The US federal government has made significant investments in IT across its agencies to catch up to technology adoption rates in the commercial sector. And while government IT is growing quickly in capability, it is also growing in cost. The Department of Defense (DoD) alone budgets over $45 billion annually to IT, and in 2022 President Biden called for an 11% boost in IT budgets for federal civilian agencies. Additionally, the number of technologies and products that the DoD is allowed to purchase has increased significantly, complicating the decision calculus and increasing the need to ensure optimized and intentional spend.

Federal agencies have made numerous efforts to deploy their IT funds more efficiently, from cost transparency and government-wide category management to agency-specific cost reduction efforts. Yet, substantive cost curtailment and spending improvements have been rare.

From our case experience, we have identified the leading issues behind this failure of US government agencies to generate IT cost improvement, especially when compared with commercial peers, across three key categories: budgeting and funding processes, savings program execution, and government constraints. And we offer five key strategies that can close the gap to commercial best practices and improve cost outcomes.

Budgeting and Funding Processes

Shadow IT. Whereas commercial organizations tend to focus on expenditures, government agencies focus on program budgets, with IT just one of many embedded components. This approach typically gives little visibility into “shadow IT”—IT spending that is hidden in adjacent budgets or vendor contracts. As a result, while the amount of money spent by each program is clear, the percentage allocated to IT is not, and senior government officials are thus unable to budget enterprise-wide IT spending effectively. In fact, when cost transparency is introduced, we often find that IT expenditures are up to 30% higher than anticipated due to this hidden spending.

Lack of Oversight. In commercial entities, the CIO or CFO typically controls most IT spending or at least has a high awareness of it. Business units cannot make major IT purchases without proper authorization, and shadow IT is one of the first targets of commercial cost-reduction efforts.

In contrast, while the government has introduced a number of cost-transparency measures, such as business management practices that align costs to IT services, there is still a significant lack of CIO oversight. With hundreds or thousands of budget holders in any given government agency and multiple contracting mechanisms, such as government-wide acquisition contracts and multi-agency contracts, many budget holders can make major IT purchases using these agreements with just the approval of a contracting officer, without CIO approval or awareness.

Budget Incentives and Risks. Companies focus on metrics such as overall ROI, payback period, and weighted average cost of capital when making business decisions. It is incredibly challenging for government leaders to do the same due to the higher risks associated with budget shortfalls. For example, the DoD might budget a large amount of money to be spent in year one with the aim of saving money in years two to five, but if the effort fails to deliver, there are much greater potential adverse effects from the budget shortfall in years two to five than would be the case in a commercial business.

In addition, when determining their ultimate sourcing strategy, leaders should resist the status quo and assess whether alternative options, such as different contract mechanisms and bundling or unbundling requirements, can create savings.

Finally, when implementing a contract after negotiations, leaders should ensure that they continue to look for opportunities to save throughout the entire contracting process, including tracking and preventing leakage off the improved agreements that have been established.

Address underlying issues. Just as high-performance applications require proper computing infrastructure, high-performance cost reduction efforts require the right organizational infrastructure. Contracting policies should be improved, for example, to ensure that they do not create additional complexity for vendors. Key utilization data should be accurately measured and easily available during procurement decisions; for example, through internal knowledge management systems that ensure that IT and procurement organizations have access to the same consumption data. And vendor profiles should be clearly understood, including their business models, margins, strategic aims, and sales team compensation plans and incentives.

For example, when negotiating with cloud IaaS providers, which are more concerned about peak loads than total loads, government IT buyers can win overall discounts by locking in non-peak computing rates. Similarly, a government buyer that understands its vendor’s sales compensation structure might be able to achieve discounts by timing purchases to align with a vendor’s bonus accelerator schedule.

Once a more optimal organizational infrastructure is in place, CIOs can create savings more effectively. With improved contract management, for example, they can encourage the use of standard terms and conditions that reflect best practices and regularly assess contract performance to ensure that vendors are meeting expected service levels. They can deploy accurate utilization data to reduce quantities or service levels without harming the mission. And they can use their knowledge of vendor incentives to improve the negotiation process.

Have a plan to recoup and reinvest savings. Government CIOs need to understand their current IT costs and where cost reductions will occur so that they can track program progress and ensure that the expected reductions are delivered. The current cost baseline should therefore accurately reflect all spending controlled by the CIO and include estimated shadow IT spending to the extent possible. Without a clear baseline and tracking, the CIO will not be able to hold the agency accountable to its cost-reduction strategy.

Agencies also need to understand and control where funding will go once cost reductions are achieved; that is, the budgets that will benefit from the effort. CIOs should therefore proactively define their strategy for recouping IT cost reductions and track the results. Otherwise, cost-reduction efforts may unintentionally flow funds to lower-priority or unnecessary projects in a different area of the organization, negating the cost reduction and boosting inefficiencies elsewhere.

Manage the Changes

All these efforts to lay the groundwork for savings will be for nought if agency CIOs are unable to push through on the toughest decisions, gain the support of internal stakeholders, and follow through to keep the momentum going. Below are two examples of actions that government leaders have taken to ensure that their efforts create meaningful and lasting change.

Accept the need for tough decisions. When commercial organizations cut costs, they know that reorganization and outsourcing (i.e., headcount reduction) are always options, even if they are not to be undertaken lightly. Government CIOs need to have a similar level of intensity if they are to lock in deep, significant savings. They must be willing to accept the pain that comes from telling people “no” and pushing back on requirements. And they must be prepared to take the following steps where appropriate:

• Stop programs or cease investments.
• Force IT standardization (for example, of devices and software).
• Limit features to those necessary.
• Negotiate hard with suppliers.
• Eliminate unneeded contract jobs.
• Reorganize long-held roles and responsibilities.
• Centralize funding.

The opposition will be tough, as those affected will say the current investments are critical, their missions are unique, they need more functionality, and they won’t budge on pricing, among other arguments. Each of these responses should be evaluated on a case-by-case basis and not taken as automatically exempting a program from cost containment.

Frame the benefits to motivate internal stakeholders. Cutting costs can be a difficult pill to swallow in an organization not motivated by optimizing its profit and loss statement. To achieve buy-in, CIOs should present their efforts in a mission-centric way, such as by saying that they are using the funds to reinvest in agency priorities. If members of the leadership are asking their internal stakeholders to sacrifice, they must communicate the longer-term benefits clearly.

Once the changes are made, agencies must refrain from falling back into habitual practices. We recommend that CIOs keep four questions top of mind:

• How can we institutionalize new cost-saving practices and processes?
• What written policies and procedures should we update to support long-term savings?
• How can we track and show the impact our efforts have had?
• Who else should buy into the changes to ensure that they last?

With these answers in hand, agencies can work toward enduring cost management success.