Unlocking the productivity dividend of digital government for New Zealand
The Government is doubling down on digitisation and the AI opportunity it enables. The Government Chief Digital Officer has been empowered to digitise and transform across the public service. The National AI Strategy has been developed, and Cabinet is actively promoting new digital initiatives. To unlock the full value of all these ambitions, as well as to achieve maximum cost efficiencies, accelerating cloud adoption is vital.
But despite being one of the first countries to introduce a Cloud First policy for government agencies in 2012, a new report from Mandala Partners, commissioned by Microsoft, shows we've fallen from ninth in the world to sixteenth when it comes to digital government.
The report, Unlocking the Productivity Dividend of Digital Government for New Zealand, reveals that complex procurement rules, skill shortages and cultural resistance mean more than two-thirds of government systems still run on outdated tech – costly, inefficient and potentially vulnerable to attack.
As this Government has already shown, digitisation can dramatically improve services, accessibility and efficiency while reducing costs.
Why government digitisation matters: the bottom line
Cloud migration may seem like old news in comparison to all the present-day discussion around AI. However, consider that the entire government operating allowance for 2025 was $1.34 billion. Speeding up the current rate of public cloud adoption across the public sector by just five years could save $1.1 billion by 2030 and $3.6 billion by 2035 – savings that normally require tax hikes or programme cuts to achieve. Here, they can be achieved while improving service delivery, also unlocking an estimated $2.3 billion in AI-driven productivity gains.
Tom McMahon, a partner at Mandala Partners who authored this research, underscores this point: "Accelerating cloud migration would save the New Zealand Government $360 million every year to 2035 – that's a 14 per cent reduction in IT costs. This efficiency could free staff up to focus on delivering innovative and effective public services."
These numbers are possible because modernising doesn't just cut costs: it creates the platform for innovation. Realising the full potential of AI requires going back to basics and getting the foundations in place so government agencies can use these smart technologies at scale. To use Copilot as an example, one trial at a large government agency found each user saved 10 hours per month on average. Importantly, 76 per cent reported more productivity, and 79 per cent reported greater quality of work.
Meanwhile, inaction is costing us big. The research revealed that 67 per cent of government systems are not hosted in the cloud. Yet on-premises infrastructure can be 10 times more costly than the equivalent public cloud configuration. It requires specialist IT teams and tools to maintain, which also adds significant productivity costs.
That doesn't reflect the additional cost of cyber incidents. In the most recent reports, the public sector accounted for nearly 40 per cent of nationally significant incidents. At one large government agency, a quarter of databases and just under half of servers are using software that is no longer supported, exposing it to increased security and outage risks. According to Mandala's research, moving to cloud could save $121 million in costs related to cyberattacks over the next decade while also minimising disruption to services and better protecting New Zealanders' data. This is all money that could be invested in frontline services.
Christchurch City Council has recently completed a major cloud migration project, seeing 90 per cent of its servers moved into Azure public cloud. Chief Information Officer Anurag Madan says that with hyperscale cloud providers like Microsoft now operating data centres in New Zealand, previous barriers around data residency are no longer a concern, while the drive to modernise is stronger than ever.
"Our recent cloud migration has opened opportunities for the council to better understand our citizens' needs using modern offerings like Fabric and AI from the Microsoft platform in conjunction with our core platforms. We're now looking at how we can map residents' journey through our platforms and services and generate insights to improve the services the Council offers and people's experiences engaging with us," Madan notes.
As if that weren't enough, public cloud also advances New Zealand's climate goals, reducing the public sector's carbon footprint by 11 per cent – the equivalent of taking 14,000 cars off the road.
And when government agencies migrate to cloud services, they create demand that supports local data centres, edge computing facilities, and network investments. They also build digital skills in their workforces that help grow a pipeline of skilled professionals.
Tackling the barriers head-on
One of the key recommendations in the report was growing partnerships between agencies, academia and cloud providers to overcome barriers like skills shortages. The New South Wales Government recently partnered with Microsoft to migrate systems to the cloud while equipping thousands of public servants with new skills in AI, cybersecurity and cloud computing. Through similar partnerships here, agencies could share the upfront costs and risks of cloud migration while benefiting the entire workforce and industries from tech to construction.
Above all, procurement models need to be brought up to date. The report highlighted the need to consider aggregated purchasing across agencies and develop centralised procurement frameworks to enable faster, more efficient cloud migration. The recent move to make the Government Chief Digital Officer responsible for digital procurement for most of the public sector is an excellent step in this direction.
The next step is to allow agencies to use flexible, pay-as-you-go cloud models under opex budgets rather than requiring capex investments, which has hampered modernisation. There also needs to be stronger governance to drive coordination on funding and policy, and help address cultural resistance to cloud models, with clear targets for digital transformation. The solution is actually quite simple. To adapt the well-worn saying, it's about grabbing the low-hanging cloud. The payoffs, on the other hand, are huge. Accelerating Cloud First is a generational opportunity to create significant benefits for all New Zealanders, for years to come.
