What the COVID-19 downturn means for cloud spending and cloud costs

At the outset of the COVID-19 pandemic, cloud spending levels remained remarkably resilient given the wider economic turmoil. Between the rapid shift to telecommuting, increased e-commerce activity and rising demand for digital services ranging from news to video gaming, consumption of services from cloud providers like AWS stayed strong throughout early 2020.

According to Synergy Research Group, cloud costs reached $29 billion in Q1 2020, which translated to a 37% annual increase. Meanwhile, Gartner projected that for 2020 as a whole, cloud expenditures will still climb 19%, a notable achievement in light of an expected 8% drop in overall IT spend over the same time period.

But will this momentum last? The vast ripple effects of COVID-19 will continue well into the 2020s, and they could force a reckoning in many IT budgets, including how much organisations spend on cloud infrastructure, platforms and applications.

The cloud picture heading into 2021 and beyond

For some context, Gartner estimated that cloud spending grew nearly 40% year-over-year in 2019, meaning that even the firm’s seemingly optimistic expectations for 2020 would represent a significant slowdown in terms of growth rate. In 2019, AWS still accounted for almost half (45%) of all IaaS spend, followed by Microsoft Azure at 17.9%.

To see what’s reducing cloud spending growth and why it might continue to slow down or even go negative in the near future, consider the results of a 2020 Enterprise Technology Research survey of 1,200 IT buyers:

• Fifty-nine percent of respondents had frozen personnel hiring in Q2 2020, up from 26% in Q1, and 41% had halted new IT deployments.
• Close to 8 in 10 stated that COVID-19 had directly affected their IT budgets, compared to only 63% who said so in Q1.
• Many reported across-the-board cuts of up to 20% and renewed scrutiny of expenditures from upper management.
• With all of these cutbacks, it’s no surprise that roughly one-quarter reported employee layoffs.
• Increased and improved remote work had not been sufficient to avoid disruptions to either business operations or to company workforces.

These trends could affect the bottom lines of the “big three” of the cloud — AWS, Azure and Google — in the short term, due to their broad exposure to the industries hard-hit by COVID-19. ETR’s report shows flagging Net Score sentiment (essentially, a measure of momentum) for all three over the course of 2020 and into early 2021. At the same time, the increase in home working could ultimately boost cloud spend despite these COVID-19 headwinds, as AWS et al. are far superior to on-prem IT when it comes to supporting remote workers.

Overall, the economic outlook for cloud services also varies considerably by service type.

ETR found that a handful of cloud platforms, including the increasingly popular VMware Cloud on AWS for running vSphere applications, actually had higher Net Scores in July 2020 than April 2020. VMware Cloud AWS along with AWS Lambda and the AWS platform overall were also still among the top 10 Net Scores for cloud services. Also, cloud cutbacks are still likely to be less severe than those in other IT domains.

Managing cloud budget in challenging times

Although some budget cuts may be inevitable, many organisations haven’t fully capitalised on the savings opportunities available to them in AWS. Accordingly, they may be able to create significant breathing room without having to make draconian reductions.

For example, the 2019 introduction of AWS Savings Plans instantly changed the calculus of any savings strategies that had revolved around Reserved Instances. A combined Savings Plans- Reserved Instance strategy is now preferable to relying on just Reserved Instances, but getting the right mix of Savings Plans and Reserved Instances, plus ensuring optimal value from Convertible Reserved Instances in particular, takes some work.

In this context, Tecflair has built the specialised tools and best practices for up-to-date cost optimisation of Savings Plans and Reserved Instances. The Tecflair dashboard streamlines how savings are allocated with Reserved Instances, while our automated cost and term optimisation techniques ensure that you get maximum flexibility and value from Convertible Reserved Instances. We’ll make sure you make the most of Savings Plans and Reserved Instances in tandem and also pursue the right paths toward rightsizing (e.g., have you updated to the right instance families?) and the use of capabilities such as AutoScaling groups.

With so many different AWS services and ways to save money on your cloud costs, you may be wondering where to start your cost management journey. If so, check out our 80/20 Video Series which will show you the quick wins you can achieve by taking a few simple steps to massively grow your savings.

Find out more about the Video Series here.