There’s been an onslaught of negative economic news of late, with gloom and doom aplenty out there. However the economy plays out in the coming months, people perceive that there is turbulence ahead and are behaving accordingly.
One thing businesses may try to do is rein in cloud infrastructure spending to reduce the substantial bills they have from AWS, Azure, Google Cloud, and others. But simply wanting to cut costs and actually being able to do it are two entirely different matters.
What you can’t do is limit your ability to operate your business in the name of trying to cut expenses.
It is clear that cloud bills are becoming a big part of the operating budget of many companies. The cloud has allowed company bookkeepers to shift computer spending from capital expenditures to operating expenditures — theoretically paying only for what you use — but in reality, there can be a lot of waste, and you don’t want to pay for resources you aren’t using regardless of the economy.
A shift toward profitability over growth
While public cloud infrastructure is consumed by most (if not all) industries to varying degrees, it is in the technology sector that we expect to find the greatest cloud spend as a percentage of operating costs; tech companies built atop public clouds from birth see their infrastructure spending expand with time, making them lucrative customers of AWS, Azure and others — and potentially those with the most incentive to hunt for savings.
But there is more than just relative spend to consider. According to data from a recent software valuations report from venture shop Battery, investors have shifted their operating preferences.
The data that the venture group collated and shared with TechCrunch dealt with companies at varying points of balance between growth and profit. There is a natural tension between the two, with startups often absorbing heavy losses in the name of growth. The Battery dataset, however, makes clear that there has been a shift in market perception recently. Before 2022, tech companies that lost more money but grew more quickly were awarded richer valuation multiples than the peers who were more profitable but growing more slowly. In 2022, the situation inverted.
Tech companies are now rewarded for indexing more heavily toward profitability than growth, though, naturally, companies that sport both quick growth and strong profitability remain the most valuable. As investors put more weight on profitability, reducing spending in non-human expense categories becomes critical. Layoffs are far harder to execute than cuts to public cloud spending in terms of internal message, external branding and morale, for example.
Major cloud players will not relish their tech customers looking to reduce their public cloud line item, but for the technology companies in question, following investor wishes is a way to preserve corporate value. In a falling stock market, that’s a critical task.
The incentives have changed, making cloud spend reductions more attractive than ever. But how much can tech companies really hope to cut?
But how much can you cut?
Is it even possible to save significant money by slashing cloud computing costs? If you need the resources, you need them — there isn’t much you can do without shortchanging your business.
John Dinsdale, chief analyst and research director at Synergy Research, a firm that closely watches cloud revenue, said looking to cut unnecessary costs is always going to be worthwhile, regardless of external economic conditions.
“No matter what the economic or environmental climate, there are always going to be some companies claiming they want to cut back on cloud service spending. That is natural and actually not unhealthy. Companies want to know that they are getting full value for money from their cloud spending, and the better they feel about that, then the more positive is the future outlook for cloud,” Dinsdale said.
But he noted that it is often much easier said than done. “There are underlying and powerful drivers that are fueling cloud growth, and they don’t go away just because some companies want to review their cloud usage and costs.”
The alternative of going back to running your own infrastructure is simply not an option anymore, and the flexibility that cloud spending affords is one of the things that makes it so appealing.
“The key for enterprises is to ensure that they maintain flexibility and control of IT spending, but that is exactly why cloud services are such an attractive option [compared] to investing in on-premise infrastructure,” Dinsdale said.
Casey Aylward, a partner at Accel, agreed that cutting back substantially is not going to be an option for many companies, especially as some organizations have certain fixed requirements.
“Making a significant cut would be challenging,” she said. “When you are growing quickly, engineering resources are spent on building and scaling new product features versus cost optimizations.”
But, Aylward added, “There is some low-hanging fruit, like shutting down spot instances or even limiting access to who has access to run compute-intensive jobs,” she said. But she believes that ultimately companies could be better off putting those engineering resources to work on higher-value tasks that could generate customer value, rather than administrative tasks related to cutting spending.
Jason Lemkin, an investor who also founded SaaStr, a company and community targeting entrepreneurs building SaaS companies, agreed that there is always some fat, but most companies are going to struggle to cut these kinds of expenses in a substantial way.
“Many companies do over-provision for expediency. That spending will come under scrutiny. That’s different from truly cutting back core spend, which is very hard to do,” Lemkin told TechCrunch.
Regardless of the reason for the cuts, Lemkin said, sizable cutbacks could end up having a substantial impact on infrastructure vendors.
“If I’m overspending 30% a month because no one’s worried about compute costs, and then we scrutinize, we may be able to stretch budget next year without increasing spend as much,” he said.
Of course, there are a number of startups (and established companies) out there who are happy to help you find the waste in your cloud spend. In fact, cloud optimization is a hot startup area where we’ve seen some consolidation, with companies like Cloudyn, Cloudability and Spot getting snapped up in recent years, while earlier-stage companies like Cast AI, Exotanium and Harness, which developed a cloud optimization module last year, are all working to help cut cloud spending in various ways.
Other efforts include cutting down on the cost of data storage in the cloud, and startups like Wasabi and public company Cloudflare, with its new R2 storage, are working to bring down the cost of pure storage. Some startups are working to attack the amount of data by optimizing it before it gets stored, including Monte Carlo, Cribl and Datameer.
Peter Wagner, founding partner at Wing Venture Capital, pointed out that shifting engineering resources to cost optimization comes at a price. “Cloud cost optimization generally requires engineering resources, often the same ones needed to develop new product capabilities,” he said.
“Companies that are prioritizing growth will often defer cost optimization projects so that they can devote their scarce engineering resources to product features that are attractive to customers. These companies will accept lower gross margins for the time being in order to grow faster.”
But Wagner said every choice comes with tradeoffs. “Now that we have entered a period of retrenchment, where profits matter more and growth is harder to come by, cost optimization projects are likely to be higher on the priority list.”
Regardless, Lemkin said he is not seeing significant cutbacks in spending as of yet.
“So far, there have been few signs of any pullback in the enterprise in cloud or SaaS spend,” he said.
In reality, companies should always be looking at wasteful spending, but in times of abundance, there is less motivation. As Wagner noted, cutting cloud spending can be a lot like security: You know you need it, but you don’t always take care of it as well as you should.
“But the reality is that cost optimization (like security) is a never-ending journey — there is always room to do more,” he said.