Why indiscriminate cloud investments might lead to losses

Outsourcing workloads and data processing functionalities is often seen in the market as an efficient way to reduce costs and generate operational efficiencies. 

As a result, spending on cloud services has gained traction in recent years and seen an unprecedented rise with the operational and working restrictions generated by the pandemic.

But cloud, some experts warn, is not a panacea – and some companies could now be regretting making such a rushed move, claiming that there have been increases in their costs.

“The journey [to cloud in Latin America] has accelerated greatly. Companies said 'let's go to cloud'. Cloud-first, this is the way. Cloud, cloud, cloud.' Now that things are starting to stabilize, what happened? Some customers have seen their costs go up a lot,” Rodrigo Martineli, VP and general manager of Rackspace Technology for Latin America, told BNamericas.

Brazil-based Sky.One, which operates in 11 Latin American countries and supports companies in their migration/integration to cloud, has a similar view. 

According to the company, the “second stage” of the cloud boom comes now, with a more considered and less indiscriminate approach towards the format, with greater focus on extracting value.

“Now we're already seeing a certain slowdown after the initial boom of the pandemic, with companies looking to be more agile and have more flexibility with what they have,” Sky.One’s chief revenue officer (CRO), Roberto Arruda, told BNamericas.

Martineli argues that while a company's business continues to grow, any initial increase in cloud costs is not seen as a problem.

But it may happen that the tides turn for various reasons, such as macroeconomic impacts, and business slows.

“There are customers who, with this cloud-first business, have moved things to the cloud that they shouldn't have," he said.

"The business started to grow at first. But then they started to report that the costs tripled and that they were impacting their margins,” Martineli added.

THOROUGH ANALYSIS

Being cautious towards the cloud, however, does not mean distrusting the vaunted benefits of the format, but rather analyzing when and where adoption makes sense for a business – and when and where it does not.

“The 'pay for what you use' model used by most public cloud providers adds to the difficulty: If usage is monitored and managed appropriately, this model can result in significant savings, but it’s also easy for costs to spiral out of control,” VMware says about cloud cost management.

In recent years, this understanding has prompted the firms engaged in consulting, managed services and analysis of companies' applications to map and identify how migration to the cloud can bring more benefits, efficiencies and cost reductions.

That considers whether customers should use a hybrid format (mixing cloud-hosted systems and systems maintained on-premise) or multi-cloud format (merging different cloud systems, depending on the type of application the company wants to migrate and how the API integration will work).

Founded in 2013, Sky.One is one of the companies helping support migrations. It grew 80% last year alone in revenue terms, after nearly doubling its income in 2020. In mid-2021, the company received a new, 45mn-real (US$8.3mn) investment, in a Series B round led by the Inovabra Ventures fund. 

The company specializes in the integration of companies' ERP systems with the cloud. According to Arruda, every time a client invests in ERP, they invests three times more in all other software surrounding the ERP.

“We believe that it’s possible to have both worlds. We will see these digital-native companies, which are already born as SaaS and operating increasingly in handling data, and non-digital-native companies, but who want to understand how and when to go to the cloud,” said Arruda at Sky.One.

Sky.One reports that it has around 1,400 customers. Brazil and Mexico are the its main markets in the region. The latter represents 50% of the company's sales in Latin America.

“Companies in the region have always invested little in cloud and cybersecurity," said the executive. "But the role of the CIO became more important with the pandemic. And IT budgets increased."

According to IDC, spending on cloud computing in Latin America, divided between IaaS, PaaS and SaaS, is set to remain strong this year. Cloud is due to be one of the key drivers of overall IT spending.

“For 2022, we expect a continuous increase in IT spending [by companies], with average growth of 9.4% as technologies allow, modify and accelerate the dynamics to continue with the business,” Ricardo Villate, IDC’s VP for Latin America, said in a recent study.

Arruda is optimistic, particularly regarding the demand for data, IoT and cloud expected with the development of the ecosystem around 5G technology. He said January 2022 has been more intense in terms of contacts and projects with companies than either January 2021 or January 2020. 

Nonetheless, the executive said he had certain concerns about the macro environment and the business climate arising from national elections expected this year, particularly in Colombia and Brazil.