A Perfect Storm?

A Perfect Storm?

6 minute read

Forgive us for the pun, but when it comes to cloud computing, there’s a storm brewing.

A number of factors are combining to make cloud computing costs a major issue for organisations.

• Cloud computing costs have been rising above inflation.
• Shadow IT means organisations underestimate their true technology costs – sometimes drastically.
• The availability of AI tools like ChatGPT is resulting in a huge rise in technology use in general and shadow IT in particular.
• The macroeconomic environment is becoming less benign – interest rises, the latest Budget.

The cumulative effect of these factors is to make cloud computing costs – what organisations pay for SaaS applications and cloud services like Amazon Web Services – a significant and rapidly growing cost item that can’t be ignored.

Accelerating Cost of Cloud

Cloud computing took off so rapidly because apart from the technical advantages it offers, it also promised to drastically reduce the cost of IT. It probably did; but things are different today.

Vendors are of course firmly implicated when it comes to why cloud services have not always delivered the expected savings, and why the costs of cloud services have been outpacing general inflation. Apart from straightforward price rises, vendors have also indulged in creative pricing practices like “shrinkflation”.

Customers are not entirely blameless though. One of the challenges with cloud is just how easy it is to access and pay for cloud services, be it packaged software like Microsoft 365 or Salesforce, or Platform or Infrastructure as a Service offerings like Amazon Web Services (AWS) or Microsoft Azure. This ease comes with a price though. It’s easy to make the initial purchase, but who’s keeping track of what’s needed a year or three later? Particularly when vendors may have changed the licencing for an application or have introduced new capabilities that offer better price / performance.

What may have been a smart deal two years ago may not be today – and that’s excluding the scenario where software and services are still being paid for but never used; the vendor may be culpable for setting up auto-renewal, but if the customer isn’t on top of software usage in their company then they have to share some of the blame for spending money on software that’s gathering virtual dust.

Shadow IT

Also due to its ease of access, cloud computing has led to an explosion in Shadow IT. As anyone with a credit card can sign up for SaaS applications or services like AWS, the IT function does not have the control over the use of technology in the organisation that it had before cloud came along. This is great in terms of businesses getting access to the latest tech, but can have some side effects, including –

• Different types of software that do the same job get bought separately by different teams, causing excess costs, administration, and integration problems.
• Hackers have something else they can attack at a company, and it’s something that nobody in the company has done any kind of cybersecurity evaluation on.
• Customer and other sensitive data can be shared without any oversight.
• Expensive, over-specified and just plain poor software can get purchased, representing a low return on investment.

It would be interesting to speculate just how much of the ever-rising revenues reported by technology companies are due to shadow IT, but it’s not clear how that could ever be reliably calculated. In the same way, many companies have no idea how much they are spending on software applications and cloud services, let alone whether that spend represents value for money.

The Effect of AI

Generative AI has to be one of the highest-profile and rapidly proliferating technology trends in the history of information technology. ChatGPT has become a household name, and pretty much every other large tech company has launched AI assistants. Aside from the slight concern that AI will result in a sentient entity that will then proceed to wipe out the human race, there are a few nearer-term (hopefully!) concerns about AI when it comes to business technology.

These would include:

• Having proprietary information that gets shared with an AI tool then getting shared with a competitor.
• Providing customers with incorrect information, or even discounts because of the limitations of current AI tools.
• Turbocharging shadow IT, with all the cost and security implication that come with it.

Don’t Mention The Budget

Understandably, there’s been a huge amount of commentary about the recent Budget. I’ve no wish, or credentials, to add to the general to the discussion about its general economic impacts, so I’m going to confine my comments to one aspect, and how it relates to Cloud costs. That’s the increase in employer National Insurance Contributions (NICs).

According to the Institute for Fiscal Studies, for every full time employee on the minimum wage, employers will pay an extra £770 per year. For every employee on the median earnings of £33,000, the increase will be £900. Using that median figure, a 250-employee company is therefore looking at a cost increase of £225,000.

We estimate that on average companies are paying £2,000 a year in software licences per employee. The industry consensus is that 30% of software spend could be avoided, which would mean an average overspend of £600 per employee per year. In the case of our hypothetical 250-employee company, that would equate to a saving of £150,000.

Tackling cloud overspend can therefore greatly reduce the bottom-line impact of the increase in employer NICs.

Any Solutions?

So, cloud computing costs are rising rapidly, organisations find it hard to keep on top of them, and whether or not the recent Budget turns out to have any negative macroeconomic effects that could make life harder for companies, it is definitely increasing employment costs. What can organisations do about any of this?

• The first step is to really understand what software and cloud services are in place – both officially and unofficially.
• For software applications it’s then a case of analysing what’s in place and being paid for versus what’s actually needed to support the business. Are there three applications that do roughly the same thing? Are there lots of “pro” subscriptions when “basic” ones would be ok for most users?
• For cloud services like AWS and Azure, aside from looking at what’s in place and how it’s being used, e.g., does housekeeping need to be done, are all the services that are being paid for actually being utilised, there’s more complex investigation that needs to be done. Are the most cost-effective technologies being used? Has the architecture been designed with cost in mind as well as technical requirements?
• Across applications and cloud services, a roadmap then needs to be created to a more cost-effective software estate, taking into account contractual, technical, and other constraints.

This sounds like quite a lot of effort, and, if you’ve not done it before, it can be – even if your organisation has the tools and knowledge to do it effectively. Using a partner like Costimised can significantly reduce the effort involved for your company, and more importantly, radically reduce the time to cost savings being realised. To set up a call to explore how much you might be able to reduce your cloud costs please contact us at enquiries@costimised.com.

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