The Whitehouse Office of Management and Budget has announced that, from now on, cloud computing would be the "default approach to IT" for US government agencies.  The move comes as an element of a sweeping set of government IT reforms begun last summer intended to "close the IT gap" between the public and private sectors.  The cloud-first policy is expected to reduce a 2000+ data center infrastructure by as much as 40%, lowering costs, improving security and performance, and speeding up the deployment of new applications.

Closing the "IT Gap"

Last June, writing on the OMB web site, then-Director Peter Orszag made this observation:

"When many of my colleagues went from the cutting-edge, social media-focused Obama presidential campaign into the federal government, they remarked that it was like going from an X-box to an Atari.

"Indeed, a significant IT gap has developed over the past decade and a half between the public and private sectors - and that is a big part of the productivity divide between the two. Closing this IT gap is key to boost efficiency and make government more open and responsive to the wants and needs of the public."

It was the Obama administration's opening salvo in a war on manifold cost overruns, schedule delays, and outright failures in IT projects across dozens of federal agencies.  Since then, the OMB has formulated and started executing on a tripartite IT reform strategy, in which cloud computing plays an important role.

The first part of the strategy was the execution of an in-depth review of the highest priority IT modernization projects that were not yet delivered, "resulting in faster deliverables, terminations of projects that didn't work, and most importantly turned around projects that were in trouble," according to the OMB.  The second was a review of 30 financial systems projects across 20 different agencies with an aggregate budget of $20b, resulting in fully half of them being altered, reduced, or eliminated entirely.

"All In" on the Cloud

The third part of the IT reform strategy aims to substantially alter the way the US government spends its $80b annual IT budget going forward by adopting the "light technologies and shared solutions" of cloud computing, starting with the 2012 budget cycle.

In a speech last week before the Northern Virginia Technology Council, the OMB's deputy management director and chief performance officer, Jeff Zients laid out some of the particulars of the cloud-first strategy.

"What this means is that going forward, when evaluating options for new IT deployments, OMB will require that agencies default to cloud-based solutions whenever a secure, reliable, cost-effective cloud option exists," Zients said, adding, "These platforms will allow agencies to easily adopt cloud solutions for systems, such as infrastructure, email, and productivity suites."

He also said that the OMB will help this initiative along by setting up secure, government-wide cloud computing infrastructure that will serve the needs of multiple agencies and result in the closing of as many as 800 data centers in the next five years.

This is great news for cloud computing for a number of reasons.

Cloud Validation

When an ultra-conservative customer like the US federal government embraces a new technology so whole-heartedly, it goes a long way to dispelling the enterprise CIOs' concerns about security and other issues that have been retarding cloud computing adoption in the high end of the commercial market.

Democratized Procurement

Furthermore, the cloud-first announcement included a declaration that the government would be "increasing budget flexibility and speeding up [technology] acquisitions."  This will almost certainly translate into smaller, pure-play cloud startups being considered for inclusion in new project procurements in a way that companies of their size never were before.

Increased Vendor Profit Margins

Finally and most notably, although the federal government aims to reduce its IT cost through its use of cloud computing, which means a corresponding reduction in the IT vendors' collective top line, the cloud-first initiative could actually improve their bottom line on federal sales.

In general, today, doing business with the federal government is not a high margin endeavor.  Where the average profit of S&P 500 companies overall is about 8.5%, most government contractors make only about five percent.  And, although highly specialized IT systems can individually earn above-average margins, the overall average for software systems sold to the federal government is about 8%, versus 12-16% for similar systems sold to commercial clients.

There are two main reasons why federal IT sales are less profitable than their commercial counterparts, and both of them stand to be potentially mitigated by the cloud-first initiative.

The first reason hardware and, to a lesser extent, software vendors make less profit on federal contracts is the typical government agency's enormous buying power.  Whether it is servers, switches or seats, huge agencies buy huge amounts of everything, and are so able to negotiate the lowest possible unit price on each thing they buy.

The economics and technology of cloud computing say that where an agency might have bought, say, ten separate server boxes to run dedicated application instances before, they will now buy a single box to run ten virtual servers now.  So, while the overall revenue might go down, the margin per megabyte or MIPS will go up.

The second reason for lower federal profit margins made by software and, to a lesser extent, hardware vendors is the attenuating effect on project schedules and budgets of excessive bureaucracy, shifting priorities, and even less wholesome factors like fraud and incompetence, coupled with a procurement process that makes it nearly impossible for vendors to be properly compensated for the time and money they lose because of those things.

There are multiple provisions accompanying the cloud-first initiative that should a long way to reducing and eliminating the various kinds of government waste that currently diminish vendor profits.   One is that the OMB is creating a new formal, government-wide career track for professional program management and will only approve IT projects with effective program management teams "hardwired into the agency's organizational structure."  Another is that they plan to streamline governance and increase accountability by "bringing senior executives to the table armed with the right information and expertise to provide meaningful oversight and drive interventions and decision making on specific projects."

In short, government cloud computing could be a much more profitable line of business than its predecessor.

Catch-Up or Leap-Frog?

Mr. Zients summed up the OMB's IT reform drive, of which the cloud-first initiative is such a large part, like this:

"Tackling the information technology gap between the public and private sectors is one of most effective ways we can make government work more effectively and efficiently for the American people. IT has been at the center of the private sector's productivity gains, but for too long Federal IT projects have run over budget, behind schedule, or failed to deliver what [sic] on their promise. That's why fixing IT is a cornerstone of the President's Accountable Government initiative."

That statement makes it sound like the government thinks it is trying to catch up to the enterprise, but, with regard to cloud computing in particular, one has to wonder if they really understand the magnitude of their goal.

While the OMB intends to use cloud computing to enable shutting down 800 data centers in a few years, most large commercial enterprises are still just taking baby steps, dragging their feet, or digging in their heels with regards to the cloud, and very few are attempting anything nearly as ambitious as the OMB plan.

The US government takes a lot of heat and engenders a lot of cynicism from its citizenry, and much of it is certainly deserved.  But, regardless of our individual politics, we each can probably think of at least a few things the government has done that to us represent startling achievements that we can't help but admire and hope will be further pursued in the wider commercial world, like space exploration or disease prevention.

Two weeks ago, I never would have guessed that cloud computing might be one such thing.