (SaaS) applications or the hosting of specific applications via platform-as-a-service (PaaS).
It is becoming increasingly obvious therefore that the classical approach to shared services and cloud offerings are on a collision course.
In fact, both government centralised and shared-service providers are striving to deliver scalable and elastic services that are provided on a consumption basis. To do so, they must build private clouds and/or broker external cloud services.
However, for commoditised services, the value they can add on top of the existing cloud services is very limited, while costs are likely to be higher.
Implementing their own private cloud is a complex and expensive endeavour, while reselling external cloud services will require them to add or significantly improve vendor management skills.
They are likely to be subject to demands that they customise these services for their government clients at some cost and complexity.
This is not an investment that a large scale cloud vendor would contemplate. It is far more likely in this case that a government agency would accept the need to modify their own processes to gain the efficiency, innovation or saving offered by a commercial player.
An economist might describe this as an example of the supply and demand model. In IT, we call this feedback.
Agency CIOs will favour cloud providers
Gartner believes that the higher cost and lower flexibility offered by shared-service organisations over global-class cloud services will cause agency CIOs and business executives to favour cloud providers.
While it may take some time, stand-alone shared-service organisations that provide IT infrastructure services on large scale will see their value proposition eroded by external cloud service providers.
Such providers will be able to offer similar services at better prices due to larger scale and comparable security.
In some cases, shared-service organisations will dynamically embrace this change by moving higher in the technology stack, acting as brokers or storefronts for external services.
Shared-service organisations that take this approach and couple their offerings with unique government or program specific capabilities are likely to be successful.
Others that are more reluctant to change will struggle, causing friction and, as has been seen on numerous occasions, attempting to invoke mandates to use their services.
Agency CIOs should regularly assess the cost of services delivered by the shared-service organisation against market options. Higher costs may be justified by other agency objectives, such as greater security, resilience, responsiveness and privacy.
When mandated shared services have higher costs than alternative market options, CIOs should use governance or market-test mechanisms to push them toward providing higher value-added services and/or performing a brokering role.
Adoption of cloud services by the business will grow
Increasing cloud-computing adoption by the business will challenge existing business models and governance arrangement for both agency CIOs and shared service organisations.
While agency CIOs often dispute the value proposition from shared service organisations, so do their business managers question the value delivered and the responsiveness of their own IT department.
The increasing maturity of cloud offerings in areas like web hosting, collaboration and CRM-like services will be compounded by the increasing adoption of or exposure to consumer-grade products and services (such as mobile devices and public cloud applications) by the business.
Agency CIOs should take a critical look at their IT service portfolio to identify candidate services that can provide value equal to or better than market offerings.
In many cases, systems in this category will provide some unique capability to the organisation – possible as a consequence of being specifically created for a core program.
In contrast, those services that don’t demonstrate superior value are very likely to be more commodity solutions and will be good candidates for being sourced in an alternative way.
Assisting a business owner to transition these services to an appropriate cloud based offering is likely to deliver significant benefits. A potential economic role for a shared services provider in either of these scenarios is unclear.
Government IT executives need to start planning the evolution of their organisation toward a new role, where it will be less a provider and more a broker, aggregator and storefront, and work with business executives to transform the IT organisation in a direction that provides more value, acts to ensure compliance with government requirements and, perhaps most importantly, innovation.
This kind of ‘new look’ government IT organisation is becoming increasingly possible as a consequence of viable alternatives to insourcing, outsourcing or classical shared services.
But it will only be realised by those CIOs that embrace this model rather than resist it.
Glenn Archer is research vice president on Gartner’s public sector team, advising Gartner's senior government technology and executive clients globally. His research focuses on digital government. Prior to joining Gartner, he was the Australian Government’s CIO and led the Australian Government Information Management Office (AGIMO).
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