Worries about recession are rising; will it affect the cloud industry?

10.08.2022 766 0

It’s safe to say that the new decade started in a very unpleasant way for the world. Crisis after crisis tormenting the world leading to a logical worry for a global economic slowdown and possibly even a recession. That would be bad for all industries, or would it?

So far, the IT industry has remained relatively unscathed. It was actually among the big winners of the pandemic and a lot of IT companies netted historic profits. The only real major issue for the industry was the chip shortage, otherwise, it would have performed even better. Now though some more serious challenges are possibly coming – a recession in some of the world’s biggest markets which could lead to a global downturn.

Naturally, this would mean organizations around the world would start limiting their spending for everything. So, how would all of that reflect on the IT industry and more specifically the cloud segment? Right now, the cloud is enjoying healthy interest and nets increasing revenues, but a recession could change this.

Investments are still big

Right now, the world is still going through a lot of issues. Despite that, the latest Synergy Research Group data shows there’s a lot of activity among private investors, especially in the world of data centers.

Their data covers the first half of 2022. It shows that during the first six months of the year there were 87 merger-and-acquisition deals that closed for a total of $24 billion. There are also pending agreements for $18 billion that should close before the end of the year. At this rate 2022’s data center investments will at least match 2021’s record activity, Synergy says, quoted by Channel Futures. Last year the company tracked 209 deals for a total value of more than $48 billion. And 2020 was also a record year with $34 billion in deals. So, 2022 has all of the potential to be a third record year in a row.

A lot of the funds are coming from private funds. Cloud computing is still regarded as THE technology to rely to for digital transformation and as a result, companies continue to increase their cloud usage, hence the rise in multi-cloud projects. Of course, all of this drives the demand for more data centers, too. And this attracts more private investors. It’s a closed circle which is bringing in a lot more money to the segment. For example, between 2015 and 2018, private equity provided 42% of the funds in the data center segment. From 2019 to 2021 that jumped to 65% – and just for the first half of 2022, it’s already above 90%.

“There is an ever-increasing demand for data center capacity, driven by rapidly growing cloud markets, aggressive expansion of hyperscale operator networks and continued growth of data-rich digital services,” said John Dinsdale, a chief analyst at Synergy Research Group. He notes that the trouble is that building and operating large fleets of data centers is highly capital intensive. So even big data center operators are seeking external funding to meet growth targets.

Synergy also notes that big names like Oracle, Google, AWS, etc. are all rapidly expanding their data center infrastructure, as well. This is also well-received by investors as it signals to them there’s still a lot of untapped potential in the sector and it means there’s money to be invested and made.

Will the cloud be affected severely

That’s great, but not everyone is a private investor, and there’s more to the cloud than building data centers. So, would a possible recession hurt the cloud industry as a whole? According to Morgan Stanley, some segments will remain top priorities even if a recession does actually happen.

The Morgan Stanley CIO survey for Q2 of 2022 shows that IT budget growth is declining. The expectation for the 2022 IT budget growth among CIOs came in at 4% where it was previously at 4.2% for Q1 of 2022, Business-Standard notes. The IT services budget growth is down to 3.5%.

Expectations are that the recession effects will be mostly limited at least initially. If a recession happens and it’s longer, then it will impact the industry as well. As that happens, organizations will naturally start to tighten IT budgets. That reduction will likely not be as big as in previous recessions. The reason is that years ago organizations viewed IT spending as a nuisance and were quick to cut it. Now a lot of companies do know the value of IT for their businesses and would be working towards keeping these budgets as high as they can.

Of course, if the recession is too severe, those budgets will also suffer. Even if that happens, CIOs says that cloud computing, security and digital transformation will remain their top priorities. The majority of IT budgets will continue to head their way.

But not everyone thinks so. Jim Chanos, a popular investor and short seller, said his big short right now is the data center industry. “The story is that although the cloud is growing, the cloud is their enemy, not their business. Value is accruing to the cloud companies, not the bricks-and-mortar legacy data centers”, he says in an interview with the Financial Times.

DataCenterFrontier notes that there were other similar predictions. Back in 2009 Jim Cramer also said that investors should get out of data center stocks and that the industry will fall because of a new technology. Obviously, that didn’t happen. Quite the opposite, in fact. Of course, what happened in the past is not a guarantee for the same thing repeating in the future.

Although Chanos’ arguments are even more left field. He expects the data center industry to fall because cloud is what gets the most attention. Except the cloud relies on data centers to even exist, so it doesn’t really make much sense. And as we saw from the previous data, all types of data center operators are looking for external investments. Of course, along with a recession, there are different conditions, and investments can be lowered. Cost cutting seems inevitable and if you must do it, then it’s better do it right.

How to cut costs wisely

Cutting costs seems like an easy task. Simply reduce spending, right? If you just cut budgets outright, that could worsen your situation. It’s important to carefully choose the areas for reducing costs and the ways to do so.

There are plenty of strategies that you can choose. Often though, companies simply go for the easiest and most obvious routes. For example, slowing down hiring or even reducing staff, limiting spending for services, etc. This is a short-term solution that only brings strain on the remaining staff, and it also means even more delayed costs when the recession is over.

IT managers have the tough challenge to navigate the cost cutting in a proper way. The key, according to TheNewStack, is very close cooperation between the IT manager and the company’s CEO. “From there, IT managers will have the knowledge to understand how they can operate accordingly. Without a clarified company overview strategy, IT managers are more inclined to make ad hoc decisions, whereas they should be spending the time aligning IT goals with the overall business goals,” said Stanley Huang, CTO and co-founder at Moxo, a client management platform.

A common mistake in organizations is that different departments don’t know what happens across the rest of the company. This leads their managers to make wrong decisions because they don’t know the full picture. Close working relationships between different managers are important for the company health, especially during a crisis. The management can then reassess what the company has and needs.

“This enables conversations to be guided by concrete data, which helps avoid knee-jerk reactions when the request to cut costs comes. It is important to have a factual picture of what is driving business performance before actions are taken,” says Helena Nimmo, CIO of Endava.

“Re-evaluating unused and underutilized assets can help IT significantly reduce capital expenditures,” said Swaminathan Kasiviswanathan, senior director, DevOps at Kissflow. He adds that companies often can downscale assets that are running at less than 10-20% utilization. You can do that in phases and still enjoy cost savings without major work disruptions.

Sometimes substantial savings can be done via optimizing resources. For example, if you have allocated 100MB for an asset, whereas in reality, you actually use less than 50MB. Of course, this means being proactive in monitoring and being able to scale up if/when needed.

“Review the returns of recently introduced services,” said Mark Hopwood, principal consultant, security improvement and remediation practice at consulting firm NCC Group. “Are they delivering the benefits you expected, or should they be cancelled or scaled back to save money while maintaining security?”

Trust the cloud

Using the cloud is not cheap, especially if not utilized effectively. This is why proper cloud cost optimizing is key. It may seem counterintuitive to make big investments but moving to the cloud may be beneficial during a recession. You can take advantage of the cloud’s natural ability to scale up or down as needed. And you can also save costs thanks to the cloud as there will be much fewer expenses for hardware and maintenance.

This way you can scale up when needed during the recession, for example, if you operate an online store and offer a limited sale which will temporarily drive more traffic to you. And then easily scale back down for the regular operations. The result is always having the needed resources on hand but paying for them only when you actually use them.

You also can use the cloud for better data analytics. For one, you can more easily pinpoint resources that aren’t utilized properly or are not needed right now. Also, you can find out how your IT spending is bringing in business value and saving money on the features and services that aren’t effective. A recession is a very important time to know your customers well and be able to cater to their needs as best as you can. Thanks to the cloud and data analytics you have a better chance of achieving this goal and turning the recession into a benefit for you.

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