Rapidly evolving technology transformations are putting pressure on procurement teams. Several hard-to-crack categories—such as managed services, cloud solutions, and digital marketing—present unique challenges because of engineering and business decisions.
Optimizing these complex categories is difficult and may not get easier as procurement works to keep up with continuously evolving technology architecture. For instance, the cloud services market has dynamic pricing models that can lead to unexpected budget overruns and suboptimal service. This is especially the case in organizations with strong functional silos that hinder transparency and demand optimization.
Yet organizations with significant cloud spend are being asked to gain greater transparency and proactively manage this unmetered spend. The procurement function can strategically drive fact-based demand gating, contract optimization, and cost governance.
This blog, the first in a series on hard-to-crack categories, examines what it takes to unlock procurement value in cloud services.
Cloud spend surges globally
We didn’t know how our cloud spend would grow over the years, and now have massive spend commitments in our cloud service provider contract.
This lament gets to the heart of why a strategic approach to cloud services procurement is paramount. Many businesses overspend on cloud services or lock themselves into multi-year contracts simply by taking a piecemeal approach to procuring them.
Spending in this space is high-risk and easy to get wrong, given the enormous and rapid growth of cloud in recent years. By 2030, global cloud revenues are expected to reach $2 trillion, driven by increasing digital transformation and the growing demand for AI and scalable cloud solutions.1 A medium-size tech or retail company may spend $30 million to $40 million or more per year on cloud services, making it one of the larger categories a procurement team can support. Furthermore, recent McKinsey research found that 28 percent of cloud spend is wasted for many companies.
The challenges of managing cloud demand
The complexity of cloud-based architecture and computing makes it difficult for organizations to manage their cloud spend in a demand-driven, dynamic, and continuous manner. Optimizing cloud services requires a deep understanding of cloud consumption’s underlying business and technical drivers, application remediation, and their statistical relationship with spend.
As cloud demand and services mature, so do the practices to optimize cost, performance, and developer experience. For example, moving between Kubernetes clusters, ephemeral environments, and edge applications that require lower-latency solutions impacts demand and, in turn, cost. While many companies have strong sourcing capabilities for traditional IT, very few have the advanced procurement knowledge to be effective business partners in cloud services.
A strategy for optimizing cloud procurement
From our work with companies with significant cloud spend, we see two elements that unlock value in cloud procurement: understanding the commercial levers and optimizing the drivers.
Dig into rates, rebates, and commercial terms
Cloud procurement requires a deep understanding of how providers charge: control planes, worker nodes, load balancers, and storage. These terms are nonstandard in traditional sourcing.
Companies can achieve significant savings by negotiating discounts for frequently consumed products and accounting for hidden costs such as data transfer fees. The strategic and financial incentives cloud service providers (CSPs) offer, such as talent or domain expertise, can further enhance contract value. Finally, “should cost” models can increase negotiation leverage and flexibility.
A flexible, dual-supplier approach—which assigns a primary CSP for most workflows, while a secondary CSP handles secondary loads—can significantly impact select companies with top-tier spend levels. This strategy also prevents unnecessary vendor lock-in and accelerates domain-specific development.
Cloud service contracts can span five to ten years. Balancing elements such as exit-related clauses, flexibility in usage terms, risk appetite, desired pace of change, and funding needs is key to creating a sustainable, robust cloud sourcing strategy.
Unveil the drivers of demand to forecast and optimize use
The rapid pace of product innovation and artificial intelligence buildout makes forecasting cloud consumption challenging; organizations, however, can develop effective cloud sourcing strategies based on accurate projections for cloud usage. Procurement teams with deeper expertise in demand drivers can build best-in-class cloud planning and management competencies.
Several technical drivers are essential to learn: which segmented workloads correlate to high run costs, regional capacity requirements for hybrid and multicloud environments, and metering to switch the cloud on and off as needed. Procurement teams are finding a growing need to acquire specialized talent and bridge stronger collaboration between engineering and sourcing.
Achieving a step-change in cloud cost is an engineering problem that requires a high degree of transparency. The trade-off between cloud spend and engineering capacity is key in capturing savings and demands high collaboration between engineering and procurement. This requires building the right organizational and FinOps transparency to manage fluctuations in consumption.
The benefits of such an approach are clear. A detailed consumption analysis at a major video-streaming company helped that business build a demand-driven model to forecast cloud consumption with 95 percent accuracy, resulting in 15 to 20 percent savings across consumption, architecture, and pricing levers.
The time has come for procurement teams to prove their value in cloud solutions. While this category is complex and challenging, its strategic importance and growth make it unique in driving enterprise value, and a prime opportunity for procurement to be a strategic partner.
1 “Cloud revenues poised to reach $2 trillion by 2030 amid AI rollout,” September 4, 2024, Goldman Sachs.