Balancing Funds in a Changing Technology Landscape

Technology has become ubiquitous across both private and public sectors as well as culturally within our nation. Technology enables those that wield it the ability to operate at a scale never before experienced. Advances in the utilization of technology have given organizations, to include those in the public sector, the ability to deliver core services more efficiently and effectively than ever before. Recently, companies in the technology sector have begun to migrate their services to a model where their applications are hosted in the cloud and licensed on an annual subscription basis. The rapid migration to the new licensing type has created a problem for organizations with tight definitions and controls around how certain types of services receive funding. Namely, the migration from capital expenditures to a model dependent on operational and maintenance dollars has created a significant issue for the public sector and public sector dependent organizations.

Traditional purchasing models for Information Technology systems and applications begins with a capital expenditure that brings in the technology and the hardware required to operate the system. Since these systems usually require support from the vendor an operational and maintenance cost gets assigned to the tool. The O&M cost is around 20% and may increase over time as the age of the system increases and the cost to keep it operational increases as well. Eventually, the system would fall out of support and a new capital project designed to replace or upgrade has to be initiated. The capital purchase followed by annually recurring O&M costs, which are a percentage of the original capital purchase, is a pattern is that nearly all organizations understand as a usual way of funding Information Technology projects. The traditional pattern has recently changed as more and more vendors have migrated their offerings in ways where there are no more hardware purchases, and there are only annual payments (or monthly payments). 

The migration to this new service delivery model was fully normalized in 2011 when Microsoft released Microsoft Office 365 which is a line of subscription services offered by Microsoft, as part of the Microsoft Office product line (Office 365 Wikipedia). The service offering gave organizations around the world an opportunity to offload infrastructure support of these services and consume email, word processing, and other features of Microsoft Office as a commodity. Organizations had begun to realize at this point that services like email were not inherently special and for organizations with more control over the funds available for operations and maintenance, there was an opportunity to reduce overall expenses by moving to this model. Other companies took note of what Microsoft was doing and followed their lead. Consider niche industries within the technology sector, such as cybersecurity for example. Capital expenditures are the exception rather than the rule. As expenses shift more towards a subscription/operational model, organizations with limitations on O&M financing become impacted.

    Public sector organizations, as well as heavily regulated industries such as utilities, do not usually have full control over their budget and the way they spend money like the private sector. Public sector agencies and departments have tight restrictions on where the money to pay for services originates. For government organizations like municipalities, nearly all of the O&M funding comes from sales tax collections. (OKC Budget, 2018) Sales tax collection is relatively volatile as changes in the economic climate can have immediate impacts on spending behavior which lowers the amount of O&M budgetary dollars available to provide services. The aging collection of tools and applications also complicates O&M funding of Information Technology. The legacy application problem is especially prevalent in federal agencies.

    In a report released by the Government Accountability Office in 2016, it was identified that the federal government spent about 75 percent of the total amount budgeted for Information Technology for fiscal year 2015 on operations and maintenance investments. Such spending has increased over the past seven fiscal years, which has resulted in a $7.3 billion decline from fiscal years 2010 to 2017 in development, modernization, and enhancement activities (GAO Report 2016). Public sector organizations suffer two-fold from advancements in technology. First and foremost, public sector organizations struggle to keep up with the rapidly changing technologies which create challenges in the long-term support efforts. Namely, public sector organizations cannot upgrade systems fast enough to avoid the O&M trap that they currently find themselves in. 

    Some adjustments on how organizations account for expenditures related to critical technologies that power and enable our public sector agencies to provide services include changes significant investments in existing technologies and changes to accounting principles themselves. There is not a particularly good solution to either of the two leading causes of the O&M cost increase because the issue of old technology is relatively systemic and the changes in licensing are due to changes in how the market rewards technology companies. Reducing O&M costs related to the support of legacy systems requires significant commitments to either upgrade to versions or systems that are cheaper to manage or seek to remove the system in its entirety and migrate those services to some other existing system. Managing the changes to the newly adopted licensing models of technology vendors requires a profound change in how governments fund technologies related to the provisioning or management of public services. Generally Accepted Accounting Principles (GAAP) are set by the Financial Accounting Standards Board and guide organizations on proper standards for accounting. GAAP needs to adjust to provide organizations with the flexibility needed to consume and utilize technology services for the mission of public sector organizations.

References

Office 365 Wikipedia: https://en.wikipedia.org/wiki/Office_365

GAO Report: https://www.gao.gov/assets/680/677574.pdf

OKC Budget: https://www.okc.gov/home/showdocument?id=11892

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