However, as industry experience with the cloud matures — and we see a more complete picture of cloud lifecycle on a company’s economics — it’s becoming evident that while cloud clearly delivers on its promise early on in a company’s journey, the pressure it puts on margins can start to outweigh the benefits, as a company scales and growth slows. Because this shift happens later in a company’s life, it is difficult to reverse as it’s a result of years of development focused on new features, and not infrastructure optimization. Hence, a rewrite or the significant restructuring needed to dramatically improve efficiency can take years and is often considered a non-starter.
“An eye-popping 50% of the cost of goods (COGS) in the companies he researched was attributable to the cloud,” Casado and Wang wrote. “That’s an enormous number that greatly, greatly suppresses the share price unless you’re able to drop it.”
The point of this post isn’t to argue for repatriation, though; that’s an incredibly complex decision with broad implications that vary company by company. Rather, we take an initial step in understanding just how much market cap is being suppressed by the cloud, so we can help inform the decision-making framework on managing infrastructure as companies scale.
I agree completely with the authors that the “cloud is the perfect platform to optimize for innovation, agility, and growth” but I have to disagree that growth invariably leads to a need to depart from the cloud.
Build cloud-native, optimize, and continue to grow in the cloud. As long as you’re thoughtfully architecting your systems, instead of lifting and shifting — you’ll benefit from huge gains in speed, innovation, scale, and yes, better margins.
VC firm Andreessen Horowitz, which invests heavily in the software space, posted the article (link below) on their “a16z” site and the data is clear—the public cloud is so expensive at a scale that software companies are bringing their workloads back in-house. Companies with significant cloud-based operations are reporting that “repatriating” their workloads will cost between 2 and 10 times less. Multiple examples are cited—eg, Drop-Box improved their operating margins from 33% to 67% over a 3-year transition from public cloud to private cloud. Others are following suit—CrowdStrike, Zscaler, etc…
Our analysis highlights how much value can be gained through cloud optimization — whether through system design and implementation, re-architecture, third-party cloud efficiency solutions, or moving workloads to special-purpose hardware. This is a very counterintuitive assumption in the industry, given prevailing narratives around cloud vs. on-premise. However, it’s clear that when you factor in the impact to market cap in addition to near-term savings, scaling companies can justify nearly any level of work that will help keep cloud costs low.
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