Companies 'prone to self-delusion' when using cloud, McKinsey says

Dive Brief:

Nearly two-thirds of industrial companies use cloud computing yet 74% of cloud transformations fail to yield expected savings or business value, McKinsey found in a survey of more than 800 CFOs, CEOs, CIOs and other executives at manufacturers in Europe and North America.
Almost half of respondents found cloud technology more costly than anticipated and 40% exceeded their cloud budgets — "some to a significant degree," McKinsey said, adding that "it is really easy for cloud transitions to run over budget and behind schedule."
During the pandemic "many industrial companies turned to cloud technology to increase their productivity, agility and resilience, and praised it as a turnkey cure-all for just about everything from sagging sales to flagging profits," McKinsey said, adding that "many companies are prone to self-delusion" when gauging success of cloud adoption.

Dive Insight:

During the pandemic, cloud deployment became a priority for the entire C-suite. The technology allowed businesses to adapt and stay operational.

Many finance chiefs credit cloud computing for helping them weather COVID-19 by cutting fixed costs, moving to remote work and adapting to a surge in online demand. Looking ahead, CFOs rank cloud enterprise resource planning (ERP) at the top of the list for information technology investment through 2024, according to a Gartner survey.

Worldwide expenditures on public cloud services will balloon to $362.2 billion in 2022 from $257.5 billion last year — a 41% increase, according to estimates by Gartner. Money channeled to the cloud will represent 14.2% of total IT spending by 2024 compared with 9.1% in 2020, Gartner said.

Yet the typical company wastes as much as 35% of its cloud budget, according to some estimates. Many companies have identified lax budgeting as their No. 1 problem when using the cloud. Sixty-one percent of firms said cost savings was their top cloud initiative, ahead of moving workloads off of in-house computers, Flexera said.

Companies also seek payoffs from the cloud in the wrong place. They expect to gain the biggest benefits from improved IT reliability, speed, data security, governance and cost control rather than in generating business value, McKinsey found in its survey across six countries and a variety of sectors, including automotive, machinery, semiconductor, aerospace and defense manufacturers.

"Our research indicates that the cloud's value in IT amounts to only about 5% of the cloud's potential value," McKinsey said, adding "around 95% of the cloud's $600 billion value potential lies in business-related functions" such as manufacturing, procurement and supply chain.

Cloud adoption can lead to greater operational efficiency, reduced time to market and the launch of cloud-enabled products and services, McKinsey said. "Capturing these business benefits requires transformational changes in business processes, organization, product development or sourcing."

Companies that widely use public cloud service providers gain more than those that rely more on in-house computing, McKinsey said.

"Not only are they more likely to capture the expected IT cost savings from a cloud migration, but the likelihood of capturing the full business value increases by about 50%," McKinsey said.

Companies waste money on cloud computing in several ways, including by storing useless or obsolete data, overestimating needed capabilities, or paying for services that sit idle for hours on end.

"With a name like 'cloud,' it's no wonder organizations lose sight of what it means and how it can deliver tremendous amounts of business value," McKinsey said.