Federal CIOs, CTOs and other IT leaders are increasingly responsible for driving their agency’s innovation agenda, delivering operational excellence through automation and maintaining mission assurance. Addressing these often-conflicting demands requires a wholesale shift in how IT operates with new organizational structures, operating models, skillsets and even culture needed. By navigating this transition successfully, they can lead their agencies to become faster, leaner, more agile and smarter.

While most CIOs and other IT leaders have long recognized the need to modernize, they have often lacked the funding and framework to do so. The question is no longer whether or not to modernize, but how to modernize.

The newly published Federal CIO Playbook: IT Modernization aims to arm agencies with recommendations for where to start, outlines some of the most effective ways to modernize federal systems and offers four financial strategies for making modernization happen today: using central and self-funded Working Capital Funds, shifting from capital to operating expenses, accelerating retirements and partnering with program leaders to achieve mutually beneficial results.

Modernization is essential to reducing costs, improving security and optimizing outcomes.
Four funding strategies for IT modernization: Taking advantage of working capital funds, shift from capex to opex, accelerate legacy retirements and partner to capture and share program cost savings.

Four funding strategies for IT modernization

While most federal CIO and other IT leaders have long recognized the need to modernize, they have often lacked the funding to do so. For example, tight budgets and reliance on Continuing Budget Resolutions over the past several years have made consistent IT investment decisions challenging. This makes identifying new sources of funding a priority. CIOs can use a combination of four core financial strategies to make IT modernization a reality.

Strategy #1 – Take advantage of working capital funds

Good choice for modernizing commodity systems and infrastructure

The Modernizing Government Technology Act (MGTA) of 2017 was passed as part of the National Defense Authorization Act (NDAA) for fiscal year 2018. Signed into law by the Trump Administration on December 12, 2017, MGTA creates new funding streams that agencies can use to modernize their technology to lower the cost of government, improve mission performance and agility, capture greater efficiencies and enhance security. Among the most notable MGTA features are Working Capital Funds (WCF)—multi-year, revolving funds with two specific varieties:

Central WCF. MGTA promotes the use of a centrally administered competitive IT Modernization Central Fund. Any federal agency can apply for funding that must be repaid within five years. The proposed overall funding is just under $500 million for fiscal year 2018-2019. Sunset provisions limit most funding to these time periods—creating an incentive to move quickly to secure the dollars.

To capture these funds, agencies need to present a strong business case for IT modernization projects/initiatives that adopt agile or iterative software development, must show preference to the use of commercial cloud technology, enhance cyber security and embrace strong program management and procurement strategies. It will also be critical to embrace standardized Technology Business Management-based metrics and reporting structures (an Office of Management and Budget requirement already familiar to those managing certain aspects of agency IT budgets in fiscal year 2018).

Self-funded agency WCF. MGTA also authorizes the 24 CFO-level agencies to take advantage of their own new or existing self-funded WCFs to support modernization efforts within those agencies. Due to the needed and immediate flexibility that they offer, self-funded WCFs can have significant long-term impact.

Agencies are well advised to focus these investments initially on quick-win projects that can deliver rapid payback with meaningful impact and minimal risk. This allows limited funding to be used for several modernization cycles within the funding window. Cloud infrastructure and software/platform-as-a-service are prime examples as they minimize upfront development. Continuing with data-center and contact-center optimization and consolidation may be wise choices for similar reasons.

Four steps to IT modernization

Download the full Federal CIO Playbook: IT Modernization for step-by-step guidance on creating a sustainable, enterprise-level IT modernization strategy within the federal government.

View the Report

Strategy #2 – Shift from CAPEX to OPEX

Good choice for modernizing fully integrated or commercially focused systems

Agencies operate many legacy systems on premise using in-house or contractor resources—at significant cost for basic operations and support. While modernizing them can help reduce maintenance costs and deliver other performance advantages, the scope of these systems often necessitates significant upfront capital investments to upgrade.

By shifting some systems from capital expense to operating expense, CIOs can kill multiple birds with a single stone. Among them: minimizing immediate capital investment, reducing ongoing costs (and making them more predictable), tapping into commercial platforms, innovation and expertise, and addressing cybersecurity risks.

CIOs can run this play in a variety of ways:

Managed services, where existing systems are shifted to third-party management and can therefore be modernized through operating costs without the constraints of annual budgets.

Shared services, where multiple agencies team up to standardize and simplify core back office processes (for example, finance, procurement and human capital management).

Software-as-a-Service (SaaS), which makes it possible to benefit very quickly from the latest technology—with continual enhancements and security updates—without any large, upfront costs.

This play is already top of mind for many, as evidenced by the recent Accenture Federal Services Digital Decoupling survey of 185 federal IT decision-makers. When asked about making this shift from capital expense to operating expense for cloud-based IT, 80 percent agreed that this switch makes it affordable to migrate systems that had been too costly to move in the past.

As one example, a federal agency recently leveraged a managed services contract to modernize a suite of mission-critical mainframe-based legacy systems. By reducing O&M spending under the agreement, the agency could reduce long-term contracting costs while facilitating upfront investments in modernization. In addition, the multiyear agreement provided the flexibility to update the system iteratively. Taking advantage of DevOps to increase development speed and agility, the agency was able to replace more than 3 million lines of COBOL code and legacy databases with a new, cloud-ready, Java/Oracle-based application suite. Following the migration of 18 billion records, the systems were seamlessly switched on with no end-user impact.

80%

of federal IT executives believe that funds freed up by moving to the cloud and adoption other new technologies will finance their migration from legacy systems.

Strategy #3 – Accelerate system retirements

Good choice for replacing agency-specific systems, applications and environments

For some systems, the most sensible path forward is to simply retire them. A thorough portfolio analysis can determine which systems are aligned with current and future business needs or are candidates for retirement. By eliminating redundant or underused systems, CIOs can demonstrate rapid progress on multiple fronts: reducing costs and vulnerabilities, increasing efficiency and freeing up resources for other modernization initiatives.

In some cases, the application itself is managed by a specific program while the support and infrastructure costs are borne by IT. Many CIOs are familiar with the frustration of having to maintain legacy technology to power outdated applications, which drive up costs and risks agency-wide. This scenario can create a disincentive to modernize where the costs and benefits are not distributed equitably. A detailed business case showing total and ongoing costs for orphan systems can provide additional motivation for programs to modernize—or serve to justify higher chargeback fees for those that elect not to.

In terms of migrating systems to the cloud, the conventional wisdom is that they should be rearchitected first to fully capitalize on native cloud capabilities. However, in some cases, a more accelerated “lift and shift” approach is preferable. Using this model, agencies can retire legacy infrastructure faster and then invest the cost savings in subsequent cloud optimization. For evidence that this approach can pay off, look to the Federal Communications Commission (FCC), where former CIO David Bray was able to slash spending while delivering better performance.

When Bray took over as CIO of FCC in 2013, he uncovered 207 systems—some dating back more than 20 years. Those systems were being maintained by nearly 400 contractors whose tenure averaged 15 years. All told, the agency was devoting 85 percent of a $64 million IT budget to legacy systems. Within four years, FCC had cut legacy spend by 35 percent through a modernization plan focused on delivering small wins, migrating to cloud computing and trimming back contracted personnel.

In terms of shifting from CapEx to OpEx, FCC replaced its aging Consumer Complaint Center with a commercial SaaS solution. The SaaS option cost just $450,000 and was deployed in only six months—a fraction of the $3.2 million and two-year timeframe quoted to build a new system internally. The agency also deployed a cloud-based Electronic Comment Filing System without requiring new money from Congress. Those initial successes prompted the agency to go “all in” on cloud with “Operation Server Lift.” Moving racks of servers to facilities run by a commercial cloud provider has led to an immediate decline in legacy spend.

Strategy #4 – Partner to capture & share program cost savings

Good choice for modernizing large, agency-specific systems

Investments in modernization can produce cost savings far beyond the IT budget itself. The challenge for many agencies is capturing and recognizing these benefits, especially as they can often dwarf IT savings alone.

With this play, the CIO engages with program leaders to build a joint business case to justify a modernization investment based on total financial impact. For example, collaboration between the CIO and program leaders can reveal significant opportunities to redesign and improve business processes, including adopting automation. The growing maturity of digital platforms makes it easier to jointly develop prototypes to demonstrate and validate these proposed performance improvements.

Ultimately, better processes and more up-to-date systems can yield reductions in cost to serve, fraud, waste & abuse, supply chain and other program costs—funds that can then be reallocated to further modernization efforts by both IT and the programs it supports. Furthermore, initial successes can make it easier to work with other programs on win/win partnerships to improve performance and reduce costs.

Learn More: Read the entire Federal CIO Playbook: IT Modernization report for additional insight. This report provides step-by-step guidance for creating a sustainable, enterprise-level IT modernization strategy within the federal government. Use the View Full Report button to access and download the expanded PDF.

For more on empowering change agents to deliver mission outcomes, visit Digital Government Transformation.

Dave McClure

Principal Director – CIO Advisory

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