Dive Brief:

• Headwinds to economic growth will intensify scrutiny of spending on cloud computing in coming months and trigger efforts to identify waste, McKinsey predicted in a report.
• “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,” according to McKinsey. “CIOs may soon find their cloud programs on the chopping block.”
• Many companies in recent years have pushed up annual spending on the cloud by as much as 30%, McKinsey said. A detailed review of cloud programs that follows five cost-cutting principles can often lead to quick spending reductions ranging from 15% to 25%.

Dive Insight:

CFOs worldwide will likely increase cloud spending by 20.7% next year to $592 billion as they seize on the flexible and scalable benefits of the technology, according to Gartner.

At the same time, companies worldwide say their wasted spending on the cloud is rising, Flexera said, citing a survey of 753 executives. Respondents estimated they spend 32% more than needed compared with 30% in 2021.

The actual wasted spending “is likely even higher on average, as many organizations tend to underestimate their amount of waste,” Flexera said.

CFOs can trim unnecessary spending, McKinsey said, by taking five steps:

1. Stop “unhealthy growth”

Lax oversight of cloud computing use, such as spending for applications that have been shut down or contracting for more computing than needed, can add to budgetary fat, McKinsey said.

“Cloud cost increases can reflect healthy growth, such as growth in the user base, increased digital adoption and the development of new digital capabilities,” McKinsey said.

Recessions may throw such growth off kilter, McKinsey said. A company should consider putting in place financial controls and automated tracking that promotes accountability by targeting allocations to the leaders of various business divisions.

2. Make simple fixes

A company eager to cut cloud costs can take several “no-regret” steps such as eliminating unused capacity, launching auto-scaling capabilities and aligning services with the sophistication of the application by, for example, downgrading where possible from a “memory-optimized” service.

“In many cases, companies can capture these productivity improvements by taking relatively simple steps,” McKinsey said.

3. Focus on “cloud elasticity”

With cloud computing, a company can spend efficiently by dialing up or down computing power depending on immediate needs.

Yet many companies manually regulate cloud computing use, run outdated and inflexible systems and tolerate other weaknesses that lead to the purchase of unused cloud capacity, McKinsey said.

CFOs should collaborate with the engineering teams to fix the least flexible workloads, looking especially at those that were “lifted and shifted” to the cloud, McKinsey said. Companies should avoid a lift and shift move, “unless there are strategic reasons for it, such as an exit from a data center.”

4. Review agreements with vendors

Companies often plot an overly ambitious timeline for migrating computing to the cloud and commit to too much spending with their cloud provider, McKinsey said. In a recession, a company’s cloud computing usually falls lower than the forecast.

If a company today would not extend an existing contract under current terms, it should try to renegotiate, McKinsey said. The company can, for example, achieve a discount by accepting less flexibility on cloud use.

Many companies fail to start renegotiating contracts until 12 to 18 months before expiration, leaving little time for worthwhile discussions, McKinsey said.

5. Sustain cloud migration

Companies often seek to reduce cost by slowing their shift to cloud computing and maintaining reliance on their on-premises technology, McKinsey said. They end up prolonging their use of labor, utilities, leases, software licenses and other costs generated by legacy systems.

Instead of scaling back migration, companies should prioritize shifting the highest value workloads, such as those that enable customer-support automation or that rely on systems that will shortly need to be replaced or upgraded, according to McKinsey.