Spending money to save money
Image: Christopher T. Fong/Protocol

Spending money to save money

Protocol Enterprise

Hello and welcome to Protocol Enterprise! Today: how SaaS companies are capitalizing on the inability of cloud newcomers to control their spending, Microsoft and Google Cloud report earnings, and a new group at Microsoft will target cloud laggards.

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It’s Subscriptions Week at Protocol, and on Monday CAST AI decided to pitch in. According to new research from the company, overprovisioning cloud resources costs cloud newcomers about three times more than they should be spending.

We lowered your bill! Here’s our bill.

The rise of the cloud made businesses faster, quicker and more agile. But it created a new problem: Usage-based billing models at cloud providers like Amazon AWS, Microsoft Azure and Google Cloud Platform have made it easier than ever for enterprises to lose control of computing costs.

There’s an underlying assumption that moving from on-premises servers to the cloud will help companies save money, said ServiceNow IT asset manager German Bertot. But that’s not always the case.

  • “The promise is there, and it is great. But companies are having a hard time realizing those savings,” he said.
  • “People are very surprised at how much money cloud computing is costing [them] over traditional computing,” said David Linthicum, Deloitte’s cloud strategy leader.
  • While some of that is just the price of access to computing power, the majority of it is due to inefficiently managing spending, he said.

That’s why SaaS companies like Flexera, Apptio and ServiceNow are helping companies lower their cloud subscription costs — as long as you subscribe to their services, which, of course, aren’t free.

The reason cloud costs can balloon so quickly is that managing expenses associated with compute power is a lot more complicated in the cloud than it was when companies bought and managed their own servers.

  • With data centers, it was common for CIOs to only purchase new technology every few years, said Flexera Senior Director Brian Adler. In response, IT employees would ask for as many resources as they could get, especially because most companies provisioned more computing power than they needed at the time.
  • Because it took such a long time to purchase and deploy infrastructure resources when operating on-premises data centers, this was fairly common behavior, said Forrester Senior Analyst Tracy Woo. The difference with the cloud is that provisioning “is something that you can demand and get online within minutes.”
  • However, when many customers first moved from on-premises operations to the cloud, they often brought the old data center mentality along with them.
  • But with the cloud, “I don't buy the peak, I can rent the peak. So that's a new behavior that folks need to learn,” said Adler.

The other aspect that makes managing cloud costs difficult is that IT spending isn’t as centralized as it used to be.

  • For one, the ease of getting started on the cloud means it’s a lot easier to subscribe, deploy and then rack up large bills.
  • “You don't need to get a purchase order out to your hardware provider, bring them in, pay for it up front, get the hardware into your data center, install it and so on,” said Bertot.
  • Even gaining visibility into where spending is coming from can be a challenge, because a company could have hundreds of engineers using resources but only get one bill.
  • And those bills are so complicated that no one could look at all that data and determine if they’re being overcharged, said Adler, who has seen Flexera customers with 12 million rows of information in a single monthly bill.

The best way to manage cloud spending could be spending money on spending-control tools, although that might seem counterintuitive, That’s why the major cloud providers AWS, Azure and Google as well as SaaS companies like Flexera, Apptio and ServiceNow all offer services to help companies cut their cloud costs.

Although many of these services require purchasing yet another subscription, according to industry practitioners and analysts, the savings can be massive.

  • On the SaaS application end, understanding which users are consuming licenses, and how much they’re using, can help determine which subscription tier to purchase or who to give licenses to.
  • If a user is consuming a license but not using it, “are there ways for us to analyze the usage patterns and suggest a lower level subscription … and in the process achieve savings?” Bertot said.
  • Other times, savings can come from rationalizing SaaS applications. “How many different communications platforms do I have? Do I have Zoom and GoToMeeting and Teams and Citrix? What if I consolidate those?” said Apptio Vice President Eugene Khvostov.
  • At Deloitte, Linthicum has seen clients save as much as 200% on their cloud bills after using a spend management tool. Although that’s an outlier, “in many instances it’s going to be 30% to 50% savings,” minimum, he said. And “there’s always going to be some sort of savings 100% of the time in my experience.”
  • And because many of the cloud spend management tools are fairly affordable — typically, 1% to 3% of what customers spend on cloud services in a month — the return on investment far outweighs the cost of subscribing. “Generally you see an ROI for these within two weeks to three months,” said Woo.

While customers who are new to the cloud will face many of these problems, over time they will get better at understanding how to manage their own spend.

  • “Initially, it's usually a pretty big bang for the buck, and then it peters out over time,” Adler said.
  • But as customers become more adept at managing their own spend, could demand for these services wane? To some the answer is no, because cloud spend management requires ongoing monitoring.
  • In the cloud, cost governance is about the ability “to not only have observability so you can see where the costs are going, but have observability around the interdependencies, observability around how things are going to be billed moving forward, and do that across platforms,” Linthicum said.

Without spend management tools, companies would have to build their own internal processes and software to have that level of visibility over their cloud spend. While that’s possible, it’s a lot easier to buy a subscription.

— Aisha Counts (email | twitter)


Join experts from Salesforce, Crowe, Banner Health, and Formstack as they discuss the 2022 State of Digital Maturity: Advancing Workflow Automation report, the movement toward continued automation, and the top ways to accelerate your organization's digital maturity.

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Cloud earnings roundup

Microsoft enjoyed another quarter of strong cloud sales to start 2022, as revenue from the company’s various cloud services rose 32.2% to $23.4 billion. Once again, Microsoft declined to share a specific revenue figure tied to Azure but did say that Azure revenue rose 46% during its third fiscal quarter, roughly the same percentage growth as in previous quarters.

Meanwhile, Google Cloud said its revenue increased by 44% to $5.8 billion, compared to last year. The unit, which includes sales of both Google Cloud Platform and Google Workspace, is still unprofitable, but it narrowed its operating loss to $930 million.

AWS reports earnings on Thursday.

— Tom Krazit (email | twitter)

Around the enterprise

Microsoft created a new sales group tasked with convincing the cloud holdouts within its traditional customer base to switch to Azure, according to The Information.

Red Hat added new application delivery capabilities to OpenShift, hoping to help its customers ship applications more quickly without compromising security.


Join experts from Salesforce, Crowe, Banner Health, and Formstack as they discuss the 2022 State of Digital Maturity: Advancing Workflow Automation report, the movement toward continued automation, and the top ways to accelerate your organization's digital maturity.

Learn more

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