Why it isn’t easy to throw cloud spending on the cutting block

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?