Modelling approach

KPMG has modelled outcomes for the Australian economy, excluding agricultural services, which is a relatively small sector with low ICT intensity. Modelling inputs were heavily influenced by findings in the financial services, property and business services, and education services sectors. These were the sectors where data from consultations were most robust. Other sectors either had a limited number of interviews conducted, or the information that was collected contained limited quantifiable data due to cloud

implementation being in its early stages. To support economy-wide modelling, KPMG supplemented primary research findings with an extensive national and international literature review.

Figure 9 below provides a graphical representation of KPMG’s approach to modelling the impact of the cloud on the Australian economy.

In essence, firms’ expenditures on ICT (split into capital (capex) and operating expenditures (opex)) are measured before and after implementation of the cloud. Any reduction in costs per unit of production is then incorporated into KPMG’s Computable General Equilibrium Model (MM900).

Figure 9: Impact of cloud computing

Source: KPMG

MM900 incorporates cost curves based on some 900 different products across each industry sector. KPMG will extrapolate the expected change in cost curve structures within MM900, for example replacing some spending on a unit of ICT with spending on a new input that is cloud computing services. The impact of these changes is then measured over a 10-year period, allowing the economy to adjust in an iterative process.

4.4

Assumptions

This section reviews the key assumptions underpinning the modelling. These assumptions are based on KPMG’s preliminary findings from interviews as well as the findings of desktop research presented earlier in this chapter.

Modelling assumptions are split into two categories:

The current state — the cloud computing market in Australia at present.

The future state — what the cloud computing market in Australia will be in 10 years’ time.

The key assumptions of the current state include:

• current ICT spend per industry, based on KPMG CGE model databases, ABS ICT Satellite Account 5259.0 and 2004-05 input-output tables as well as Ovum survey data

• based on discussions with Australian businesses to date, as well as information from Forrester19_{, cloud adoption in Australia appears to be in its infancy and is estimated as} approximately two years behind other more mature markets, such as the US and Europe • in some instances, cloud-based solutions may lead to either short-term or even

permanent increases in overall ICT costs as investment in cloud is undertaken.

The key assumptions used in KPMG’s future state (i.e. after 10 years) modelling.

• ICT opex and capex will significantly reduce for each unit of output from business-as- usual (BAU) outcomes as a result of cloud adoption:

- based on literature reviews, as well as consultations with Australian businesses, the reduction is assumed to be 25 percent for opex and 50 percent for capex (the smaller percentage reduction for opex takes into account the offsetting impacts derived from additional costs due to new activities associated with cloud computing (including software integration requirements)

- while cloud implementation may be undertaken at different rates across different sectors of the economy, over a long period of time all sectors of the economy can be expected to converge in adoption rates – because Australian cloud offerings are still in the early stages of development, KPMG has modelled two potential scenarios with uniform rates of adoption at 75 percent and 50 percent.

• Forrester estimates that total spend in the global cloud market will increase to $159.3 billion by 2020 — as this market increases, traditional ICT markets will proportionally reduce.

• The rate of change in ICT opex and capex is expected to reduce as market offerings become more mature. Forrester suggests that this will happen more quickly for infrastructure (IaaS) than software (SaaS).

Table 6 summarises the current level of ICT expenditure, broken down into operating and capital expenses, as a per cent of total costs by sector, as well as the expected level of expenditure under the two adoption scenarios modelled.

The reduction in the cost of traditional ICT expenditure that is replaced with cloud allows an increase in output (as measured by GDP) either through maintaining expenditure on ICT inputs to increase production, or by freeing up ICT resources to alternate (additional) forms of production.

Table 6: Expenditure (operating and capital) assumptions

Sector

Cost shares of ICT

Opex Capex Opex Capex Opex Capex

Base Case 75% take up 50% take up

Agriculture, forestry and fishing 0.2% 1.3% n/c n/c n/c n/c

Mining 0.4% 3.2% 0.4% 2.3% 0.4% 2.6%

Manufacturing 1.3% 9.1% 1.2% 6.7% 1.2% 7.5%

Electricity, gas and water 0.3% 8.2% 0.3% 6.0% 0.3% 6.8%

Construction 1.2% 9.8% 1.0% 7.2% 1.1% 8.1%

Wholesale trade 1.7% 17.8% 1.5% 13.1% 1.5% 14.7%

Retail trade 0.6% 16.4% 0.5% 12.1% 0.6% 13.5%

Accomm., cafes and restaurants 1.5% 2.5% 1.3% 1.9% 1.3% 2.1%

Transport 4.0% 4.9% 3.5% 3.6% 3.6% 4.0%

Communication services 6.0% 31.4% 5.2% 23.1% 5.4% 25.9% Finance and insurance 1.6% 31.1% 1.4% 22.9% 1.5% 25.6% Property and business services 2.3% 22.4% 2.0% 16.5% 2.1% 18.5% Government admin. and defence 4.6% 37.2% 4.0% 27.5% 4.2% 30.7%

Education 2.3% 11.4% 2.0% 8.4% 2.1% 9.4%

Health and community services 0.5% 15.7% 0.4% 11.6% 0.4% 13.0% Cultural and recreational services 1.8% 7.9% 1.6% 5.8% 1.6% 6.5% Personal and other services 2.1% 7.7% 1.8% 5.7% 1.9% 6.3% Ownership of dwellings 0.0% 0.0% n/c n/c n/c n/c

Total 1.7% 9.9% 1.5% 7.4% 1.6% 8.2%

Source: KPMG Analysis using ABS data

4.5

Modelling results

The following long-run GDP impacts from cloud adoption across all sectors were derived by employing the data and assumptions outlined previously in this report in KPMG’s

in-house CGE model of the Australian economy.

The CGE model allows the economy to adapt to significant changes, such as the potential shift in the cost structures of ICT goods and services as a result of cloud implementation, over a prolonged period of time and across all areas of the economy such as labour and prices.

Table 7: Potential GDP impact of cloud computing adoption

Expenditure

Annual GDP impact over 10 years

At 75% adoption At 50% adoption

Percent $ billion1 _{Percent $ billion}1

Capital 0.10% 1.44 0.07% 1.01

Operational 0.13% 1.87 0.08% 1.15

Total 0.23% 3.32 0.15% 2.16

1. At 2010-11 prices.