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The latest wave of economic headlines is enough to make any CFO run for cover. Elevated inflation, ongoing supply chain headaches, potential employee layoffs, rising energy prices and the biggest interest rate hike since 1994 all point toward a very bumpy future for growing companies.
The textbook reaction involves activating all the standard belt-tightening measures: freeze hiring, slash budgets and spending, and wait for a turnaround. But solely relying on reactive cost-cutting will only slow your growth, and you can’t afford that with today’s fast-moving technology landscape and ruthlessly competitive market. While you are blindly cutting, your competition is investing for growth — and growth is the name of the game.
As a strategic CFO, you must cut costs for short-term survival while simultaneously investing for long-term growth and category dominance. The cloud offers a unique opportunity for both, given its inherent agility, pay-as-you-go payment possibilities and tremendous scale. However, it’s a bit of a double-edged sword as it can also create margin pressure that, by some estimates, weighs down more than a trillion dollars in market capitalization.
It’s why Andreessen Horowitz’s Sarah Wang and Martin Casado have written, “scaling companies can justify nearly any level of work that will help keep cloud costs low.” Now is a good opportunity to take a close look at your cloud infrastructure bill. You’re likely paying more than you need to, and there are plenty of levers you can pull to lower those costs.
First, realize some short-term benefits by simply practicing good cloud hygiene — turning off unused instances, decreasing overprovisioning and switching to reserve commitments instead of on-demand pricing. These are all appropriate and helpful steps that any company should employ. But taken alone, they won’t enable you to exit this looming recession as a category leader. You need to think about creating a competitive advantage and investing to cost-effectively grow today using the cloud.
Strategic Approaches to Cloud Cost Optimization
With the short-term solutions in place to stop the bleeding, it’s time to get more strategic: Identify which parts of the business you most want to protect and begin by improving efficiency and productivity there. Once again, the cloud plays a crucial role: optimizing cloud performance has proven to deliver massive payoffs for both the top and bottom lines.
Don’t worry if this feels outside of your domain. Modern CFOs are increasingly cloud leaders who are well equipped to drive organizational change by weighing the needs of growth and innovation with the balance sheet implications of such investment. For example, Gartner estimates, “By 2024, widespread adoption of cloud will raise the CFO’s influence over the chief data officer’s (CDO) decisions due to explicit linkage of workloads to cost, bringing disruption to the CDO role.”
Your business is likely adopting the cloud in a decentralized manner, causing a greater need for centralized governance — often prompting the CFO to collaborate with the CIO and other technology stakeholders. By combining your expertise, you’ll create a flywheel effect where technology improvements lead to positive financial outcomes: One key is embracing technology that improves application performance, creating a better customer experience while requiring fewer compute resources and thus lowering the cloud bill.
Additional steps include adopting a cloud monitoring tool that keeps a constant watch on your existing cloud architecture, infrastructure and services for waste or inefficient spending; these solutions are a helpful item in your toolbelt, but they are no panacea. Another key action at this stage involves establishing a cross-functional cloud center of excellence that sets policy and drives cloud excellence across the organization. This strategic initiative is critical for long-term cloud success.
Gartner® has stated, “Organizations with little or no cloud cost optimization plans rush into cloud technology investments. They end up overspending on cloud services by up to 70% without deriving the expected value from it.” (Gartner, Realize Cost Savings After Migrating to the Cloud, Finance Research Team, April 28, 2021.)
With cloud operating expenses slashed and strategic plans in place, CFOs now have more operating budget and cash to invest in long-term growth.
Create a Flywheel of Profitable Growth
Now comes the exciting part. While your competitors are stuck in the cost-cutting mindset, you’ve set yourself up for the single most important metric investors look at when assessing the value of most companies: growth.
Of course, you know the valuation of a company is a multiple of revenue: If you’re growing at a 30% clip, your valuation will likely be substantially higher than your competition that is growing at 10-15%. Even when the markets drop as they’ve done recently, the fastest growers are still getting the best valuations. And the companies that can achieve rapid growth while simultaneously generating profits and EBITDA are now considered best-in-breed.
Why is valuation so important? It’s not just the showy high valuation when you exit that matters; it’s also a reflection of the company’s credibility. If you’ve got a great brand that’s growing, you can hire better people faster and invest more in products, partnerships and marketing — all things that drive even more growth.
The picture is even rosier if a fast-growing company can also demonstrate profitability along with that growth. Recent market moves have shown that the “grow at all costs” mentality is dead, and high-flying hypergrowth tech valuations are getting hammered. Profitable growth is the key to success in this economic climate. If you’re growing quickly and can show a model that makes money today or in the future, you can weather any short-term volatility.
Having led companies through previous economic downturns over my 30-year career, I’m encouraged that well-run companies come back stronger each time. And they do so because they don’t just reactively cut costs but rather find the careful balance between cost-cutting and containment and investment for profitable growth so they can exit the downturn with momentum.
Today, cost-optimized growth is the key to that market-leading valuation and the outsized rewards that come with category dominance. Many hypergrowth companies have turned to the cloud to fuel their rapid rise, but those costs can begin to spiral out of control without a plan in place. There’s a balance between driving top-line growth, achieving critical strategic business initiatives in the cloud, and keeping costs under control.
As bad economic news continues to swirl around you, the clear-headed CFOs should not merely focus on cutting costs but rather pursue the virtuous cycle of profitable growth. Growth is king. Finding your way to enhanced profitability allows you to invest in even more growth, and the flywheel continues.
Written by Scott Sellers, President, CEO & Co-Founder, Azul Systems.
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