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Is now the time for retailers to double down on cloud investments?
Microsoft last week was downgraded by UBS as field checks showed slower growth for cloud software providers, including Microsoft’s Azure unit.
Azure “is entering a steep growth deceleration that could prove worse [in Microsoft’s 2023 and 2024 fiscal year] than investors are modeling,” analyst Karl Keirstead wrote in a note attained by Reuters. The business “may be slowing due to maturation, not just a tough macro,” he added.
The downgrade comes as the cloud computing providers reported robust gains in the third quarter but warned of decelerating growth amid macro pressures.
Amazon Web Services’ sales grew 27.5 percent, its slowest expansion since at least 2014 and six percent below its second quarter rate.
Amazon CFO Brian Olsavsky told analysts, “The continuing impacts of broad-scale inflation, heightened fuel prices and rising energy costs have impacted our sales growth as consumers assess their purchasing power and organizations of all sizes evaluate their technology and advertising spend.”
Mr. Olsavsky noted that one of the “real valuable points about cloud computing is that it’s turning fixed cost into variable” to help organizations when seeking cost savings.
Alphabet reported 37 percent growth at Google Cloud year-on-year, down eight percentage points over the previous year. Some of Google Cloud’s customers are taking longer to decide or committing to shorter-term or smaller size deals.
Sundar Pichai, CEO, nonetheless added, “The long-term trends that are driving cloud adoption continue to play an even stronger role during uncertain macroeconomic times. Google Cloud helps customers solve today’s business challenges, improve productivity, reduce costs and unlock new growth engines.”
In a Harvard Business Review column, William Forrest, senior partner in charge of McKinsey’s Cloud practice, said organizations have a “can’t-miss opportunity” to shift beyond moving applications from their own servers (“lift and shift”) or building test environments to try new programs as tech talent has become available.
“Now is the time to think bigger and smarter,” he wrote. “In 2023 companies should focus on building out strong cloud foundations that allow them to take advantage of the most important benefits that cloud provides (e.g., scaling applications or automatically adding capacity to meet surges in demand).”
- Microsoft shares lag Big Tech peers as growth worries prompt UBS downgrade – Reuters
- Cloud Computing Growth Slows As Enterprises Cut Costs – RTInsights
- Which Cloud Computing Stock Will Reign Supreme in 2023? – The Motley Fool
- Microsoft Stock Drops After Downgrade on Weaker Cloud Computing Outlook – Barron’s
- Amazon.com Announces Third Quarter Results – Amazon.com
- Amazon (AMZN) Q3 2022 Earnings Call Transcript – The Motley Fool
- Alphabet Announces Third Quarter 2022 Results – Alphabet
- Alphabet Q3 2022 Earnings Call Transcript – The Motley Fool
- Where Is Tech Going in 2023? – Harvard Business Review
Discussion Questions
DISCUSSION QUESTIONS: Have you seen retailers become more cautious with their cloud investments? Is the current economic climate more of an opportunity for retailers to accelerate or slow cloud investments?
Poll
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Retailers have become cautious about every expense, not just cloud investments. Notwithstanding the current challenging economic conditions, retailers need to continue to modernize their technology infrastructure, and moving to the cloud can deliver many benefits. While a soft holiday season may provide a temporary reason for slowing cloud migration and tech investments, retailers need to take a longer, more strategic view of these types of investments and keep moving forward.
Retailers have always been cautious with their cloud investments as it’s hard to get an old dog to do new tricks. But the promise of cloud far outweighs the investment. Shifting from fixed to variable costs is important. With cloud computing, you can actually tell what’s affecting your ROI. RFID and prescriptive analytics, for example, can help increase SKU visibility in the supply chain and in sales, minimize returns and associated costs, and improve customer convenience and engagement. The challenge here is to get someone in the organization to sign up for an infrastructure investment. This is not about cutting the budget but investing in the future. Those companies willing to make the investment will reap the rewards many times over.
Agreed. I have always been a big fan and supporter of cloud services as I have seen the value of a big investment in regards to managing scalability, etc. The issue I see is making the initial investment into something that will pay off in spades for years to come. We can do with what we have with a few rolls of masking tape and chicken wire until we see clearer skies, and that may work for a while but eventually the decision will have to addressed. I don’t know how companies will be able to grow and not have a proper infrastructure to support it.
Full disclosure: I make my living marketing cloud solutions to retailers, so I realize my opinion will be judged as having bias. But if the past decade has taught us anything, it’s that enterprise agility is existential to modern retail. And I think I can say without fear of being judged biased that cloud infrastructure is critical to achieving that agility. For most of the (many) retailers we work with, it’s cloud or bust. Economic uncertainty may be slowing the pace of investment for some, but no one is questioning the strategic value of moving to the cloud.
Forrest is correct, now is the time to think bigger and smarter. What should that include? Absolutely a focus on automating processes by leveraging cloud capabilities, but also leveraging integrations with tools like Zapier and Integromat. And equally as important as leveraging the technology to improve operational effectiveness and reducing cost, they should be leveraging these technologies to improve the user experience: easier, more entertaining, better search and checkout, etc.
If retailers understood the future savings caused by cloud investment, they’d be more compelled to make the move. Up front, it may seem like a big ticket cost, but the efficiencies cloud-based architecture creates is completely worth it. Adopting a long-term perspective surrounding technology decisions is crucial. Though times are tough right now for budgets, postponing cloud investments will cause challenges down the road.
The concept of almost dynamic expandability or reduction of resources, coupled with the concept of browser-based applications that are easier to install and to access from anywhere, made the so-called “cloud computing” a de rigueur technology from the start. It was only the group of potential users that feared the very new that held out. There was very little choice between the cloud and on-premise computing. The cloud wins.
As Mark Ryski notes, retailers are indeed cautious about every expense. They are, as a group, also historically technophobic when it comes to adopting solutions that aren’t thoroughly proved out. The bottom line is the cloud investments hold the potential for a significant upside, but only if retailers understand their full potential. And, in any case, in a tough economic climate tech spending is among the first “optional spends” to go.
Like any investment, proper due diligence must be performed and cloud is no different. I know of several customers who are still on-prem (not in the cloud) and getting tremendous ROI and doing amazing innovation. It’s worth repeating — they have zero cloud and they like it this way, and these are Fortune 500 companies. On the flip side, I know hundreds of other customers who’ve spent the time and money moving all applications to the cloud and they, too, are seeing benefits (innovation, scale up/down agility, analytic rigor/maturity). In the end, I think you’ll see hybrid situations, where companies are optimizing both on-prem and multi-cloud instances to support and drive their agendas.
As Ken mentions, retailers have already been cautious about cloud investments. The real view will be on the applications, not cloud. However the importance of cloud does not go away in turbulent times. The shift from Capex to Opex can not only save money but ensures that the business eliminates the costly management of infrastructure not germane to retail merchandising. Retailers are in business to sell merchandise not manage IT. That said, cloud products need to be scrutinized to make sure you’re getting your money’s worth. Just as any investment set, there are good purchases and bad ones – both just happen to be touting cloud as an IT medium. The real view should be around the products, not whether they’re cloud based.
Being cautious about new investments is reasonable. However the last few years have made it increasingly obvious that retailers MUST have real time access to their inventory data at all parts of their logistics chain, information about consumer choices and preferences, and have employees monitoring the data constantly. If the retailer will not use the data or will not monitor data constantly, the investment in cloud is irrelevant. Having the data available and using the information that constant monitoring provides would give the retailer a competitive advantage. Using the cloud in and of itself does not provide success.
Retailers are rightly paranoid about the security of their data and that caused cloud to be more slowly adopted in retail than in some other industries. But that has changed and cloud has proved itself to not only be secure but also financially beneficial. To say they should invest in the cloud is missing the point somewhat, they need to invest in technology that uses the cloud. Fortune favors the brave and I have long said that the retailers who invest in technology in tough times are the ones who succeed moving forward.
Retailers are tuning in to cloud tech and we’re seeing them look for efficiencies. Cautious? Not really. Diligence? Absolutely! The e-commerce space is a great example of this — retailers are looking for cloud tech to make their existing customer experiences better and more personalized. With the challenges of inflation, supply chains, and competition, retailers also want to find operational efficiencies, such as dynamic pricing and inventory forecasting, that improve the bottom line.
Cloud investment should only be what benefits the retailer in significant ways. There is no “right level” across all retailers as it depends on that unique retail situation. More critically, if the investment is to increase, it should only increase if it creates serious competitive advantage.
Cloud providers are blaming decreasing revenue on the market. At a macro level, though, remote computing vs in-house computing has always ebbed and flowed when we follow it back to the 1960s. Why? Technology trends. So I won’t be surprised when the cloud ebbs as is bound to happen.
Disclosure – I work for Microsoft.
There have been several analysts and media comments regarding reduced spending on cloud across all industries – not just retail. One key observation I have made regarding this is that there are current global concerns regarding an economic downturn. You have to remember that this is the first time there has been a downturn since companies adopted cloud technology.
I have advocated that customers are very careful in how and where they cut their spending – focusing on the overall business case. More importantly they need to establish a Cloud Financial Operations team that blends finance and sourcing skills alongside technical skills. The technical angle requires detailed governance regarding architecture for projects to pick the most cost-effective approach (evaluating use of virtual machines versus event driven approaches for example) but also ensuring general “housekeeping” practices are followed – for example shutting down development virtual machines at night.
Any time retailers can take advantage of technology and its market conditions, they should consider doing so. With market growth slowing in the cloud market, there may be opportunities for retailers to use more cloud computing for less money. Retailers should be moving toward the cloud for a more service model for their computing costs as it is more transaction related and scalable rather than the fixed costs that go with having the software in house.
With retail entering global economic headwinds, evaluating every project ROI a little closer, what to hold off on vs what to continue with, is just part of responsible operations. Cloud investments and related digital projects must also show ROI — does it help our customers, does it reduce operating costs, does it increase sales or profit margins?
By the end of last summer and early fall, retailers went into overdrive in expense controls and even revisiting and reprioritizing their investments in growth initiatives. Cloud investments impact future margins and fall in both categories: reducing costs and enabling future growth. With the higher and potentially sticky cost of capital, the new hurdle rates make ROI more challenging. Retailers must project future demand amid economic uncertainty and Fed policy determined to curb consumer spending. So, while logic and experience present an opportunity to invest in more cloud capabilities (as Dave Bruno called it, “cloud or bust”), retailers must manage their working capital and protect their balance sheet in 2023. Deep-pocketed cloud providers must structure the right “deals” to help those retailers overcome their legitimate concerns.
Cloud solutions provide the digital agility retailers and brands will need to face the challenges of the future. Ones we can’t necessarily predict. And the up and coming market disruptors are all cloud first. Those that stay on legacy monolithic systems are going to get left behind as competitors innovate and enhance their customer offerings faster. While cost cutting and efficiency is essential, staying on legacy tech is a short term tactic, not a strategy for long term growth.
The retail industry has undergone massive transformations in recent years, pushing CEOs to reconsider their traditional business models. Technological investments, in my opinion, cannot be overlooked. Additionally, industry leaders understand that the cloud is critical for innovation, establishing the foundation for important adjacent technologies. As a result, retailers must migrate to cloud-based infrastructures. Moreover, since most CEOs prefer to invest in their core business to leverage an asset-light business model rather than rebuilding an in-house tech framework, outsourcing is a viable option.
If they have not done so already, the current economic uncertainty should motivate retailers to invest in the cloud for a better chance to compete in today’s market. Winning a sale has never been more competitive. Consumers want a frictionless shopping experience. Cloud solutions are a cost-effective way to allow retailers to meet those expectations by integrating agile composable headless solutions to quickly adapt to ever-changing consumer habits and demands.