The forces behind enterprise cloud spending trends

After a small decline in 2021, cloud spending is up again, but perhaps not for the reasons we expected, which are often based on faulty assumptions.

The forces behind enterprise cloud spending trends
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Global spending on cloud infrastructure rebounded in the third quarter of 2021 after its first quarterly decline since the pandemic triggered a massive increase in cloud spending. According to researcher IDC, spending on cloud infrastructure environments increased 6.6% year on year to $18.6 billion in the third quarter of 2021.

When the pandemic loomed back in early 2020, many enterprises and technology companies planned huge reductions in IT spending, including cloud. However, most companies soon turned bullish on cloud’s role in the new normal of remote work and virtual cloud-based IT. They ended up being right. The main boost in cloud spending occurred in the second quarter of 2020, which saw 38.4% year-on-year growth.

The cloud will continue to experience consistent growth during the next 10 years. However, the speed of that growth will change over time, and it will change for different reasons. It’s easy for analysts in larger enterprises to rely on historically accurate assumptions to predict future cloud spending, but those assumptions may prove unsound going forward. New forces are at work that will drive the velocity of cloud spending quarter to quarter, and most of those forces are not yet well understood. 

Here are a few potentially mistaken assumptions:

A reduction of traditional compute spending always shifts to a growth in cloud spending. I see many technology and business analysts make this assumption, and it does seem logical. However, less spending on traditional computing (legacy) is not a great indication that those dollars will shift directly to cloud computing.

Typical reductions in traditional compute spending are unrelated to those traditional systems being replaced by cloud hosting or software as a service. Moreover, the way you spend dollars on traditional systems is very different from the way you spend on cloud-based systems, with investments in software and hardware made in larger chunks versus the utility-based pricing of cloud computing.

Cloud spending follows most of IT spending. This is one thing that many people got wrong about cloud computing at the start of the pandemic. They assumed that if IT spending was reduced, then cloud spending would also be reduced. While this makes logical sense, spending on cloud computing is largely decoupled from IT spending patterns. 

Most enterprises spend money on cloud to react to reduced IT spending. Or, more frequently, cloud gets introduced as a strategic investment. The pandemic has highlighted the strategic advantages of cloud computing because cloud can reduce or eliminate many of the risks around the pandemic. For example, cloud can remove applications and data from enterprise data centers that were vulnerable to quarantine restrictions that companies experienced early in the pandemic. Later, more applicable to 2021, cloud spending reflected a strategic need. The typical example is cloud’s ability to drive more innovation directly related to the business and its ability to do it faster.

The cloud will continue to grow, although the rate of its growth will vary according to shifts in market priorities, as well as enterprise priorities. The trick is to understand how these shifts relate to actual cloud spending and why. We’re making too many assumptions about how the moving parts influence spending. Many historically accurate assumptions will no longer hold true. It’s time to update our yardsticks with today’s emerging cloud markers. 

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