Unlocking value: Four lessons in cloud sourcing and consumption

Companies that are successful in sourcing and managing the consumption of cloud adopt a more dynamic, analytical, and demand-driven mindset.

Here is an excerpt from an article written by Abhi Bhatnagar, Will Forrest, Naufal Khan, and Abdallah Salamifor the McKinsey Quarterly, published by McKinsey & Company. To read the complete article, check out others, learn more about the firm, and sign up for email alerts, please click here.

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Cloud adoption is no longer a question of “if” but of “how fast” and “to what extent.” Between 2015 and 2020, the revenue of the big-three public cloud providers (AWS, Microsoft Azure, and Google Cloud Platform) has quintupled, and they have more than tripled their capital-expenditures investment to meet increasing demand. And enterprises are ever more open to cloud platforms: more than 90 percent of enterprises reported using cloud technology in some way.  These trends reflect a world where enterprises increasingly “consume” infrastructure rather than own it. The benefits of this model are plentiful. Cloud adopters are attracted by the promise of flexible infrastructure capacity, rapid capacity deployment, and faster time to market for digital products. The COVID-19 crisis has accentuated the need for speed and agility, making these benefits even more important. From an infrastructure-economics perspective, perhaps the most attractive innovation of cloud is the ability to tailor the consumption of infrastructure to the needs of the organization. This promises greater economic flexibility by transforming underutilized capital expenditures into optimally allocated operations expenditures.
While this concept is attractive in theory, many enterprises are facing challenges in capturing the value in reality. Enterprises estimate that around 30 percent of their cloud spend is wasted. Furthermore, around 80 percent of enterprises consider managing cloud spend a challenge. Thus, even though more than 70 percent of enterprises cite optimizing cloud spend as a major goal, realizing value remains elusive.  In our experience, a major driver of value capture is transforming the approach to sourcing and consuming cloud. Enterprises that approach this task with a traditional sourcing and infrastructure-consumption mindset are likely to be surprised by the bill. The flexibility to consume cloud as needed and cost effectively places responsibility on enterprises to maintain a real-time view of their needs and continuously make deliberate decisions on how best to adjust consumption.Here are four ways enterprises can derive value from cloud by transforming their sourcing and consumption approaches.

Lesson 1: Sourcing and managing consumption of cloud is a dynamic exercise

Over the years, enterprises developed a robust model for sourcing IT infrastructure assets. It is episodic in nature based on asset refresh cycles and follows a structured sequence: requirements to request for proposal (RFP) to negotiations to award. Success in this model requires solid negotiation and contracting skills and the ability to engage the business at the right touchpoints in the process. The RFP juncture came to constitute the major point at which value was captured. Once the contract was signed, the organizational focus normally shifted to other areas until the next negotiation cycle.

Cloud economics mandates a fundamentally different approach. While cloud service provider (CSP) selection and negotiation are critical components of the cloud journey—determining, for example, the price of services and discount levels—many of the decisions impacting value capture come afterwards. The very flexibility that cloud provides means that enterprises must continuously make dynamic consumption decisions about which services and specifications are needed when and for how long. Each of these decisions can have significant cost implications if not deliberately managed. One manufacturing company we know was able to leverage its traditional procurement muscle to negotiate competitive discounts from its CSPs, only to be surprised by the high cloud-consumption projections—up to twice its spend commitment—a year into cloud adoption. This prompted the company to consider renegotiations with its CSPs and to accelerate the shift in its internal approach to cloud to a more demand-focused model.

The need to continuously manage cloud consumption is accentuated by the rapidly evolving vendor marketplace and its continuous introduction of new offerings, features, pricing mechanisms, and regions. For instance, AWS has changed prices—mostly dropping them—more than 60 times since its launch in 2006. It introduced more than 20 new top-level services last year alone. Sourcing and managing the consumption of cloud in this world requires a deep understanding of the cloud ecosystem and continuous engagement with the business as partners.

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As enterprises progress along their cloud journey, transforming the way enterprises source and consume cloud will make the difference between value capture and value leakage. Success will require a mindset shift toward a dynamic model that appreciates the nuances and complexities of cloud economics, the importance of deeply understanding demand, and the benefits of a revamped organizational approach to sourcing and optimizing the consumption of cloud.
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Abhi Bhatnagar is a partner in McKinsey’s Atlanta office; Will Forrest and Naufal Khan are senior partners in the Chicago office; and Abdallah Salami is an associate partner in the New Jersey office.


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