Public Sector Cloud Transition Could Cost Up to EUR120 Million

A recent study conducted by the Centre for Sustainable Transformation (ZNT) at Quadriga University in Berlin reveals that public sector entities in Germany may incur additional costs of up to EUR120 million when switching cloud service providers. Researchers attribute these excess expenses to the lack of adequate regulation against unfair licensing practices in the German cloud market.

According to the study, approximately 80% of public organizations currently utilize cloud services, and a similar percentage anticipates rising costs associated with these services over the next five years. Cloud applications already account for about 25% of IT budgets within these organizations. Alarmingly, around 70% of respondents indicated that switching providers required new software licenses, resulting in costs that ranged from EUR27 million to EUR120 million. This figure does not include further expenses faced by those unable to switch providers due to restrictive licensing conditions, with 60% of respondents asserting that a transition is not economically viable.

Furthermore, about a quarter of the survey participants described the licensing terms imposed by service providers as opaque. Public sector entities often find themselves constrained by stringent confidentiality agreements, hindering their ability to conduct financial comparisons, according to ZNT Director Torsten Oltmanns.

In parallel developments, Oltmanns pointed to the German Federal Cartel Office's role in overseeing the market power of major digital service providers, which is crucial to ensuring fair competition in the cloud services landscape. He noted that regulatory bodies in other countries, such as Spain, Denmark, and the United Kingdom, have been more proactive in investigating cloud service providers and their licensing agreements.

The UK's competition authority initiated a market examination of cloud services in 2022. Their preliminary findings, released at the end of January, highlighted technical and economic barriers that impede customers from switching providers, effectively binding them to their initial choices. Additionally, the authority noted that Microsoft leverages its dominant position in the software sector, particularly with products like Office and Teams, to stifle competition.

On a European scale, Microsoft has faced scrutiny over its practices, with the cloud industry association CISPE previously lodging complaints with the EU Commission regarding Microsoft's Azure contract terms. After Microsoft revised its clauses and assumed legal costs, CISPE withdrew its complaint. Recently, Microsoft competitor AWS exited the CISPE board following a decision to limit board membership to European companies.

Given these circumstances, Andreas Mundt, President of the Federal Cartel Office, has cautioned against the growing concentration of market power among cloud service providers. Meanwhile, Oltmanns advocates for political intervention, stating that the authority already possesses the necessary legal powers but must take action. He urges the next German government to empower the Federal Cartel Office to rectify these issues, emphasizing the importance of fostering growth, innovation, and efficient operational conditions for public sector organizations.