Better Practice Guide Financial Considerations for Government use of Cloud Computing

Transcription

1 Better Practice Guide Financial Cnsideratins fr Gvernment use f Clud Cmputing Nvember 2011 Intrductin Many Australian Gvernment agencies are in the prcess f cnsidering the adptin f clud-based slutins. The range f fferings frm clud vendrs are expected t increase as the clud market matures and the capability f clud vendrs strengthens. Adpting a clud-cmputing slutin ften invlves a range f cmplex financial cnsideratins that agencies shuld cnsider as part f the evaluatin prcess, such as: understanding the cmmercial principles assciated with clud cmputing; financial issues related t prcurement and cntract negtiatins. market analysis and cmpetitiveness f the market. entry and exit fees assciated with the cntract. transitining funding frm capital budgets t peratinal (departmental) expenditure. financial mdelling t determine the cst-benefits assciated with a clud-cmputing slutin cmpared t in-huse investments and service prvisin; csts invlved with disaster recvery and delivery f cre business; and impacts n the agency s financial statements and Capital Management Plan where ICT infrastructure will n lnger be wned by the Cmmnwealth. This guidance advice fcuses n the financial issues that agencies need t address when adpting a clud slutin. 1 Financing the Clud

2 Transitining capital expenditure t peratinal expenditure One f the key financial issues facing agencies in adpting a clud slutin is transitining funding prvided t the agency n the basis f capital expenditure t peratinal expenditure. In terms f clud cmputing, agencies shuld seek guidance where it is prpsed that funding prvided fr capital items (like servers and sftware) are t be transferred t perating items. Such a transfer may als fall within the definitin f a New Plicy Prpsal (NPP) and require Cabinet cnsideratin. In these circumstances, agencies shuld refer t their respective Department f Finance and Deregulatin Budget Agency Advice Unit (AAU) fr mre infrmatin and advice. Where an agency brings frward an NPP, the accmpanying business case shuld identify the extent f any capital investment fr ICT r perating expenditure required and be reflected in ICT investment advice prvided t AGIMO each year. In summary, the areas that agencies shuld seek guidance frm their respective AAUs are: Transfer f an agency s apprpriatins fr capital expenditure t peratinal expenditure; Reallcatin f departmental apprpriatins between perating and nn-perating expenditure within a financial year; and btaining apprval fr perating lsses. Capital Management Plans Adpting a clud cmputing slutin may impact n an agency s Capital Management Plan (CMP) where capital investments may be replaced thrugh the purchase f clud cmputing services frm a vendr. In these instances, as a capital investment is replaced by services prvided by a vendr, the agency may decide t retire the respective asset and will need t reflect this utcme in its CMP and their agency Financial Statements. The verall impact will be a reductin in the agency s estimated capital expenditure and assciated capital budget, as well as an increase in peratinal expenditure althugh this may nt ccur n a ne-fr-ne basis in terms f the financial accunts. If an agency decides nt t retire an asset after purchasing clud cmputing services - that wuld effectively render the asset bslete, r decides t retain the asset fr disaster mitigatin r sme ther reasn the CMP shuld make nte f any such decisins. This can be achieved by updating the Ntes sectin f the CMP where changes in the estimated capital expenditure and capital budgets at the Pre-ERC (Expenditure Review Cmmittee) update are explained. The CMP shuld recncile with Capital Budget Statement and Asset Mvement Table in the Central Budget Management System (CBMS) fr the fllwing sectins: Apprved Departmental Capital Budget / Cllectins Develpment and Acquisitins Budget (r depreciatin funding prir t ); Own surce revenue (S31 r cash reserves); and Prir Agreed - equity injectin (Bills 2,4,and 6) Funding. 2 Financing the Clud

3 An agency is required t update its CMP t reflect changes in its estimated capital expenditure and capital budget. Fr further infrmatin, it is suggested that agencies cntact their respective AAU within the Department f Finance and Deregulatin. Financial assessment Agencies cnsidering clud cmputing are reminded that this shuld ccur in the cntext f ensuring prper use f Cmmnwealth resurces (i.e. efficient, effective, ecnmical and ethical use that is nt incnsistent with the plicies f the Cmmnwealth), whilst als cmplying with the financial framewrk requirements and whle-f-gvernment prcurement arrangements (e.g. ensuring cmpliance with the Financial Management and Accuntability Act 1997 (FMA Act) Regulatins and Data Centre Strategy). Agencies shuld als cnsider the implicatins f entering a clud cntract n their Incme Statement and Balance Sheet. The fllwing table prvides an verview f the key financial implicatins ver the frward estimates perid. Table 1 - Financial implicatins ver the frward estimates perid ($ millin) Optin Ttal ICT cst baseline (existing) Incme Statement and Balance Sheet New Capital investment r disinvestment (Balance Sheet) New Operating expenditure (Incme Statement) Less savings realised Ttal cst The adptin f clud cmputing will typically result in a transitin frm capital expenditure t perating expenditure, which will impact n the value f assets held and hence an agency s balance sheet. As previusly discussed, this must als be reflected in the agency CMP. This will cntinue t be the case as agencies increasingly purchase clud cmputing slutins frm the private sectr. The transitin t clud cmputing will als have impacts n the way budgets will need t be managed in future. Traditinally cst savings have been measured against reducing perating expenditure. Hwever, under the clud mdel, the percentage f perating expenditure t ttal expenditure will increase, whilst capital expenditure (and by implicatin verall expenditure) will decrease ver time. 3 Financing the Clud

4 Financial risks The key financial risks that agencies shuld be aware f when cnsidering adpting a clud cmputing slutin are: Ensuring that the cntract with the clud vendr des nt lck the agency int a relatinship with the vendr beynd the duratin f the cntract. Agencies shuld be aware f the requirements under Regulatin 9 (Apprval f Spending Prpsals) and Regulatin 10 (Arrangements beynd available apprpriatin) f the FMA Act. One risk may arise fllwing the develpment f intellectual prperty by the clud vendr t supprt the services prvided t the agency client, e.g. data schemas built specifically fr the client. This can als be assciated with csts f transitining int the clud arrangement and transitin csts ut f the arrangement. If the clud vendr des nt release client specific IP it has built at the terminatin f the cntract, this may result in excessive exit fees fr the agency r the need fr additinal investment in the new services. Sme clud vendrs may perate using multi-tenanted infrastructure services. This may result in hidden csts fr agencies in the situatin where any changes t the system requested by an agency will be charged back t the agency. It is essential that agencies understand the ecnmic and pricing mdels used by the clud vendr, particularly the pricing pints assciated with increases in service level usage. Agencies shuld cnsider including a service mnitring facility in the clud cntract t assist it in financial mnitring f the cntract and service usage, e.g. mnitring may take the frm f daily reprting n service use. Cmmercial principles The adptin f a clud cmputing slutin invlves an array f cmmercial arrangements, the majrity f which cntain financial cmpnents. The fllwing table highlights emerging cmmercial issues that agencies shuld cnsider. Table 2- Emerging cmmercial issues Current situatin Future situatin Cntracts Generally medium t lngterm cntracts. Shrter cntracts under clud arrangements t avid vendr lck-in and take advantage f market cmpetitin. Pricing Purchase, licence fee fr Transparency in pricing t be prvided by 4 Financing the Clud

5 Marketplace Prcurement Cntracting technlgy prvided, cmplex cntracts. Restricted by high investment, limited cmpanies participating in the market and cst f market entry barriers. Lengthy and cstly fr buyer and seller. Multiple vehicles, multiple departmental cntracts. vendrs. Pay fr use, utility, subscriptin pricing mdels as well as utcme mdels where apprpriate. Flexibility in pricing is btained thrugh shrter cntract lengths. Cmpetitive and vibrant market, pen t innvatin with lwer barriers t entry resulting frm the availability f Infrastructure as a Service (Iaas) and Platfrm as a Service (PaaS). The number f market participants will be higher and care is needed in evaluating their capabilities. Ease f selectin as prcurement panels are established fr clud cmputing vendrs. Cmmnwealth Prcurement Guidelines (CPGs) t be fllwed accrding t threshlds. FMA Regulatin 9 and 10 issues shuld be cnsidered if lng-term cntracts are signed. In the future, cntracting arrangements t be managed by either business areas r CIO s and verseen by central prcurement arrangements and CPG s. Within the cntext f the Australian Gvernment Clud Cmputing Strategy we are als cnsidering the establishment f a clud prvider panel. 5 Financing the Clud

6 Summary f Checkpints 1. Transfers between capital and perating expenditure shuld be discussed with the Department f Finance and Deregulatin (Budget Grup Agency Advice Units). Ensure that yur agency has determined the necessary requirements thrugh discussins with Finance. 2. Capital Management Plans must be updated t reflect any transfers between capital and peratinal expenditure. Ensure that yur agency has updated its Capital Management Plan t reflect changes in the estimated capital expenditure and the assciated capital budget. 3. Undertake a high-level financial assessment fr the purpses f financial cntrl f yur clud prpsal. Ensure that yu have cnsidered the financial impacts f yur clud prpsal frm the perspective f yur agency s Incme Statement and Balance Sheet including any perating lss apprval Understanding the financial aspects f yur clud prpsal will help t implement financial cntrls ver the duratin f the cntract. Ensure that yur ICT investment advice t AGIMO reflects the implicatin f clud services. 4. Understand the financial risks assciated with the cntract. Make sure that yu understand the financial risks assciated with the prpsal such as cntract lck-in, entry/exit fees, hidden csts and the pricing mdel used by the vendr. Make sure yu check fr any implicatins with the Data Centre Strategy. 5. Cnsider the cmmercial principles underlying yur clud prpsal. A cnsideratin f the relevant cmmercial principles will fcus yur attentin n the attributes f yur prpsal that shuld be cnsidered in btaining savings and imprved ICT capabilities. Ensure that yur clud prpsal will prduce value fr mney. 6 Financing the Clud