Cloud Expenses under the Microscope as Remote Work Soars

By guest author Aaron Tilley from Wall Street Journal

The pandemic has made business more dependent on cloud-computing than ever—and companies are now racing to rein in the soaring costs.

Cloud spending at Audi Business Innovation GmbH, a unit of Volkswagen AG -owned car maker Audi, jumped 12% between March and April, with employees using more of the rented, remote computing power and software tools to work from home. But with car sales plunging, companywide budgets were under pressure.

Audi Business, which serves as an internal technology department for parts of Volkswagen, worked with Amazon.com Inc.’s cloud services unit to shut off unused cloud systems, and moved one cloud service to a cheaper third-party option sitting on top of Amazon’s cloud. With the changes, Audi Business now expects its costs with Amazon Web Services to fall 30% this month, said Sven Sonnendorfer, who manages cloud issues for the Audi unit.

“If there’s any possibility to decrease our costs, we need to work on that,” Mr. Sonnendorfer said.

The corporate shift to the cloud has accelerated, with businesses last year spending an estimated $96.4 billion on cloud infrastructure services, surpassing their spending on in-house data-center hardware and software for the first time, said John Dinsdale, chief analyst at Synergy Research Group.

The pandemic has further fuelled demand, as more activity has shifted online, delivering a boon for big cloud players including Amazon, Microsoft Corp., and Alphabet Inc.’s Google unit, and helping buoy the tech industry during the broad economic slump. Amazon, the industry leader, said in April that its cloud division grew 33% to $10.22 billion in the first quarter. It is scheduled to report its latest results Thursday.

Booming business for those companies is the result of more spending by their clients at a time when many businesses are struggling with the economic impact of coronavirus. Businesses that spend heavily on cloud services—which for the biggest companies can run to hundreds of millions of dollars annually—typically get discounts from their providers linked to the size of their future usage commitments, which can entail double-digit increases, said Corey Quinn of the Duckbill Group, a company that helps customers lower their Amazon cloud bills.

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Now, some are renegotiating deals that build in less growth. “People are being more conservative,” Mr. Quinn said. And as companies examine their cloud spending, some are finding that they overestimated their needs, he said.

Entur AS, which runs ticketing and trip-planning services for Norway’s transportation system, has doubled its annual spending in each of the past three years on cloud services, mainly from Google. That was fine while the business was healthy, said Tor Magnus Castberg, who leads cloud operations for the government-owned company.

Then Covid-19 sent ticket sales nosediving as people throughout the Scandinavian country sheltered at home. Entur’s cloud use fell more than 50%—but to the company’s shock, its monthly Google cloud bill of around USD 100000 rose 7 % between January and April because the applications had to be kept running.

Entur started scouring its cloud-usage reports and found unnecessary spending, such as paying for additional cloud servers to handle increases during rush hour. It cut down unnecessary resources it used in Google’s cloud. “Things will get worse unless you work on keeping them tuned up,” Mr. Castberg said. By June, the company had stabilized its spending.

A Google spokesman said it wouldn’t comment on customer payments terms it views as confidential.

Analysts say there is still plenty of room for growth among the biggest cloud providers, though the market is showing some signs of slowing from its red-hot pace. Microsoft, the second-biggest cloud provider, on Wednesday said revenue in its Azure cloud business in the June quarter grew by 47 %—rapid by almost any measure, but down from 59% in the previous quarter and a 64 % clip a year earlier.

Most companies that package and resell cloud services, the middlemen between corporate IT departments and cloud vendors many companies use, are expected to miss 2020 sales targets as customers control spending, said market researcher OTR Global LLC.

Even some companies thriving in the pandemic are looking to better manage cloud costs. Zoom Video Communications Inc., one of the biggest benefactors of the pandemic as use of its videoconferencing tools soared, has had to rely increasingly on outside cloud providers to handle the growth. Zoom’s cost of revenue in the quarter through April more than quadrupled from a year earlier, outpacing sales growth. The company said last month that it planned to add more of its own server capacity to bolster margins.

The pandemic, for many cloud users, has shown that costs can spiral if they aren’t closely managed. “There are lots of inefficiencies,” said Jyoti Bansal, chief executive of San Francisco-based startup Harness Inc., a company that sells software developer tools. “You lose control of it.”

When Harness brought in a chief financial officer last year, he questioned why its cloud bill was so high. The company developed a tool to better use cloud capacity, and during the pandemic has cut its monthly spending on such services by 40% from $100,000. It is now selling that service to others to help them keep cloud bills low during the pandemic.

The need to rein in costs is especially acute for tech startups, where cloud services are often the second-largest overall expense after employee compensation. Outsourcing computing needs to the cloud helped many startups grow without having to invest heavily in their own IT departments. Now that the economy has turned, cloud spending has become the top area to try to reduce costs, said Matt Murphy, a partner at venture-capital firm Menlo Ventures who oversees investments in software startups.

“Every board meeting in the first eight weeks of Covid was, ‘We need to get our costs under control. We need to have the company have at least 24 months of cash,” he said.

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