Cloud computing is in the process of revolutionising the way that IT services are provided across government, healthcare and the broader public services. It promises to radically reduce costs through economies of scale and greater flexibility, with some organisations claiming saving of 30% or more from its adoption.
It is not surprising therefore that many public sector bodies are moving away from using their own data centres and their IT decisions are increasingly about ‘sourcing’ and integration of cloud based software solutions. It is also why the UK Government has adopted a ‘cloud first’ policy since 2013.
Cloud computing can, however, create challenges for finance teams as it means that software and technology are now purchased ‘as a service’, with expenditure potentially moving from capital to revenue compared to traditional hardware based procurements. In addition where charges are based on usage there may be less certainty over future costs. There may also be VAT implications.
The use of whole life costing should allow for proper option appraisal and comparison between capital and revenue based procurement but there can remain a perceived difference in the attractiveness of capital compared to revenue funding as a result of public sector funding models. Whilst capital expenditure will ultimately feed into financing costs, the direct charge to the revenue account arising from service based contracts can be seen more explicitly as a call on scarce resources, an issue which is particularly pertinent when future revenue streams are subject to a degree of risk