New report details potential productivity dividend of cloud and AI in Australia

Australia has long been a global leader in digital government. But as other nations and industries accelerate their transformation in the AI era, it is critical that Australian governments keep pace or risk falling behind. The Federal Government's decision to convene last month's Economic Reform Roundtable was a timely and important step, bringing together public and private sector leaders to build consensus on the role technology can play in lifting national productivity and improving public services.

A new report by Mandala, Unlocking the Productivity Dividend of Digital Government, shows that by modernising outdated legacy IT systems and shifting to cloud and AI-enabled platforms, Australia can unlock billions in productivity gains while strengthening cyber resilience and improving sustainability.

The Opportunity: $1.4 Billion in Annual Savings

Australia's declining productivity growth is not uniform across the economy. The non-market sector, which includes public administration, education and healthcare, have fallen behind other areas of the economy when it comes to productivity performance. Digital government is one of the key levers we have to turn this around.

The report finds that retiring outdated legacy IT infrastructure and accelerating cloud adoption by just five years could save the Australian Government an average of $1.4 billion annually, equivalent to a 13% reduction in total IT costs. That's a cumulative saving of $3.4 billion by 2030 and $13.5 billion over the next decade - equivalent to more than half of the Government's $22.7 billion Future Made in Australia commitments. Savings of this magnitude typically require cuts to major programs or tax increases.

The report suggests savings would come from reduced infrastructure and software costs (more than $10 billion), lower external IT labour costs (around $2.1 billion) and increased productivity from internal IT staff (an additional $1.3 billion). Depending on their size and function, agencies could reduce IT budgets up to 28% over the decade. The biggest opportunities for transformation are in large agencies, while smaller departments are already leading the way.

Today, only 10 per cent of government IT spending is on public cloud, so agencies are relying on systems that can't actually support the AI tools and productivity improvements government needs. Accelerating cloud adoption would drive productivity gains that would unlock $1.4 billion every year. These changes would free staff to focus on higher-value work and transform how government delivers services to the public.

- Tom McMahon, Partner at Mandala

Cloud technology is more than a cost-saving tool. It is the foundation for modern, secure and resilient government services. It also acts as a key pillar of the digital ecosystem, enabling growth of Australian companies in areas like software-as-a-service (SaaS) applications and data centres. However, more than 70% of Commonwealth entities still rely on legacy IT systems that are expensive to maintain, vulnerable to cyber threats and a barrier to innovation.

Cloud infrastructure allows agencies to pay only for what they use, scale on demand and avoid over-provisioning. It supports modern digital services, enables collaboration and provides access to advanced technologies like artificial intelligence.

The AI Dividend

Cloud is essential for deploying AI at scale, and indeed it is the key to unlocking data assets and securing systems to capitalise on the unprecedented opportunity AI presents. Mandala estimates that accelerated cloud adoption could unlock an additional $5 billion in productivity gains through AI tools by 2035, representing a 63% increase compared to maintaining the status quo.

The Australian Government's 2024 trial of Microsoft 365 Copilot demonstrated what's possible when the public sector embraces innovative technologies. Participants saved around one hour per day on tasks like summarising content and drafting documents, and many said Copilot improved speed (70%), improved quality (61%) and that the time saved was reallocated to higher-value work like planning and stakeholder engagement (40%).

Strengthening Cybersecurity & Boosting Resilience

Legacy IT systems are not only inefficient; they carry increased risk. These systems can be end-of-life, unsupported by vendors and increasingly incompatible with modern security standards. The urgency to address this technical debt has never been greater. In 2024, the Australian Government reported 163 data breaches, the second highest of any sector. Accelerating cloud adoption - and the improved security that comes with that transition - could save $178 million in breach-related costs over the next decade.

Modern cloud platforms offer automated threat detection, real-time monitoring, regular security updates and encryption. They also enable threat intelligence sharing, allowing agencies to respond to cyber threats more quickly and effectively.

Cloud infrastructure is also more reliable and energy-efficient than on-premises systems. The report estimates that accelerating cloud adoption could prevent 2.9 million hours of IT downtime over the next decade, saving $82 million in lost productivity.

Cloud migration could also reduce the government's IT carbon footprint by 14%, avoiding 480 million kilograms of carbon dioxide emissions - equivalent to the annual emissions of approximately 205,000 cars.

Despite the benefits, several barriers are inhibiting cloud adoption and creating incentives to re-invest in outdated legacy IT. Procurement frameworks often favour capital expenditure rather than ongoing operational funding that would allow agencies to subscribe to modern cloud platforms and services. A risk-averse culture encourages the status quo and discourages innovation. Many agencies face skills gaps that limit their ability to manage transitions without external support; indeed only a quarter of agencies currently offer transformational digital training to staff. These challenges are especially acute in large agencies with complex systems and siloed data.

The TCA supports the use of tech by government to improve the way data is managed and services are delivered. Making the most of the improvements and efficiencies offered through digital solutions is part and parcel of seizing the broader national opportunity tech provides.

- Damian Kassabgi, CEO, Tech Council of Australia

A Roadmap for Action

The report outlines three key areas for reform to accelerate cloud adoption and unlock the productivity dividend:

1. Modernise Procurement and Funding: Government must move beyond traditional procurement models. This means adopting multi-year operational expenditure budgets aligned with cloud consumption, and evaluating vendors based on long-term outcomes like innovation, security, and sustainability. Procurement processes should be streamlined to match the speed of cloud services. The U.S. Technology Modernization Fund offers a useful model, providing central funding for cloud projects with milestone-based repayments.
2. Strengthen Governance and Leadership: The Digital Transformation Agency (DTA) should be empowered to set whole-of-government targets for modernising government systems and driving AI adoption. It should coordinate across key decision-making bodies, including with security agencies, to ensure consistent policy and funding signals. Improved governance would help agencies move beyond siloed initiatives and capture shared benefits. The UK's Government Digital Service is a strong example of how central leadership can drive consistent standards and accelerate delivery.
3. Partner with Industry: Strategic partnerships between government and industry can share risk, accelerate delivery and build internal capability. These partnerships can support co-funding, deliver joint training and enable knowledge transfer. The NSW Government's partnership with Microsoft is a strong example. Over five years, the state migrated 25% of its IT services to the cloud, enhanced cybersecurity, and delivered digital skills training to thousands of public servants. A national Digital Productivity Co-Investment Fund could replicate this model federally.

We can properly digitise government or keep burning money on outdated systems, it's that simple, and this report makes it too stark to ignore. Cloud and AI can lift service quality for all Australians, while at the same time lifting national productivity by cutting red tape. Our public sector can lead the digital race and we must act now or be left behind. Australia could be saving billions by simply getting up to speed on new technologies in our departments and agencies

- Bran Black, Chief Executive, Business Council of Australia

A Moment for Leadership

The Mandala report makes it clear: cloud and AI adoption in government is not just a technology upgrade - it's a national productivity and resilience strategy. The benefits are measurable, the barriers are surmountable and the time to act is now. By embracing cloud-first strategies, modernising procurement, strengthening governance and partnering with industry, Australia can save billions over the next decade, improve service delivery, strengthen cybersecurity, reduce emissions and unlock the full potential of AI.

This is a once-in-a-generation opportunity for the public sector to lead by example and demonstrate how digital transformation can drive productivity, resilience and better outcomes across the Australian economy.

Read the full report from Mandala here.