Picture this, each day your PortCo tech teams are provisioning more cloud services. Each month your cloud infrastructure bill is growing. There are rumblings of setting up a new data centre in Austin and South Africa. Something doesn’t feel right.
You suspect that your PortCos might be spending too much money in the Cloud. You might be wondering how much is too much?
This might be a good time to introduce you a simple but effective cloud cost model. This model is based on the idea that enterprise firms typically over provision infrastructure and services.
In the cloud between 50-70%.
With a physical data centre this is more like 70-90%!
There are a number of reasons why this is the case, we can explore the why in another post.
For Private Equity firms there can be a significant amount of ebitda left on the table at exit.
Let’s say your PortCo is a SaaS service provider. They have an annual revenue of $100m. We’ll call them PortCo A.
It’s not uncommon for a firm like PortCo A to spend at least 20% of their revenue on Technology. This cost includes licensing, people, services and infrastructure.
For PortCo A this would be $20m p.a.
If we assume that 30% is allocated to technology infrastructure and services this would be $6m p.a for PortCo A.
Using the cloud over provisioning assumptions (50-70%). The optimisation opportunity for PortCo A would between a reduction of $3m-$4.2m p.a. If PortCo A had a physical data centre this would be a reduction of $4.2m- $5.4m p.a
You can easily see what this might look like at exit with a 5x, 10x or 15x multiplier
Not to mention that if PortCo A’s annual revenue was $1bn…. you can do the math.
How will you use this information with your PortCo tech teams? What do you think their objections might be? How long do you think they would need to take this cost out of their business?
We’ve turned this into a simple excel model you can use yourself, drop me an email and I’ll send it your way!
Thomas
thomas@themarkethill.com
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