Introduction
Towards the end of 2023 I was asked if I would be interested in contributing to a forthcoming
微软
Whitepaper, which would focus on challenges around achieving IT/Digital Transformation in the Public Sector alongside the challenges the sector has around funding streams and the ways in which CapEx and OpEx are often used. What follows is my original thoughts, not the Microsoft Whitepaper (I'll update with a link when I see it has been published!)
I would love for anyone reading this to comment - whether that is just showing agreement with what I've written, or indeed disagreeing or offering any alternative points of view....
I have seen the difficulties and intricacies of managing the capital and revenue budgets in the public sector, as someone who has worked for many years in both the NHS and Education sectors. Funds used to buy or improve physical assets, such as buildings, equipment, or software, are called capital expenditure (CapEx). Funds used to pay for the ongoing costs of running the services, such as salaries, utilities, or maintenance, are called revenue expenditure (OpEx). In the NHS especially, there is often a dilemma between the need to invest in new and innovative solutions that can enhance the quality and efficiency of care, and the need to sustain the existing infrastructure and workforce that provide core services. This dilemma is worsened by the limited and unstable funding available from the government, which creates doubt and risk for long-term planning and decision-making.
One of the areas where this dilemma is most obvious is the adoption of cloud computing. Cloud computing is a way of delivering IT services over the internet, where the provider owns and operates the infrastructure, software, and platforms, and the customer pays only for the resources they use. Cloud computing has many advantages, such as scalability, flexibility, security, innovation, and cost savings. However, it also has some challenges, especially in terms of the procurement and financial processes that control the allocation and use of the capital and revenue budgets. In this document, I will address some of the questions that emerge from these challenges, based on my experience and knowledge in the public sector.
Questions and Answers
Q: When going through Procurement cycles in public sector (health and local regional government) are you experiencing push back from Procurement or CFO’s office on the capital and revenue expenditure conversations?
A: Yes, I have experienced push back from capital and revenue expenditure conversations when trying to adopt cloud computing. The main reasons for this are:
- The procurement process in the public sector is often lengthy, complex, and rigid, and it has not adapted to be well suited for the dynamic and flexible nature of cloud computing. For example, the procurement process may require a fixed specification of the requirements, a detailed business case, a competitive tendering, and a long-term contract. These requirements may not match the reality of cloud computing, where the customer may need to adjust the resources and services they use according to the demand and the innovation.
- The financial process in the public sector is often based on the distinction between capital and revenue budgets, and it is not well aligned with the consumption-based model of cloud computing. For example, the financial process may require a clear allocation of the funds between the capital and revenue budgets, a justification of the return on investment, and a depreciation of the assets. These requirements may not match the reality of cloud computing, where the customer may pay for the resources and services they use as an operational expense, without owning or depreciating any assets.
Q: What are the arguments they are citing with reference to Capital and revenue expense?
A: Some of the arguments they are citing with reference to capital and revenue expense are:
- Revenue budgets may look large on paper, but the reality is that a significant percentage of the overall revenue budget is used for staffing which for most organisations is at the core of being able to deliver their service. What is left to bid for or allocate is often not able to stretch across all organisational asks when also put alongside Cloud computing costs, unless key senior financial staff are involved and also align to the cloud mentality.
- Revenue budgets can vary from year to year based on fluctuating incoming funding streams, which make it difficult for Finance leaders to give the assurances required to IT leaders, thus making planning and robust cloud investment a risk.
- Cloud computing is a risky and uncertain investment because it depends on the availability and performance of the external provider, the security and compliance of the data and services, and the volatility and unpredictability of the demand and the costs. Therefore, it should be justified by a robust business case, which shows the expected return on investment, the break-even point, and the total cost of ownership.
- Cloud computing is a complex and challenging transition because it requires a change in the culture, skills, and processes of the organisation, as well as a coordination and integration with the existing IT systems and services. Therefore, it should be planned and managed carefully, with a clear specification of the requirements, a competitive tendering, and a long-term contract.
Q: What are the key concerns for the customer when making this decision from a financial perspective?
A: Some of the key concerns for the customer when making this decision from a financial perspective are:
- How to balance the trade-off between the upfront and ongoing costs of cloud computing, and the potential savings and benefits that it can generate in the long run.
- How to align the budgeting and accounting practices with the consumption-based model of cloud computing, and the reporting and auditing requirements that it entails.
- How to mitigate the risks and uncertainties associated with cloud computing, such as the dependency on the provider, the variability of the demand and the costs, and the compliance with the regulations and standards.
- Whether budget is also available to facilitate training and CPD opportunities for staff who are required to upskill as part of the requirement to manage new technologies.
Q: What do you use as the counters for the arguments?
A: Some of the counters that I use for the arguments are:
- While Cloud can be a new and daunting thought to Finance leaders, parallels can be drawn between this and Leasing (which too has additional rigour around it in the sector, but is at least a known and largely accepted process). When positioning the conversation as effectively leasing the resources and services that the provider owns and manages, it helps align thoughts.
- Cloud computing is not a risky and uncertain investment, but a smart and strategic one, because it enables the customer to access the latest and best IT solutions, to scale up or down the resources and services according to the demand, and to pay only for what they use. Therefore, it should be evaluated by a value-based case, which shows the impact and outcomes that it can deliver for the organisation, the stakeholders, and the users.
- Cloud computing is not a complex and challenging transition, but a simple and smooth one, because it does not require a radical change in the organisation, but rather a gradual and incremental one, with a clear vision, a strong leadership, and a collaborative approach. Therefore, it should be implemented and governed by an agile and adaptive process, which allows the customer to experiment, learn, and iterate the solutions, to leverage the expertise and support of the provider, and to adjust the contract and the service level agreement as needed.
- Cloud doesn’t have to be a big-bang lift and shift approach. It is often best when steadily deployed via a hybrid approach. Assessing the current IT estate for quick wins, modest cloud investment, and reviewing performance alongside BAU services help give confidence when planning to migrate more workloads or key systems at a later date.
- An additional counter, if not creative trend that seems to be emerging, is the introduction of ‘asset as a service’ offerings where cloud solutions are given an additional service wrap, or form part of a managed service, which then allows a customer to consider capital funding streams.
Q: Are there any frameworks offering the advantage to customers to help them move cloud to a revenue expense?
A: Yes, there are some frameworks that offer the advantage to customers to help them move cloud to a revenue expense. Some of them are:
- The G-Cloud framework, which is a government initiative that aims to simplify and accelerate the procurement of cloud services by the public sector. The framework provides a catalogue of cloud services from approved suppliers, which are pre-evaluated and pre-agreed in terms of the quality, security, and pricing. The framework also allows the customers to pay for the cloud services as a revenue expense, without the need to go through a complex and lengthy tendering process.
- The Digital Marketplace framework, which is a government platform that enables the public sector to find and buy digital services from a range of suppliers. The platform offers a variety of digital services, such as cloud hosting, cloud software, cloud support, digital outcomes, digital specialists, and user research. The platform also allows the customers to pay for the digital services as a revenue expense, without the need to follow a strict and rigid specification.
- The Technology Services 3 framework, which is a government framework that provides access to a wide range of technology services and solutions for the public sector. The framework covers a variety of technology services, such as strategy and service design, transition and transformation, operational services, and major services transformation. The framework also allows the customers to pay for the technology services as a revenue expense, without the need to justify a high capital investment.
Q: Where do you focus your objection handling?? Is it: Acceleration – digital transformation, ROI, Biz Value velocity Compliance & Governance – are there specific government guidelines they are using from Gov.UK
, NHS-E etc that support the conversation. Sustainability Cost management Other
A: I focus my objection handling across these aspects, depending on the context and the needs of the customer. However, I would say that the most important and common ones are:
- Acceleration: I emphasise how cloud computing can enable the customer to accelerate their digital transformation, by providing them with the latest and best IT solutions, by allowing them to scale up or down the resources and services according to the demand, and by enabling them to pay only for what they use. I also highlight how cloud computing can increase their return on investment and business value velocity, by delivering more value and outcomes for the organisation, the stakeholders, and the users, in a faster and more efficient way.
- Compliance & Governance: I address how cloud computing can ensure the compliance and governance of the data and services, by following the specific government guidelines and standards that apply to the public sector, such as the Cloud First policy, the Data Protection Act, the NHS Data Security and Protection Toolkit, and the National Cyber Security Centre guidance. I also demonstrate how cloud computing can enhance the security and resilience of the data and services, by leveraging the expertise and capabilities of the provider, and by implementing the best practices and measures for the protection, backup, and recovery.
Q: Are there any reference points you use externally – analyst references etc you would be happy to share that we can include?
A: Yes, there are some reference points that I would be happy to share. Some of them are:
- The Cloud Adoption Framework for the UK Public Sector, which is a comprehensive and practical guide for the public sector organisations to plan and implement their cloud adoption journey. The framework covers the key aspects and stages of the cloud adoption, such as the strategy, the readiness, the migration, the management, and the governance. The framework also provides the tools, templates, and best practices to support the cloud adoption process.
- With Trustmarque and Microsoft working in partnership for a vast number of years, and Trustmarque holding all major specialisms, I am also able to draw down on any of Microsoft’s significant number of resources from across the public and partner ecosystem. We also have a significant wealth of knowledge and experience across our specialist practices and teams who are always ready to engage and help position
Trustmarque
as your trusted advisor for Cloud Adoption.
Mark Braham, Enterprise Architect (and M365 Evangelist!) – Trustmarque
(Mark is a former IT Manager, Leader and CIO with strong emphasis on digital transformation and cloud opportunities – having worked across the Education and NHS sectors over a 20+ year career prior to joining the Trustmarque team)
