What does technology really cost – and perhaps an even more critical question – how do you fund its acquisition?
These two questions were at the forefront of Government Technology’s “Understanding Total Cost of Ownership” webinar on October 26. For state and local government agencies expanding their tech infrastructure and investing in new innovations, understanding and funding the true long-term expenses of technology investments are crucial tasks.
On the funding side, conveying that information to lawmakers and traditionally frugal budget decision-makers can be especially challenging – particularly when more and more projects are shifting away from traditional capital outlays and moving toward ongoing software-as-a-service models.
Webinar panelists included our friend and newly elected NASCIO President, Maryland Secretary of Information Technology and State CIO Michael Leahy, and City of Mesa, Ariz., CIO Travis Cutright. The moderator was Justin Marlowe, Professor and Associate Director of the University of Chicago’s Center for Municipal Finance.
Setting the stage, Marlowe opened the session with an audience poll question – “What are your greatest challenges in developing an understanding of the total cost of ownership.”
By far the greatest challenge identified by the audience was, “Working with the budget and finance organizations to develop a multiyear funding strategy.” That was followed by, “Costing out the implementation of these systems themselves.”
These answers presented two interesting propositions – accurately figuring out the budget of complex, multi-year IT projects, and then convincing skeptical budget decision-makers as to their accuracy and necessity. All part of the standard portfolio of the intrepid CIO.
Turning the question of the greatest challenges to the panelists, Maryland CIO Leahy related an interesting analogy. “I think it’s like the story of the blind man touching different parts of an elephant. It depends on which piece you’re focused on any particular day,” he said. He was clear, however, that defining and developing that total cost component are the most critical steps.
“Unless you have a very advanced enterprise, most state systems are still federated,” he said. “There is considerable overlap and definition within each of the agencies. So one agency may consider something administrative costs, while another may consider it an IT cost.”
Therefore, even establishing a budget within a particular year for operations, or longer term innovation project budgets, is a real challenge. “And technology is moving so quickly that anything that’s more than two years out is likely going to have to be revised before you actually start anyway,” he added.
Mesa CIO Cutright agreed, and went further. “When different business units and other departments go out and procure software tools, they think that it’s just the cost of that tool, and they don’t consider everything else that goes along behind it, supporting that tool. It’s an art to be able to have the relationship with these departments and communicate the total cost of ownership. It’s more than just the initial capital outlay,” he said.
Marlowe asked Cutright to expand on that critical communications issue. “What I do is when we have a business solution proposal brought forward, I’ll sit down with the leadership – that’s the OMB and also our city manager – and discuss it,” he said.
Cutright used the Federal stimulus CARES Act funding as an example. “Here’s some free money to go out and do great things for our citizens. But I always remind not only the city manager but also my staff because our internal staff don’t always consider the implications of bringing a solution in and the associated operating cost related to this,” he said.
Cutright explained to his city manager that first there’s the investment in software and hardware, then there are implementation costs. Next, there’s data migration that needs to be considered, and then you have to adjust for user licenses because they’re paid annually, and that affects the operating budget.
“There’s the interface cost, and God forbid you get into customization and then the resulting mess is the rabbit hole, it can explode uncontrollably. And don’t forget software maintenance, patches, and so on,” he warned.
These are conversations that need to happen on the front end, before an organization makes those investments, or at least understands them. “And I know my city manager appreciates that, because that is not what folks have generally been considering when they want to bring in a tool or expense for capital. And so that’s my approach to just being transparent upfront on what the total cost of this solution actually is. Then we make a decision on whether or not to proceed.”
Leahy explained Maryland’s approach to budgeting and transparency. “We have over the last several years implemented a process that is rather different than what we started with,” he said. Previously, the budget office funded his agency to provide other department services. Unfortunately, under that model there’s no direct cost to these departments, and demand is unlimited. “So we have moved the budget, modeling and costing from the Budget Office to the departments, and we’ve implemented a chargeback model.”
In that same vein, in terms of communication, Maryland has implemented two new initiatives which Leahy believes are making a huge difference.
“We are really attempting to build a partnership with these agencies, that they don’t see us as the geeks in the back room that have lights, and Jacob’s Ladders and things of that sort. So instead of reviewing a particular solution that an agency would bring to us, I have set things up so that they don’t bring us a solution. They bring us a problem,” he said.
In that manner, by discussing the agency’s business processes, their needs, their workflows, and what tools the state may already have, Leahy’s team has much better insight into the problem to be addressed. “Then to follow up on that we’ve created what we call the portfolio office, where the governor has under the chief of staff, deputy chiefs of staff, each of whom is responsible for a number of the executive agencies. “There’s also a business relationship manager that is responsible for those agencies specifically, and to that deputy chief of staff, to serve as a subject matter expert. And with those changes, we’ve seen a huge improvement in relationships, and in building trust and transparency,” Leahy said.
The remainder of the session discussed various examples of other interesting financial models that the panelists had seen that can help governments really get their arms around this question of what is total cost of ownership and how to fund it? Right punct?
As the panel was concluding I was able to pose a question virtually – asking the panelists why other state and local jurisdictions had not attempted to replicate Massachusetts’ IT Bond model, which was successfully implemented when I was state CIO in the early 1990’s, and is now working on its fifth or sixth version under current CIO Curt Wood? Unfortunately, the session ran out of time, and my question went unanswered.
For further information on Massachusetts’ IT bond and the potential for use in other jurisdictions, please see my recent article Could IT Bonds Become States’ Answer for Technology Modernization Funds?