Can the public sector scale cloud services, yet control costs?

Public sector organizations are allocating 30% of their tech spend to on-demand technologies – with this figure set to rise to 44% in 2026. What’s causing this increase in costs and how can the public sector contain it?

In a new report from the Capgemini Research Institute (CRI), The on-demand tech paradox: Balancing speed and spend, 82% of technology leaders surveyed across industries have seen significant cost increases for cloud, SaaS, and Gen AI usage. Almost half are considering moving workloads to on-premises environments as a result. The debate surrounding cloud sovereignty is further fueling this trend, as CIOs and their teams aim to avoid compliance risks and data privacy dependencies that could arise from geopolitical challenges.

What’s accelerating public sector cloud adoption?

Cloud is a necessary foundation for delivering modern, joined-up, data-driven services. And, as AI continues to mature, success with it depends on cloud services. That’s because AI only works when it’s given good data, and cloud offers a better way to connect that data.

Yet on-demand cloud services are cited as one of the biggest IT cost drivers. For the public sector, these services increasingly underpin the way public services are delivered at scale, as well as how the sector handles new or periodic service demands, such as during an election, AI-powered chatbots dealing with citizen queries, and platforms for remote working and collaboration.

What is clear is that the power of the cloud, while creating opportunities for streamlining and automating countless processes, also generates one of the biggest challenges. Just as control, transparency, and governance are required to ensure a sovereign cloud, so it is for cloud costs, particularly as on-demand IT resources are scaled.

Cloud use in the public sector – what’s going wrong?

The CRI survey revealed some startling facts about the difficulty public sector organizations face in controlling their cloud spend:

• 67% are unable to accurately forecast cloud budgets
• 68% see cloud waste as a big challenge – significantly higher than the 59% all-sector average
• 61% say their organization’s on-demand tech costs are “a big black hole”
• 53% have faced bill shocks due to unpredictable spikes in cloud usage

More generically, only around 30% of organizations across sectors have achieved their savings target.

Why the public sector needs FinOps

These figures are perhaps not surprising. What’s missing in so many cloud environments are the controls required to keep costs from spiraling as on-demand tech sprawl expands. For example, 58% of public sector leaders said they did not have complete visibility of how many SaaS apps they had.

What’s needed is an effective FinOps program. FinOps is the continual management of both operational and cultural practices that ensures you get the most from your cloud investments, while controlling their costs. The word “continual” is important here because cloud and on-demand are flexible by nature, thus your controls need to flex in tandem.

But that’s precisely the catch. Many organizations are considering FinOps, but few are implementing it effectively. In the public sector, while 53% of the CRI survey respondents said they used cloud cost management tools, only 34% regularly evaluated the performance and impact of those tools and took action based on the insights. 

Furthermore, FinOps is invariably pushed behind cloud strategies (perceived as an afterthought), thus lagging behind the cost explosion. Playing catch-up is much harder than preventing that cost explosion in the first place.

FinOps, like compliance and security, must therefore be part of the cloud strategy from the outset, moving away from the idea of technology first, cost control second.

What is procurement’s role in controlling cloud costs?

So, where do you start? It is vital when developing a cloud strategy that you identify the base costs for each functionality, as well as the cloud’s cost drivers in a design-to-cost methodology. You should also establish a clear usage framework.

With cloud services – especially AI-based automation – becoming more and more prevalent in business processes, their procurement should be managed just as professionally as other purchased goods. This is precisely why purchasing/procurement has always existed as a standalone skill and function. A good industrial purchaser has the technical background to efficiently manage negotiations and supplier management.

But how good is the purchasing department’s expertise in cloud technology? With 67% of the public sector survey participants saying they are unable to forecast their cloud budgets accurately, something is clearly going wrong.

A big clue lies in how established procurement processes have worked in the past. The public sector has historically used fixed price terms and deliverables. So, while cloud environments have been set for most use cases and are waiting to be deployed and used, on-demand pricing is, in general, a huge challenge for public sector procurement. Balancing cloud cost and on-demand agility demands wholly new thinking.

Rebalancing speed and spend

The pattern of cloud/on-demand first, costs second (often after a service has been built and launched) is especially evident in the public sector. Indeed, 65% of public sector participants reported that this was the case, against an all-sector average of 54%. The outcome of this is clear. For example, taking just one element of on-demand budgets, spending on SaaS in the public sector has seen an average over-spend of 12% in the past year.

Meanwhile, 65% of the public sector respondents confirmed this pattern of tech first, cost second thinking, whereas private industry players are addressing this more effectively, with an all-sector average of 54%. The life sciences sector shows a marked contrast at 38%. This presents an opportunity for public sector organizations to tap into already proven best practices from the private sector. This is particularly pertinent in today‘s climate, where the need for digitization is increasing and there is an expectation of a huge rise in funding IT/digital projects in the public sector.

What impact will sovereignty have on cloud costs?

Another aspect of cloud raises cost implications: geopolitical shifts have led to sovereignty becoming more of an imperative in the public sector. 57% of public sector organizations, versus a global average of 46%, are already embedding cloud sovereignty in their overall cloud strategy.

With the potential to add to the cost control challenge, this demands careful decisions about what environment is appropriate for each workload. Sovereign solutions should only be used where the risk management approach really demands them.

How much are organizations willing to pay for additional sovereignty and compliance? This was a key question in the CRI survey, noting that all cloud providers today are providing different offers. Most of these offers come with a premium tariff for additional compliance controls, liability terms, and local/national operations.

An all-sector average of 42% said they would be willing to pay extra for sovereignty, with an average 11% price increase. A further 37% acknowledged a tentative willingness to pay an 11% premium for sovereign cloud.

That some FinOps thinking is already in play is evidenced by 58% of respondents across all sectors saying that they conduct a cost-benefit analysis to balance sovereignty needs and cost efficiency. This will lead to a multi-cloud approach, providing the right cost/function model for different data classification needs.

What should public sector leaders do?

We have seen that the adoption of on-demand technologies, such as cloud, SaaS, and Gen AI, is accelerating. At the same time, there is a corresponding rise in both costs and complexity. FinOps offers a pathway to controlling the cost explosion and increase the value of on-demand technology.

The following steps can help to establish successful, cost-managed cloud adoption:

• Make cost a deciding factor, not an afterthought. On-demand tech decisions should be made with cost management to the fore.
• Bring procurement and IT closer together. Purchasing can then feature at the outset of new IT adoption.
• Build understanding of cloud provision and on-demand services within your procurement function. Purchasers should know what the cost drivers are and how on-demand pricing can be dealt with.
• Design scalable, agile, frugal, and sustainable architecture. Architecture choices should align costs to value, and cost-aware architecture should limit egress charges.

Making public sector cloud work – cost effectively

Cloud is playing a pivotal role in the transformation of public services. Done the right way, it can reduce costs and make digital modernization easier, but smart choices and cost-containment are key.

Organizations that get this right will be able to rely on the cloud effectively and consistently, and by increasing their use of on-demand services, drive real improvements in productivity, innovation, and cost savings.

Find out more

Read The on-demand tech paradox: Balancing speed and spend published by the CRI for more on the current state of cloud investments and on-demand usage. The breakdown of pure cloud expenditures, SaaS, and Gen AI is particularly interesting.

Our report Making it real: Four steps to implementing a sovereign cloud shows howpublic sector organizations can maintain an appropriate level of control over their data, technology, and operations.