What Are Agencies Really Budgeting for Cloud?

Published: August 28, 2019

Federal Market AnalysisBudgetCloud ComputingInformation TechnologyOMB

Analysis of OMB-reported data shows federal cloud market growth of around 5% per year.

The largest federal agencies are required by law to report their spending on information technology every year. This data is published in a report that used to be called the Exhibit 53. Today the same report is called simply the Annual IT Budget Request. Many of the data points contained are the same as they’ve always been, such as spending on operations and maintenance vs. development, modernization and enhancement. Over the last few years, however, the Office of Management and Budget has also required that agencies report what it calls “Cloud Computing Alternatives Evaluation” scores. These scores range from 1 to 6 and specify whether “the Investment, or a component of the Investment, is leveraging, considering, migrating or posing as a candidate for cloud computing.” Here is the scale in detail:

1. This Investment or a portion of this Investment is leveraging cloud computing.

2. This Investment is migrating to the cloud.

3. This Investment is considering cloud computing.

4. Cloud computing has NOT been considered.

5. Cloud computing is NOT applicable for any portion of this Investment.

6. Cloud computing has been considered but was not selected

As we can see these categories are extremely vague. For example, investments categorized as #1 could be leveraging cloud computing for “a portion” of their workloads, meaning only a small percentage of the program’s annual budget could be slated for cloud. In the FY 2020 request the data reported under #1 estimated that FY 2018 programs with $17.7B in total reported budgets were leveraging cloud all or in part. This total rose to $20B in FY 2019 and $21.4B in FY 2020. So far, so good for cloud service providers, right? Agencies are spending more on cloud and that is good for business.

Maybe. Consider those numbers in the context of overall reported IT budgets. In FY 2018, agencies reported total program budgets of $64B*, meaning that the $17.7B in all program budgets reported to be leveraging cloud equals 27.7%. No one who seriously tracks federal IT spending would agree that agencies have shifted almost 1/3 of their annual IT spending to the cloud. This shift accelerates in FY 2019, reaching 29% of total reported agency IT budgets ($20B out of $67.8B), followed by 31% in FY 2020 ($21.4B out of $69B).

Perhaps a more useful indicator of where things are heading can be found in the investments listed under category #2 – those migrating to the cloud. The program budgets for these systems totaled $3.5B in FY 2018 (5.4% of the government-wide reported total for that year), $3.96B, or 5.9%, in FY 2019, and $3.8B, or 5.5% in FY 2020. Five percent per year sounds like a much more reasonable growth estimate. Going a step farther, if we take 5% as the baseline for agency systems already primarily leveraging cloud, not just using it for a portion of the workload, we arrive at more likely totals for what agencies budgeted for cloud per fiscal year: $3.2B in FY 2018, $3.4B in FY 2019, and $3.45B in FY 2020.

Deltek takes this and other factors into account when developing its federal cloud market forecast, which will be out at the end of this week. For now, however, and based solely on government reported data, growth of roughly 5% per year seems reasonable and entirely more logical given visible trends in the market.

*DOD no longer reports budgets for “National Security Systems,” resulting in a drop in published total IT budget numbers in recent years.