Public & Social Sector Practice

Ahead in the cloud:

Transforming public-
sector performance
The COVID-19 pandemic highlighted the importance of cloud
technology and analytics in delivering public-sector services.
Can governments build on what they have learned?

by Quirin Maderspacher, Mike McCarthy, Gundbert Scherf, and Sebastian Stern

© Yuichiro Chino/Getty Images

February 2021
 The COVID-19 pandemic sent companies,
governments, and public agencies across the
world scrambling to find new ways to deliver
services. Workforces shifted to working partially
or even fully remotely; existing services were
scaled up or down and reconfigured to changes in
demand; and essential new services were rapidly
introduced to deal with new delivery needs in
policy making and business.
Cloud-based IT systems played an important role in
enabling these shifts. The performance benefits of
the cloud—secure, collaborative multiuser access to
cutting-edge software, coupled with expanded
storage capacity and analytical capabilities—have
long been known. However, adoption in the public
sector has been fragmented and ad hoc, and it has
often been driven more by the enthusiasm of
individual chief technology officers (CTOs) than by
policy objectives. In this respect, the crisis has
served as a catalyst, and has brought a greater
focus on quality data and robust analysis. We have
reviewed potential cloud-based analytics
applications in the public sector to help pinpoint
where governments can achieve the greatest
possible business value.
Web <2021>
<Ahead in the cloud>
Exhibit 1
Exhibit <1> of <2>
The United States
The United States spends
spendssignificantly
significantlymore
morethan
thanmajor
majorEuropean
cloud in government.
on cloud in government.
Total public sector cloud spend, 2019, $ million
US
20,117
Source: IDC; McKinsey analysis
2 Ahead in the cloud: Transforming public-sector performance
Over the past years, we have collected a
comprehensive library of detailed bottom-up use
cases based on significant prework by the McKinsey
Global Institute and by our Digital Practice. The
results were used in part to inform a framework for
helping public-sector organizations identify areas in
which cloud-enabled solutions would have their
greatest potential impact. This article discusses six
opportunity areas where cloud-based analytics
applications can potentially deliver the highest
possible business value—and also the highest
possible return for taxpayers. While the analysis was
based on US and European countries, the
framework can serve as a guide globally.
The value proposition of cloud should
combine long-term business value
creation with pure IT cost efficiency
Public-sector spending on cloud technology is
forecast to grow at an annual rate of around
20 percent until 2024, that is, double within the next
five years (Exhibit 1). Total spending in Europe still
lags far behind that of the United States—even when
accounting for comparatively larger government
budgets. Past investment has not always achieved
the best possible value, however.
Europeancountries
countrieson
Expected growth rate
per annum, 2019–24, %
24
20 20
18
UK Germany France
1,331 1,186 770
US UK Germany France
“It’s not about money. If you start out
with the expense reduction piece, you’ve
kind of lost your way in the beginning.”
–Director, US Technology Transformation Services
Prior to the arrival of the COVID-19 pandemic, most
business leaders saw the cloud-transformation
process as “something for IT to worry about.”
Cloud-migration initiatives typically focused on
efficiency in IT infrastructure and aimed to reduce
operating costs in IT by removing captive data
centers, increasing resilience and stability,
improving the development environment, and
enhancing cybersecurity.
But cloud-based efforts focused only on
cost efficiency in IT, and they have mostly
proven disappointing, as cost benefits delivered
were lower than predicted. There were two
reasons for this: First, costs and benefits were
not quantified realistically and holistically at
the outset, creating false expectations. Second—
and more importantly—the opportunity to
enhance performance through cloud-based
transformation was underestimated. Too often,
the mindset was “business as usual, but in the
cloud.” As a result, services and applications
were not redesigned to take full advantage of
cloud technology, and potential performance
improvements were lost.
There are some examples of successful public-
sector cloud-transformation projects, and they
demonstrate that in order to deliver the best
possible return for taxpayers, business leaders and
CTOs need to collaborate and adopt a dual
perspective that consists of both improving IT
Ahead in the cloud: Transforming public-sector performance
infrastructure and improving business
performance. For example:
— In 2014, the United Kingdom’s Ministry of
Defence (MOD) began replacing its core legacy
on-site IT architecture with a hybrid cloud-based
solution. Migrating to the cloud has cut costs and
improved performance. In particular, its 250,000
users can now access modern applications online
via multiple devices, and approximately 80
percent of MOD data have been migrated to the
servers of United Kingdom–based cloud service
providers. Most of MOD’s core IT, nonmilitary
architecture is now industry standard.
— The United States Financial Industry Regulatory
Authority (FINRA) is the largest independent
regulator for all security firms operating in the
United States, and it employs approximately
4,000 employees domestically to monitor financial
transactions. As transaction speed and volume
steadily increased, FINRA’s in-house solutions
reached the limits of their capacity. In response,
the agency adopted a cloud-based solution, which
allows it to analyze more than 37 billion data sets
per day, steer computing capacity where needed
in response to changes in market volume, and
ensure high performance—even during peak
workloads. The system now completes around
400 times as many calculations as it did previously,
and it does so at higher speeds, expanding
FINRA’s insights on market activity as a result.
3
 Governments should take a systematic
and structured approach to determine
where cloud technology will unlock the
most business value across agencies
Our research, based on previous work from the
McKinsey Global Institute and our Digital Practice,
drew on two sources: public-sector agencies that
are undergoing cloud-based transformation
processes and extensive interviews with our own
public-sector and analytics experts and leaders.
The research shows that governments should take a
systematic structured approach to unlock the full
value of cloud technology.
We have synthesised the results of the research into
a heat map (Exhibit 2) that shows cloud-based
transformation potential within different government
functions (such as defense, general public services,
and education) and across different stages of the
public-sector value chain—from research and
development, to procurement, to operations and
claims processing, to citizen interaction. While many
additional factors may influence cloud-based
transformation priorities, we believe the framework
provides a valuable starting point for guiding
strategy in the public sector, because it highlights
areas where impact is expected to be greatest.
Based on our research, we have identified six areas
of opportunity where the potential for value creation
in the public sector is particularly significant. These
are numbered on Exhibit 2 and described in more
detail below. The first five areas show the potential
impact of transforming core processes—such as
procurement or asset management—across one or
more government departments. The final
opportunity area, digital health, focuses on the
potential to transform delivery of an entire service.
Area 1: Improving data management and
document processing. Cloud-based solutions can
dramatically improve speed and quality as well as
reduce costs in general services workflows across
all agencies with high volumes of documents—such
as healthcare, tax affairs, permit issuance, and
4 Ahead in the cloud: Transforming public-sector performance
licensing. Streamlined processes that enable the
use of artificial intelligence (AI)–based applications
also allow automated analysis and the integration of
incoming data (such as claims-related data). This
both improves decision making and reduces the
volume of documents for inspection.
Use case example: Healthcare systems generate
large numbers of patient-related documents that
require reading and triage to validate the next action.
Documents pass from one healthcare setting to
another, which multiplies the amount of effort
required from staff. A cloud-enabled process can
allow machine-based document reading, dispatch to
appropriate persons, prediction of subsequent
actions with a high level of confidence, and provision
of supporting information that helps staff members
make decisions faster. Well-designed document-
management projects have achieved 30 to 40
percent reductions in manual labor while improving
service quality in parallel.
Area 2: Reducing asset-management and
maintenance costs. Cloud-based approaches can
significantly increase asset availability for agencies
operating with a high volume of assets, such as
defense and public transportation agencies.
Systems that automatically track asset utilization,
condition, and location (of moveable assets), and
that predict shortages and breakdown times, greatly
increase accuracy and effectiveness in asset
management, which, for example, allows a more
optimized distribution of assets.
Use case example: Armed forces rely on
prescheduled maintenance of their assets (planes,
for example) to ensure that they are ready for
operational use. Assets often undergo maintenance
operations before they are actually needed to
prevent breakdowns or other conditions that would
result in unnecessary costs. Unpredicted
breakdowns may still occur, however. Cloud-enabled
AI applications are able to identify faults and predict
maintenance needs through pattern recognition.
This allows asset output, capacity planning, and
Web <2021>
<Ahead in the cloud>
Exhibit 2
Exhibit <2> of <2>

The highest potential

The highest potential for
for cloud
cloudapplication
applicationin
inthe
thepublic
publicsector
sectorlies
liesininsix
six
opportunity areas.

Potential for application of cloud analytics in the public sector Low High Opportunity areas

Public sector value chain

Operations Risk Human

R&D and processing management resources
Asset Citizen
Procurement management Policy communication
Verticals

Social
protection

Health

General
public services

Education

Economic
affairs

Defense

Public order
and safety

Recreation,
religion, and culture

Housing and
community amenities

Environmental
protection

Source: Gartner; IMF; MGI; OECD; McKinsey analysis

asset distribution to be optimized and ordering
processes to be automated. Where cloud-based
predictive maintenance has been applied, we have
seen savings in equipment repair and maintenance
costs of 5 to 15 percent.
Area 3: Enhancing situational awareness and
operational control in uncertain environments.
When a physical location is difficult to access (during
a relief unit operation, for example), cloud-based
solutions can integrate information from different

Ahead in the cloud: Transforming public-sector performance 5

 sources, such as traffic cameras and satellites, and in the context of one or more audits. Since the
they can use these data to map an environment and amount of data to be processed exceeds the
monitor events in real time. This allows holistic, manpower available, only a limited number of cases
considered analysis of environments without the can be audited, leaving “blind spots.” Rather than
need for a physical presence, which facilitates rely on random sampling, cloud-based solutions
improved decision making. enable machine-learning applications to analyze all
machine-readable data available and to identify
Use case example: During relief operations, units cases with high potential for fraud. Available
from different organizations—the fire department, manpower can then be targeted at performing
police department, and emergency medical services— detailed audits. If implemented holistically and
often need to collaborate in difficult situations with rigorously, cloud-based solutions can generate
many variables. Personnel may need to go inside a savings of up to 0.5 percent of payment totals.
burning building or deal with the aftermath of a
terrorist attack, and they may have only limited Area 5: Streamlining procurement processes and
knowledge of the situation when they arrive at the reducing supply-chain-related risks. Procurement
scene, as well as a restricted means for real-time is a particular challenge for agencies that purchase
coordination during an operation. Cloud-based in high volumes across multiple sites. Many public-
solutions allow operational control for anticipating sector organizations also manage complex supply
high-risk situations and coordinating units more chains in, for example, defense, public safety, and
effectively through the use of integrative monitoring healthcare. Cloud-based analytics can fully or
and analysis of geospatial, body-sensor, and body- partially automate procurement processes in spend
cam data. They also provide enhanced interpersonal categories, for example, and they can streamline
communications for units on the ground. high-volume procurement across different agencies
to increase process speeds and reduce costs. By
Area 4: Preventing inappropriate cash outflows integrating data on supply, cloud-based solutions
as well as fraud. Cloud-based systems can perform can also identify interdependencies in the supply
automated analysis of vast amounts of data chain, even at a granular level (a tier-3 supplier level,
(financial, for example) to detect patterns and for example), which ensures greater transparency
anomalies. This ability gives agencies a means for and enhanced risk assessment.
combating payment fraud and errors occurring in
subsidies, welfare payments, or other cash outflows. Use case example: Public requests for the provision
Cloud-based AI applications also allow more- of assets require that contracts for all offers are
targeted inspections and methods of fraud stringently reviewed. This due diligence is costly,
prevention. They can, for example, match existing requires high numbers of skilled individuals, and is
data sets with inspection targets to identify sources vulnerable to human error. Cloud-based AI/machine-
in potentially suspicious transactions; detect learning solutions can automatically identify and
potential cases of identity fraud in the context of extract potentially harmful content, such as risky
healthcare or welfare claims; and focus tax-fraud- clauses related to penalties or value owed. This
prevention efforts through targeted audits. reduces the time and manpower required for review,
and it helps in avoiding conflicts of interest. In typical
Use case example: To detect tax fraud, agencies cases, cost reduction of up to 0.1 percent was
typically need to scan a large number of documents generated for overall procurement volumes.

6 Ahead in the cloud: Transforming public-sector performance

Area 6: Enabling integrative digital health
solutions. Cloud-based solutions can support
physicians along patient journeys in areas ranging
from data-driven diagnosis (AI-driven analysis of CT
scans and early detection of disease patterns and
high-risk patients, for example), to prescriptions
(predictive treatment informed by machine-
learning-based analysis of outcomes).
Use case example: Health-related information on
patients is typically fragmented over various
nonstandardized databases, both within and across
different healthcare providers (physicians, hospital
clinics, and pharmacists, for example). This
disconnected approach to recording data
jeopardizes treatment quality by allowing diagnoses
that differ from one another and findings that are not
shared. It also generates unnecessary costs, as the
patient is required to register separately with each
provider, and providers must also register each
patient separately. A cloud-based approach enables
integrative identity management with a single
patient file and identifier across multiple healthcare
providers. Processes such as diagnosis can be
streamlined, and cross-organizational collaboration
can be facilitated between physicians and
specialists, for example.
Public-sector investment in cloud technology is
predicted to double by 2024 in both Europe and the
United States. When contemplating cloud
transformation, governments and agencies should
take into consideration both improvements in the IT
infrastructure as well as benefits of a business
transformation. This will ensure that cloud-related
spending delivers the strongest possible value for
taxpayers. National governments should also
consider the nature of their relationships with major
providers of cloud services, such as Amazon,
Google, and Microsoft—particularly where issues of
security and data sovereignty are concerned. We
will explore these and other challenges around the
adoption of cloud technology in the public sector in
future articles.

Quirin Maderspacher is a consultant in McKinsey’s Berlin office, where Gundbert Scherf is a partner; Mike McCarthy is an
associate partner in the London office; and Sebastian Stern is a senior partner in the Hamburg office.

The authors wish to thank Daniel Abraham for his contributions to this article.

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Ahead in the cloud: Transforming public-sector performance 7