Companies have over $300 billion in unused cloud commitments
Cloud works so well that companies want to invest more in it. Two-thirds of companies have increased cloud spending this year, and 80% say they intend to increase spending in the year ahead.
This trend defies early 2023 expectations, when tech companies initiated layoffs, and the specters of recession and corporate spending cutbacks loomed.4 Yet even then, cloud spending did not slow down — and is still expected to increase.
Although this might be because the recession — and associated cutbacks — have eased, our research indicates that companies use cloud to accomplish many goals and are so satisfied with it that they are not cutting cloud spending.
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Figure 5. More companies will increase cloud spending
N = 2,505. We asked companies about the change in their cloud spending last year and their spending expectations for next year. The vast majority expect to spend more more next year. About 1% of respondents were unsure of how cloud spending changed in the last year.
Source: Infosys Knowledge Institute
Companies continue to add cloud providers. In our 2021 cloud research, most (51%) companies reported using two or three providers for cloud infrastructure or services.5 This year, the biggest group (65%) of companies use three or four cloud providers or services.
Companies who rely on one cloud provider represent an even larger shift. The proportion of companies with a single cloud provider decreased from 21% in 2021 to 7% in 2023.
“Massive, monolithic migration is off the table,” says Umashankar Lakshmipathy, executive vice-president and head of Cloud, Infrastructure, and Security Services, Europe, Middle East, Africa for Infosys. “Instead of a singular cloud destination, companies want the right cloud for the right situation. Cloud in 2023 must be quick, comprehensive, customizable, and priced fairly.”
Even if a company has an expressed preference or strategic reason to go all-in with a particular cloud, a department or business unit will inevitably find a reason to stay with an incumbent or opt for a service or solution from another operation, says Leigh-Currill. “The genie has escaped, and most companies continue to add more cloud providers,” he says.
Cloud in 2023 must be quick, comprehensive, customizable, and priced fairly.
Figure 6. Three to four cloud vendors is the norm, using one is rarely done
N = 2,561 (2021) and N = 2,523 (2023). The proportion of companies with three or four cloud service providers has increased more than 75% since 2021 while the proportion with only one cloud service provider has shrunk by 66%.
As cloud investment races ahead, utilization of that contracted capacity has not kept pace. Companies have utilized less than half (47%) of the cloud they already committed to.
One of the most well-known examples of unused commitment is Sabre, a US-based travel company. In January 2020, Sabre signed a 10-year cloud services deal reportedly worth $2 billion with Google Cloud, but made headlines 18 months later for slow cloud migration.6 Sabre managed to consume only $10 million of its commitment in those 18 months. Since then, Sabre has described strong acceleration of its cloud program, noting that it had shifted 69% of its compute to public cloud by spring 2023.7
While Sabre accelerated its migration, our research reveals that many companies are not using the cloud they’ve committed to (see Figure 7).
Major cloud providers also reflect this gap between cloud commitment and migration in their financial reporting.
In 2022, Google Cloud earned $26.3 billion revenue for its parent company Alphabet but reported a $64.3 billion revenue backlog, primarily related to Google Cloud and unused capacity from customers. Amazon’s AWS flagged up $110.4 billion of unspent commitments at the end of 2022, noting that customer usage drives revenue. Microsoft in July 2023 reported $53.8 billion in unearned revenue, mainly from contracted cloud services not yet in use. These reported numbers represent $228.5 billion in unused cloud commitments.
When we account for other cloud providers in our survey, this number expands to $321.4 billion in unused cloud commitments. While this does not indicate a near-term problem, companies that fail to meet their cloud contracts stand to face higher costs as cloud providers renegotiate contracts.8
Figure 7. Companies have only used 47% of their cloud commitments
N = 2,509. We asked: “What percentage of the cloud services your company has contracted for have been consumed?” These types of contract commitments became very popular after 2018, and typical terms were three to five years. Our research indicates most of these contracts had to be extended because of an inability to consume contracted cloud services in the timeframe allotted. Almost 60% of our respondents had only consumed between 30% and 50% of their current commitment.
When money pledged has not yet been spent, it creates problems for both cloud clients and their providers, according to Shyam Vijayan, an associate vice-president with Infosys Cloud Services.
A company that fails to utilize cloud commitments faces only bad outcomes: Lose money, spend more to accelerate migration, or renegotiate from a point of weakness. In renegotiations, companies blend prices and then extend the initial terms, often creating a larger commitment in the process.
If they do not spend by the end of their cloud contract, they must pay the balance or renegotiate contract terms. This happens so frequently that it has earned a nickname: blend and extend. Blend refers to pricing revisions, accounted for on a blended basis until the new end of the term. Companies blend prices and then extend the initial terms.
Typically, clients get the best terms on their initial commit contracts, which include incentives like volume discounts and billing credits. But in renewal periods, cloud providers have the stronger negotiating position. This stronger position comes from the simple truth that it is a Herculean and costly task for a company to move their systems from their current cloud providers to new providers.
These multiyear cloud commitments surged in popularity after 2018 and typically last three to five years. Our research indicates most of these contracts were extended because of an inability to consume contracted cloud services in the time allotted. About 70% of our respondents had consumed only 50% or less of their cloud commitments (see Figure 8).
Cloud providers face a problem when numerous clients fall behind on their committed or planned utilization, says Mukesh Nakra, associate vice-president of cloud services at Infosys.
"Building cloud capacity in data centers is a six- to nine-month timeline, and requires capital investments. The provider's capital outlay is predicated on the fact that clients will spend that money. But if the clients don’t follow through, the provider isn’t going to get the return on that investment,” he adds.
Figure 8. Less than one-third of companies use most of their cloud commitments
N = 2,509. We asked: “What percentage of the cloud services your company has contracted for have been consumed?” These types of contract commitments became very popular after 2018 and typical terms were three to five years. Most of these contracts had to be extended because of an inability to consume contracted cloud services in the timeframe allotted. About 70% of our respondents had consumed only 50% of their current commitment or less.
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The genie has escaped, and most companies continue to add more cloud providers.
