Studies* conducted by the OECD estimate that a company that adopts cloud technology gains a subsequent 0.2% in productivity annually. However, potentially anticompetitive practices by cloud providers entail a cost increase that erodes these productivity gains.
Studies estimate that over a ten-year period in France, the adoption of cloud by French companies has resulted in a 26 billion Euro reduction in cost or increase in value, amounting to a cumulative productivity gain of 1%. Yet, at the same time, 3 potentially and partially anticompetitive practices have led to a total cost increase for French companies of around 6 billion Euros over ten years.
The Facets of Discriminatory Leverage in Negotiations
There are 3 potentially or partially anticompetitive practices:
1. Discriminatory use of leverage during negotiations
Leverage entails using one’s dominant position in a market as leverage to promote one's products in a related market. Here, it mainly concerns dominant software editors encouraging their clients to choose their cloud infrastructure and platform through bundled sales or price increases for software.
According to a survey conducted by Vanson Bourne for Asterès among 100 CIOs (see details in Sources), these bundled offers were proposed to 72% of companies. Among these, 51% opted for a cloud infrastructure they would not have chosen otherwise, 31% of companies paid more (+26%) to integrate the software into a third-party infrastructure, and 13% would have chosen this infrastructure in any case and thus benefit from a windfall effect.
In terms of cost, companies that rejected the bundled offer see their total expenditures increase by about 600 million Euros per year, while those benefiting from the windfall effect see their total expenditures reduce by more than 200 million Euros per year.
2. Lock-in
The existence of generally high exit costs (transaction cost, learning cost, and psychological cost) allows providers to increase their prices upon contract renewal:: 88% of surveyed companies experienced a price increase, averaging 18% and can go up to 40% to 50% in some cases, during the renewal of their cloud contract.
3. Opacity and the constant evolution of cloud software terms of use
The cost of compliance with cloud usage terms in general (without distinguishing the service type) is estimated at about 4 billion Euros for all French companies that have already adopted the cloud. This cost includes two components: the cost related to efforts made upfront to comply with the provider’s terms of use, estimated at about 4.3 billion Euros, and the cost of penalties and compliance measures that may result from an audit, estimated at about 0.2 billion Euros.
OptimNow Insights: Mitigating Risks of Anticompetitive Practices in Cloud Provisioning
Beware of the Bundle Trap
Avoid the Cloud Subscriptions + Software licences bundle, like the 'hybrid license' model, incentivizing Microsoft customers to bundle Microsoft licences with Azure subscriptions. While such a bundle allows you to optimize license costs in the first year, you’re trading short-term benefits for long-term trouble, as such a deal exposes your organization to a price increase in the following years, and especially to an audit of your license usage, the conclusions of which can be potentially costly arbitrary sanctions: 22% of surveyed companies underwent audits qualified as "aggressive" leading to sanctions from their providers.
Beyond Lift-and-Shift: Advocate for Greenfield and Replatforming Strategies
Favour greenfield cloud-native development or the re-engineering/re-platforming of your applications to pure ‘lift and shift’ strategies, also known as rehosting: it often leads to disappointments when the expected efficiencies and savings are not realized post-migration. This is particularly true if the migrated applications are not suited for the cloud environment, thus requiring further costly modifications or optimizations post-migration. This approach may also inadvertently increase the complexity and security risks, as hastily migrated applications might not adhere to cloud-native security best practices
Unlock Negotiation Power: Decouple IaaS, PaaS, and SaaS
Favour the decoupling of IaaS, PaaS, and SaaS during negotiations with providers, and favour a multi-cloud approach to avoid lock-in and have a negotiation lever with one’s provider. Multi-cloud also allows having teams trained in the services of several providers, which enables better management of a transition from one cloud to another.
Embrace Openness: Leverage Open-Source to Diminish License Lock-in
Consider open-source to reduce software license lock-in: open-source offerings have now reached a sufficient level of maturity to be adopted by enterprises (see the recent availability of Linux in the Azure marketplace). Open-source is today's de-facto formula in the most advanced sectors in technology like Kubernetes or AI, just look at Hugging Face huge success with its community building a library of Open-Source Large-Language Models for Generative AI.
Integrate FinOps & Cloud Cost Monitoring Tools with Financial Governance To Keep Control of Cloud Costs
Advocate for an Integrated FinOps Approach by not only adopting Cloud Optimization and Cloud Financial Management practices but also incorporating cloud cost monitoring and optimization tools along with robust cloud governance policies. This holistic approach can enable enterprises to maintain control over cloud resources while balancing spending and aligning cloud services with business objectives.
Embrace a Unified Multi-Cloud management strategy by Engaging Cloud Management Platforms
Cloud management platforms maintain a centralized view and control over multi-cloud environments. Consider platforms like
This will facilitate streamlined operations, better visibility, and more effective management across various cloud service providers.
Cultivate proactive vendor management
Maintain open communication channels with cloud service providers. This proactive engagement can help enterprises stay updated on any changes in pricing, policies, or features, allowing for timely adjustments to mitigate any adverse impacts on business operations or costs.
Navigating the complex and evolving landscape of cloud economics requires a well-rounded strategy that encompasses cost management, vendor engagement, and technological flexibility. By adhering to the recommendations outlined, enterprises can better position themselves to unlock the full value of cloud adoption, mitigate potential risks, and foster a conducive environment for business growth.
Elevate your cloud strategy with OptimNow. Our expertise in cloud optimization can guide you through the intricacies of cloud economics, ensuring you derive maximum value from your cloud investments. Reach out to OptimNow and take a significant step towards optimizing your cloud environment.
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