Updated: Nov 28, 2022
When the Wall Street Journal says “even the cloud can’t float above recession” - you have to wonder if the cloud is recession-proof or not. To me, this raises questions to all IT decision makers that need answers. Here are a few:
How will IT decision makers handle a potential recession?
What do IT decision makers need to know about the cloud business?
How will the big three cloud providers, Google, AWS, and Microsoft, likely respond to a possible recession or economic downturn in IT spending overall?
Here are a few recent FACTS related to this topic to keep in mind:
Google saw growth slow to 35% from 44% in the first half of 2022. Microsoft also saw growth down to 40% from 46% as did AWS from 37% to 33%.
In 2008, what you could argue was our “last recession”, growth did slow down in a number of business and technology areas but we saw open source and cloud computing significantly grow.
Morgan Stanley surveyed IT decision makers on what they would likely cut heading into a recession and two areas were noticeably left off that list - Digital Transformation (which you can connect to the Cloud) and Security.
I've been around IT for decades and have faced economic downturns a few times. In the old days we responded to downturns with major cuts across many areas including IT. Back then, it wasn't uncommon to treat IT as an “on/off faucet” - basically sync IT to business cycles based on the industry and lower IT costs as business demand decreases and so on. If the business was heavily transaction based, this approach may have shown some benefit in margin. But this really never worked well for many reasons - even back then - but we still did it as it showed up in the bottom line in the short term.
Amazingly, many organizations still do versions of this today, but thankfully we are seeing this less and less. Most CTOs and CIOs of successful businesses are now valuable and contributing members of the executive team. The reason for this is most successful businesses realize IT spending is not just about processing transactions - it's directly associated and aligned with business value across the enterprise. So IT decision makers in this new world need to ensure they are ready and prepared as they enter a recession as business success will heavily depend on their choices.
So what do we have so far?
We are probably entering a difficult global recession and IT decision makers need to be ready.
IT spending should not be an “on/off faucet” - it’s necessary for strategic and economic business growth
Digital Transformation (and Security) is at a different level in how they are valued by most IT decision makers - businesses don't want to cut these even in a recession.
The big three (AWS, Microsoft, Google) have seen slight decreases in growth (but still very high growth compared to any other industry).
Many analysts across multiple firms, industries and forums believe that despite economic downturn headwinds, now is a great time to get even more serious about digital transformations and cloud investments. Besides the obvious which is to surpass the competition, the analysts are saying this because they currently still see the big 3 cloud providers with incredible sales with well over 30% growth last quarter and have a good suspicion that cloud computing is a recession-resistant business. So if you listen to Morgan Stanley, Gartner and many others - cloud providers will do even better in a recession because IT will keep spending. This is a great high level statement and probably right - but what about the details for my specific needs?
As we dive deeper into this, keep in mind this theory of the cloud being recession resistant has not been proven at all so the data isn't crystal clear. The last recession in 2008 was brief and cloud business was too new to measure. Cloud technology and the providers we have today have not been through an economic downturn that we may be facing in 2022 and 2023. How will the providers respond to the potential of decreasing IT spend across the board?
To dive a bit deeper, let's look at this from a few different perspectives - a Cloud investor, an IT decision maker, and a Cloud provider.
Investor of cloud technology
Investors have been part of a major pullback in tech stocks for the larger part of 2022. They are already "grumpy" and closely watching the market to see how cloud spending goes, and, so far, we have seen decreases in 2022 growth as noted above. As a tech industry investor myself, this is one of the few leading indicators that could cause a domino effect on cloud providers stock value which will negatively impact tech stocks across the board even more than what we have seen.
Investors also know 30% and 40% growth year over year is likely unsustainable when they compare past decades of tech stocks and disruptions. The investors I've spoken to are expecting more like 15-20% growth over the next couple of years. But now investors are looking at a potential recession that could cause even more cutbacks in IT spending which could result in what they believe a steeper decline. Even Gartner's positive outlook on cloud seems to believe that growth will settle around 15-24%. This really isn't surprising for tech companies and the big three cloud providers as they have been forecasting cost cuts themselves - as this is really still very good growth.
Investors will continue to invest - but they will be cautious and make sure they get the timing right - especially in this time of Big Tech stocks taking major hits.
IT Decision Makers
Due to all sorts of geopolitical factors, inflation, supply chain problems and more, that we won't detail in this article, IT decision makers are being challenged more today than any other time in recent history. They are already stretched with lack of digital and security skills, disconnected supply chains, inflation, and semiconductor problems - now we add a potential recession that will likely lead to new challenges and cost cuts. The responses from IT decision makers will depend on the culture of their companies and their own style. I like to think of these simply as 2 types:
The “not so diligent” IT decision makers will be presented with a financial number and implement across the board cuts to reach that number. I call this “managing by the spreadsheet”. This sounds crude but it's still used in many organizations today.
The diligent IT decision makers, with a "seat at the executive table", will relook at their digital transformation strategies and roadmaps to see where there is low hanging fruit for quick hits AND how to accelerate and prioritize initiatives where there are potential big gains. The idea here is to quickly drive and boost more business value that in essence will buy more time to ride out the recession while also moving ahead of competition who may be laying low and spending much less.
Of course, companies with this “diligent IT decision making capability” will come out of this perhaps better than others. But this is also based on customers buying their products and services and keeping employees excited.
The big three Cloud providers seem to believe that the recession will not have a big impact on cloud spending. Over the last several years, summers were typically slow and they tend to make it up by the end of the year when everyone is back from vacation signing contracts. But a worry of a potential recession this year into next year may change things a bit. Big Tech companies like Apple, Meta and Netflix are seeing the worst year in the stock market and they are starting to slow down their own spending showing up in job cuts and slower hiring. We also recently saw a major miss by Samsung who is blaming it on less consumer demand for chips in consumer products due to inflation and possible recession fears - will Samsung be next to lower costs?
Let's face it, "business is business". As we see from the Big Tech companies already, if business slows down further, we likely will see the big three Cloud providers react to this by easing their own spending potentially on their data centers - this will have a ripple effect on chip makers, hardware and software that runs the cloud for them. And this may come at a time where a major part of the growth (a jump of 11.2% according to Gartner) in 2022 into 2023 is in data-center equipment. So, Cloud providers may react and cut their own costs even if there is a demand from the companies with the diligent IT decision makers.
Finally, what do the analysts think?
Some analysts believe there will be a slow down in cloud provider growth to something more reasonable like 15-20% - even during a recession because cloud is simply needed as diligent IT decision makers will continue to spend in this area.
But there are also some analysts and executives that believe the macroeconomic environment is going to cause Cloud providers to bounce around on easing their own costs which will impact the growth of the cloud.
Overall, analysts tend to believe we will see some slow down in IT spending on the cloud, but it won't be huge even if recession occurs.
As a CTO and CIO 4x over, I had my share of implementing IT spending cuts and the decisions that go into the actions. I always look at four major areas - business, industry, people and technology - what I can do quickly that has the most bang for the buck so the company can continue to grow even during a recession. Sort of how diligent IT decision makers operate.
So from my perspective …
Many companies have already moved their workloads to the cloud. This is really not an “on/off switch” so you need to have it run as your business needs to operate in it. Sure some companies may lower their usage, but this really will be a speed bump and not amount to much lost revenue for the cloud provider. No matter what, businesses that moved their workloads to the cloud need most of the cloud to operate. This is why it's appealing to an investor - it's a recurring revenue model for the cloud provider and really can't be turned off completely. So in a way, this really is a recession proof business! Perhaps we will see lower growth rates, but this will continue to be a solid business - especially for the big three cloud providers.
But what about startup failures and businesses going out of business during a tough recession? I believe this will have a cloud demand impact on the cloud provider business growth and sustained revenue/margin, but it will be small and manageable. This again is because of the recurring revenue model used by all of the big 3 cloud providers - cloud users not only can’t simply turn it off, but they may see rates increase for any potential lost revenue - the cloud provider will not be the ones who lose money.
So the cloud business from a provider perspective is solid. They may raise their prices, but their business is somewhat recession-proof. The IT decision maker needs to do their best to protect themselves from getting locked into one provider so they have some negotiation power.
The businesses that depend on technology (for example, SaaS) will continue to use the cloud to gain competitive advantages and cost savings. This will not change much in recession either as noted above. This is why the diligent IT decision maker will continue to spend on prioritized quick hits in the cloud as well as keep the lights on - this will leave your competition in the dust especially during a recession when many are cutting their spend.
FYI, as an investor I will continue to invest in cloud technology as it's no longer a “wanna have”, it's a “must have '' and a way of life for many companies now. It's no longer a mysterious disruption, it's understood and integral to business success. Of course timing is everything as in any investment.