Published on the 24/11/2022 | Written by Heather Wright

Significant savings can be found, McKinsey says…

Companies can quickly cut as much as 25 percent of their cloud costs, while still preserving the value-generating capabilities of cloud, according to McKinsey. 

The global management consulting company says economic headwinds are likely to increase scrutiny on companies’ cloud spend, and it’s urging technology leaders to get ahead of the game and reduce costs now. 

“With the macroeconomic environment becoming increasingly challenging and company leaders looking for ways to achieve higher business resiliency, CIOs and CTOs can expect uncomfortable questions about the costs of their cloud programs,” McKinsey says. 

It says cloud spend is growing by as much as 30 percent each year. 

“Without being more sensitive to costs and responsive to the economic pressures that companies are feeling, CIOs may soon find their cloud programs on the chopping block.” 

Globally Gartner has forecast cloud spend to hit US$592 billion in 2023 – a 20.7 percent increase on 2022’s $490 billion, with public cloud spend in Australia reaching almost AU$18.7 billion (up 17.6 percent, year on year) this year, and NZ$2.6 billion in New Zealand (up 26.3 percent). 

But much of that spend is wasted according to some reports.  

Flexera’s 2022 State of the Cloud Report, which surveyed more than 750 organisations, noted respondents self-estimated that their organisation wasted 32 percent of cloud spend, up from 30 percent last year.  

The report also noted found that public cloud spend was over budget by an average of 13 percent, and respondents expected cloud spend to increase by 29 percent in the next 12 months, pushing cost optimisation to the fore.  

McKinsey appears to agree. It says companies can often find significant savings of between 15 to 25 percent – if they know where to look and offered five areas to start. 

 

Stop unhealthy growth Provisioning more resources than are required and immature consumption practices including forgetting to shut down instances that are no longer needed, can quickly add to costs, McKinsey says. 

It defines growth as either healthy – a growth in user base or increased digital adoption for example – or unhealthy (those forgetful moments of additional spend),  and says not having a clear perspective on healthy versus unhealthy costs can be particularly detrimental if spending habits shift, as they do often during  leaner times. 

It’s solution? Consistent, high-quality and comprehensive tracking and reporting, often automated, and an allocation model that promotes accountability such as charging business leaders, or at the very least making them aware of the costs of their products or services using cloud. Financial controls can also be added, tracking and managing budgets for individual teams. 

 

Make the simple fixes Releasing unused capacity, introducing auto-scaling features and aligning service levels to specific application requirements – for example switching from memory-optimised to standard instances – are among the most common ‘no-regret actions’. 

“Companies should prioritise the ones that offer maximum benefit and deploy them rapidly across teams and cloud users while doing quick feedback loops – if the lever is successful for one app or team, it can then be scaled to the others,” McKinsey says. 

 

Get elastic While being able to scale up and down should lower costs, McKinsey says many companies have are failing to use cloud elasticity effectively, with many companies using rigid and often manual provisioning, excessive reserved instances, and ineslastic applications and workloads – lift and shift being a prime suspect. 

“Companies should work with their engineering team to identify inelastic applications and workloads and refactor them, starting with the ones with the largest footprint,” McKinsey urges. 

 

Take a look at those vendor agreements If you’ve been overly optimistic about the pace of your cloud migration, you could find yourself stuck with spending commitments that can be hard to meet in an economic downturn.  

If you wouldn’t sign the same contract today, it’s time to renegotiate, McKinsey says. And don’t wait until 12-18 months before the contract expires, as it’s often too late to negotiate effectively then, the company says.  

Consider negotiating trade-offs – getting discounts for reduced flexibility or pushing back timetables on meeting targets.  

 

Get smart with new migrations The current environment isn’t about slowing down cloud migrations, McKinsey says. Instead it’s about being smart with the migrations and prioritising those that generate value through enabling critical business initiatives, use end-of-life hardware that will soon need to be replaced or upgraded, or which have sizeable operations overhead.  

“Thoughtful and targeted cloud migrations not only help lower costs, but also position the business to grow more quickly once the downturn has passed,” McKinsey says.