Unlocking the Trillion Dollar Value of Cloud

Business Cases for Cloud Migration

I’ve seen some companies struggle to assemble and vet a business case for the cloud. Intuitively, they know the investment is solid. But they get bogged down in projecting their infrastructure needs and have difficulty connecting their cloud activities to broader returns on investment across the enterprise. Fortunately, there’s a better way to gain clarity on the returns you can expect from the cloud. By comparing your company’s situation to baseline metrics established by experts like McKinsey, you can identify and attach a value to the full range of benefits and then drive your cloud activities toward realizing those benefits.

One challenge in formulating the business case is that you don’t know in advance exactly how you’ll use the cloud: its value is in the agility it provides and the access it gives you to emerging and future technologies. Another challenge is that the value you get from the cloud depends on how you use it, and that depends mostly on your strategy and your needs. The cloud is an enabler more than a strategy in itself, and it’s an enabler of not just strategy but also innovation, resilience, and that hard-to-precisely-value agility.

A further complication is that it’s not a fixed asset, but a pay-as-you-go capability, a service. Assembling a business case for the cloud seems a little like assembling a business case for telephones or electricity in your offices, or for email. You know they’re necessary—just a part of doing business—but you can’t always say just what you’re going to do with them in advance. Nevertheless, if you don’t use them and your competitors do, you’ll probably be blown out of the water. That telephone might be the one you use to close a critical round of bridge financing or an important customer account, or organize the evacuation of your employees from a plant about to be hit by a hurricane. You just don’t know that when you’re deciding on whether a telephone is a good investment. It’s a good investment regardless. Like the cloud, it’s simply how you do business today.

A Top-Down Approach to Estimating Value

With that in mind, McKinsey’s recent article “Cloud’s Trillion-Dollar Prize is Up for Grabs” is a fascinating read. While it might be difficult to build a bottom-up business case for a cloud migration in a single company, McKinsey has sized the total opportunity enabled by the cloud across all businesses—or at least that part of the opportunity that’s defined well enough to size—and then posed the question of who will reap that value. They estimate the value of business improvements offered by the cloud to be between $700 million and $1.2 billion in annual profits by 2030. Their estimate excludes what they call “pioneering” uses of the cloud—which we can consider the potentially huge upside, the “frosting on the cake” that’s available to companies that become especially good at using the cloud to disrupt their markets.

To arrive at their estimate, McKinsey divides the value available from the cloud into three dimensions: rejuvenate, innovate, and pioneer. Rejuvenation, according to their studies, is worth about $430 billion. It includes things like IT cost optimization, risk reduction, and digitization of core processes. By innovation, McKinsey means innovation-driven growth, accelerated product development, and hyperscalability. These attributes are worth about $770 billion. Pioneering—too open-ended to attach a number to—includes the competitive benefits of being early to adopt cloud technology.

A quick observation: if these are the important benefits, then many of the business cases I see companies building today focus on the wrong sources of value. If, for example, you base your business case on the total cost of ownership of computing and storage infrastructure, then you’re only looking at a portion of what McKinsey calls IT cost optimization, and maybe a piece of the value they attribute to hyperscalability. I say “a portion” because you may be ignoring the benefits in staff productivity, improved security, and availability (as measured by a reduction in high-priority incidents). According to our own Amazon Web Services studies, our customers see a 27.4% reduction in infrastructure costs per user (42.4% for applications that have more than 1,000 users) compared to companies that don’t use the cloud. But those customers also see a substantial increase in staff productivity as measured by the amount of infrastructure each employee can manage: IT admins manage 57.9% more virtual machines and 67.7% more storage.

Not All the Returns Are In the IT Department’s Financials

Those benefits are relatively easy to spot because they typically appear in the IT budget, but most of the other benefits will appear outside of it. For example, consider the 56.7% reduction AWS customers see, on average, in application downtime. This impact is largely on non-IT parts of the financial statements—it includes the business transactions and employee productivity that are not lost due to downtime.

In any case, these IT-centric benefits of the cloud are only a bit of the value McKinsey identifies: there’s also the digitization of core processes, risk reduction, improved time to market, growth through innovation, accelerated time to market, hyperscaling, and opportunities for pioneering. As I said before, these are harder to quantify in a bottom-up business case, but McKinsey’s estimates give us an idea of how much is typically missing from a business case that doesn’t include them.

Take digitization of core processes as an example. It’s another category of value whose financial impact is mainly felt outside of IT. The cloud is important in digitization because of the tools and the access to emerging technologies it offers. While you might already be considering the return on some of the immediate software delivery projects the cloud will enable, it’s harder to estimate the value of all the digitization activities the cloud will later enable. These include not just the grand software delivery projects but also low-code automation that’s often referred to as hyperautomation and robotic process automation (the term refers to software “bots” rather than human-like robots). The value you will get from digitization can’t be computed just based on the characteristics of the cloud—it depends on how you will choose to use the cloud.

How are you estimating the value of risk reduction in your business case for the cloud? McKinsey bases their $170 billion estimate on the value of increased resilience; arguably this understates the immense value of the cloud across many categories of risk. While traditional upfront investments in fixed infrastructure involve a risk that your business will change and the infrastructure will no longer be what you need, in the cloud, infrastructure can be changed in moments. When it comes to innovation, the cloud reduces risk by letting you try out new ideas, including those that require new or emerging technologies, quickly and at low cost before you commit to them. And the security and availability of the cloud infrastructure are managed by—in our humble opinion—some of the most expert folks in the world.

McKinsey cites improved time to market as a significant source of value. That’s consistent with our studies, which show that AWS customers reduce delivery time by 37.1%. In a world becoming increasingly digital, this is supported by a 37.6% reduction in the time it takes to deploy new code. Again, for an individual company trying to put a number on this, it’s a challenge to estimate, but by looking at the big picture, McKinsey gives us a way to ballpark the impact.

How are you valuing the opportunities for growth presented by innovation in the cloud? You might have some ideas today for what innovations you’d like to pursue over your short-term horizon, but the cloud will help you create a climate for innovation over the long term.

From McKinsey’s bird’s-eye point of view, it becomes clear what elements of the business case for the cloud we aren’t including but are there just the same. And, in fact, from McKinsey’s numbers, they dwarf the elements of the business case companies typically include (IT cost optimization is less than 10% of the total value). With our heads down in the bottom-up details, it’s easy to miss that bigger picture.

An Example of Where the Real Value Is

McKinsey provides an example that makes it quite clear where the cloud’s business value comes from. With the cloud, Moderna was able to produce a vaccine for COVID-19 and have it ready for phase I trials in just 42 days after the virus was sequenced. This was not a one-time stroke of luck: Moderna has systematically used the cloud to streamline their drug discovery pipeline and to analyze and coordinate data from many simultaneous experiments. The result was spectacularly valuable for the company and for humanity. More to the point: that value was not in IT cost optimization, but in innovation, time to market, and pioneering. A “complete” business case for the cloud when Moderna started their journey would have had to predict the emergence of COVID-19 and its financial consequences to be accurate. I’m guessing it didn’t. But the business value was there—latent—all along, until it was dramatically captured during the pandemic.

Of course, you need to make business decisions that are fully informed by an analysis of costs and benefits. But an analysis based only on a fraction of the cloud’s benefits might lead to poor decisions and opportunity costs, if not worse. How can you include those hard-to-quantify factors? One way is to look at McKinsey’s high-level analysis to estimate them, and assume that if you don’t capture that value, your competitors will.

Your company might not see as dramatic a benefit as Moderna did. But in a fast-changing world, unexpected opportunities and threats will arise. You don’t quite know what role your telephone, email, or electricity will play in specific business opportunities in the future. But it’s certain that you’ll use them to good effect. As you will the cloud.