Dropbox saved nearly $75 million by repatriating workloads from the public cloud and building its own tech infrastructure, the company detailed in its S-1. That such a large company would move largely off public cloud, where startups often begin and established companies shed legacy systems to get to, seemed an anomaly.
But as cloud computing continues to mature, the costs of running such infrastructure is catching up creating a "trillion dollar paradox," according to a recent report from venture capital firm Andreessen Horowitz (a16z), coauthored by Sarah Wang, a partner at a16z, and Martin Casado, general partner at a16z.
In analysis of cloud spend at 50 of the top public software companies — including Adobe, DocuSign, Slack and Zoom — a16z estimates cloud infrastructure costs and impact on margins are eating away at $100 billion in market value.
When extending analysis to the "broader universe of scale public companies that stands to benefit from related savings," companies' decisions to run cloud infrastructure rather than in-house infrastructure operations costs more than $500 billion, a16z estimates.
"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 benefits, as a company scales and growth matures," a16z said.
But simply saying companies should ditch cloud isn't the solution either, especially when architectures have been written or rewritten to run in them.
Reevaluating cloud spend, running cloud optimization and considering possible hybrid options may help mitigate ballooning cloud costs without ripping apart an organization's architecture, especially infrastructure strategies that were already ripped apart to run in the cloud during a digital transformation.
The cost of cloud keeps climbing
While spending on cloud infrastructure services only slightly exceeded spending on data center hardware and services in 2019, cloud proved dominant in 2020, according to Synergy Research Group. Enterprise spending on cloud infrastructure services grew by 35% to reach almost $130 billion in 2020, while spending on data center hardware and software dropped 6% to $89 billion.
Cloud is becoming the norm, but that doesn't mean enterprises should assume that it's the best solution for them long term, even if they've already made the shift.
That "cloud is great" is a dominant industry narrative, but "we need to consider the broader impact, too" as cloud costs start to contribute to the total cost of revenue or cost of goods sold, according to a16z.
The report "serves as a very timely reminder that there isn't a single answer. It's whatever is appropriate for the business," said Craig Wright, senior partner of advisory and transformation at West Monroe.
Wright likens this moment in infrastructure to when premature obituaries were written for mainframes — they haven't gone away. "Equally, cloud is not going away either. It's absolutely sustainable long term if it's done right," he said.
Keeping cloud sustainable
Cloud can still work, and be affordable, if deployed with planning and continuous assessment and reassessment.
Part of controlling cloud costs comes from the jump, as companies should "evaluate what they are getting into and why," Wright said. "What's the real business case and driver? Is it a cost play or is a performance play, and set yourself up accordingly with cloud."
Organizations should also be wary of chasing discounts that come with one or three year commitments because those can add costs in the long run, especially if it pushes IT leaders to buy all of the organization's public cloud needs from one vendor, and/or into buying too much.
A multicloud strategy can help an enterprise "take advantage of the ebbs and flows of cost performance across the platform of players," Wright said. "A lot of folks get stuck because they're overanxious to take advantage of discounts."
The entire benefits of cloud should be factored into any decision too, said Piyush Sharrma, co-founder of Accurics, like the "ability to move fast and build a new feature and deliver more value to customers."
Moving an architecture optimized to cloud back into an on-prem setting can create a "friction" in the customer experience too. Leaving it in the cloud, even if the cost looks higher, can lead to a "much larger customer satisfaction in the long run," which itself adds to the margin instead of taking away from it, said Sharrma.
Going through a cloud optimization can also help enterprises "identify the resources or services that are not being used enough" or not being used at all and "just burning your money," Sharrma said. That can make cloud more affordable, versus repatriating, which can be a long, tedious and expensive prospect.
Repatriation can be tricky
For companies that did a "lift and shift" into the cloud — just moving enterprise applications — repatriation might be easier because nothing really changes except where applications live, and they can be lifted and shifted back.
"Where it's not so easy is where you've invested in re-platforming and rebuilding" or optimized operations for the cloud, said Wright. If an enterprise is invested in an architecture built "to sing and dance on the cloud, now I've got to undo all that if I rebuild the way it works."
This might be feasible for a large company like Dropbox because its savings come at scale, but not affordable for smaller entities.
"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, not infrastructure optimization," Andreessen Horowitz wrote in their report. "Hence a rewrite to the significant restructure needed to dramatically improve efficiency can take years, and is often a non-starter."
Part of that is how cloud is sold, according to Wright. "That's why Amazon and Microsoft and Google look to hook people to commit. ‘Let's make all these tools available so you re-architecture your solution and it's super efficient.' Now all those things become barriers to me moving away."
The result is that organizations "give up and stay, just as they were locked into their legacy world," he said.
That doesn't mean it's not worth re-evaluating cloud spend, especially if it starts to affect margins. Entire repatriation may not be feasible, but a hybrid could. CrowdStrike and ZScaler have adopted a hybrid approach, a16z said.
A16z also recommends considering incremental repatriation in a hybrid fashion. "It doesn't have to be all or nothing." In fact, of the many companies we spoke with, even the most aggressive take-back-their-workloads ones still retained 10% to 30% or more in the cloud," a16z said.
