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How to Solve the Cloud Computing Costs Paradox

By: Ernest Sampera on September 8, 2021

Cloud computing has become an indispensable aspect of today’s IT infrastructure, especially after the COVID-19 pandemic forced many companies to rapidly deploy digital transformation initiatives. A 2020 Gartner study found that 70 percent of organizations already using cloud services expected to increase their spending in the coming year, but actual spending in 2021 was so rapid that the firm was quickly forced to increase its spending projections from 18.4 percent to 23.1 percent by the end of 2021. Managing cloud computing costs effectively, however, continues to be a significant challenge for many organizations.

The Promise and Peril of Cloud Computing

Over the last decade, most industries have wholeheartedly embraced cloud computing as a cost-efficient solution to their infrastructure and application needs. Ambitious startups often begin their life in the cloud, hosting their software development and testing tools in various cloud services. Even larger enterprises, which have much more expansive compliance and networking needs, have shifted entire workloads into the cloud to jettison costly, out-of-date on-premises infrastructure.

On balance, this approach has plenty of advantages. Cloud computing services allow companies to transition their IT spending from CapEx to OpEx while also leveraging state-of-the-art technology that can rapidly scale with their business needs. For organizations that have transitioned to a partial or fully remote workforce, the cloud makes it easy for employees to collaborate and access mission critical applications no matter where they’re located. There’s also the benefit of outsourcing the toil of infrastructure maintenance to a cloud provider, which allows internal IT teams to focus more on developing innovative new solutions that create new opportunities and growth potential.

But while there’s no doubt that the cloud offers tremendous cost savings in the beginning, there comes a point for every organization in which overall cloud spend reaches a level of diminishing returns. Over time, those diminishing returns can actually cross a threshold into negative territory where provisioning additional cloud resources actually has a negative impact on market capitalization.

The Scalability Paradox

According to a 2021 study by Andreessen Horowitz (a16z), the top 50 public software companies currently operating on outsourced cloud infrastructure are losing somewhere in the range of $100 billion in market value due to excess cloud computing costs. When expanded to non-software companies that rely heavily on the cloud, the total impact grows to more than $500 billion.

Unfortunately, most companies aren’t even aware of how much money they’re costing themselves because the impact is largely invisible. For a large scale organization, excessive cloud computing costs have a suppressive effect on profit margins that isn’t easily identified. Migrating to the cloud (or starting out there) certainly makes sense for many firms in the early days. They’re able to eliminate infrastructure costs and pay only for the resources they need while retaining the flexibility to scale rapidly when needed. As their applications and networking needs become more complex and demanding over time, however, the actual savings of the cloud compared to fully optimized private infrastructure begin to diminish. By the time the company crosses that threshold into inefficient spending, cloud computing costs are “baked in” as an ongoing expense and rarely draw much needed scrutiny.

Part of the problem is that many organizations don’t “right size” their cloud resources, committing only to their baseline needs. The same a16z report found that the average company ends up spending about 20 percent more on cloud infrastructure than they actually committed to spending, with some organizations doubling their anticipated spend.

But even if they were forecasting the correct spending levels, companies are still locking in tremendous amounts of money that could be going to other areas of the business. A company that’s spending $100 million each year on their cloud resources, for instance, should consider how much they could be saving with a more efficient infrastructure and how they could better invest those savings. In other words, they should continue to apply the very same cost/benefit analysis to their current cloud deployment that drove the initial decision to migrate to the cloud.

A 451 Research price index study found in 2019 that there is a clearly defined threshold where cloud utilization ceases to be cost effective and crosses over to a “Goldilocks Zone” where private infrastructure is more efficient. Understanding when an organization crosses that line and begins wasting money on poorly optimized cloud resources is essential for maintaining high profitability and market capitalization.

The Case of Dropbox

The file hosting service Dropbox is perhaps the most instructive example of how much a large scale enterprise could be saving by repatriating assets from the cloud. In 2016, Dropbox made the decision to transition most of its workloads from Amazon’s AWS cloud servers to a custom-built infrastructure housed in colocation data centers. The transition paid off almost immediately, with the company’s gross margins increasing to 54 percent in 2016 and 67 percent by 2017, a substantial increase from the 33 percent margin of 2015.

Within those two years, Dropbox saved almost $75 million by making the shift to a private infrastructure solution, which translated to more cash on hand and greater flexibility to invest in other growth opportunities for the business. Making that kind of transition is not an easy undertaking, especially for companies that migrated to the cloud with the intent to remain there forever. Given the massive financial benefits and other advantages that can be realized, however, it’s vital for IT decision makers to take a long-term approach to planning their infrastructure growth to maximize efficiency and revenue.

The Colocation Solution

Repatriating assets from the cloud doesn’t necessarily mean going back to managing a costly, labor-intensive on-premises data solution. Most of the costs associated with hosting private infrastructure comes not from the servers and computing equipment, but rather from the cooling and power systems that support them, as well as the redundancies that ensure reliable uptime. Rather than building and managing a data facility that requires a massive up-front capital investment and ongoing maintenance, organizations can instead partner with a colocation data center to place their assets within an environment that’s built from the ground up for ongoing reliability and efficiency.

By migrating into a colocation environment, companies can retain control over equipment that’s optimized for their business needs while still outsourcing the toil-intensive aspects of infrastructure management. They also still have direct on-ramp access to whatever cloud resources they need to provision, which allows them to take advantage of the public cloud’s flexibility without locking all of their applications and data into the cloud provider’s environment. That combination of control and versatility makes it easier to execute long-term technology plans for digital transformation and business growth.

Take Control of Your Infrastructure with vXchnge

As the most awarded carrier-neutral colocation data center operator in the United States, vXchnge is committed to helping organizations of all sizes and industries prepare their IT operations for the challenges of the future. Each edge data center location is backed up by a 100% uptime reliability SLA and features N+1 redundancies to ensure that essential data and applications remain available at all times. Every vXchnge customer also gets access to the revolutionary in\site intelligent DCIM platform, which provides real-time visibility into power and bandwidth utilization and allows them to manage nearly every aspect of their deployment remotely. 

With direct cloud on-ramps that connect to multiple public and private providers, vXchnge data centers make it easier than ever to build dynamic hybrid and multi-cloud environments that incorporate the best aspects of public and private infrastructure without compromising efficiency. To learn more about how vXchnge can help your organization execute a migration from the cloud into a data center environment, talk to one of our colocation experts today.

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