Market Hill | a northdoor group company |

Working on big, expensive, complicated technology problems.

cloud

Did you know that only 3% of all technology workloads are in the cloud?

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That sounds like a tiny number, considering how every company, vendor and tech journalist talks about the cloud. Would you expect it to be higher?

I’ve quizzed a few people on this over the years; most guess it is between 25-30%. If you break down the 3%, AWS has the clear lead:

47% AWS, 15% Microsoft, 7% Alibaba, 4% Google, 2% IBM

This is a strong indicator there is considerable unrealised value for your Private Equity firm and for your portcos by getting more workloads into the cloud.

While on the other end of the value spectrum, corporate IT focus’ solely on the overall cost of technology platforms or systems, they typically see the cloud as an extension of this world.

Corporate IT’s focus is leaving unrealised value on the table.

The key to leveraging the cloud for Private Equity in 2022 is understanding the cost per user.

Cost per user is a financial representation of the cost to service each customer.

The sum of logical maps of your system details the relationship between business > service > application > infrastructure metrics.

But, translating business demand to technology demand isn’t common practice and the cloud won’t magically make your application or service more efficient.

If you don’t measure the relationship between what a user does and how much technology you use, you can’t predict it.

If you don’t predict it, how do you know what targets to set or what good looks like?

How do I know if my portfolio companies understand and leverage their cost per user?

The simplest way is to ask them.

  • Can they draw the logical map of their system for you?
  • Can they back that up with data?
  • Can their report how this changes over time?

If they can’t, then they have some homework to do.

Thomas

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The hidden challenges to adopting SaaS usage based pricing models.

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SaaS Usage-based pricing models are simple. As your customer grows so does how much they spend with you. Their success is your success. This article from Tech Crunch does a good job of detailing the benefits of SaaS usage-based pricing models.

https://techcrunch.com/2021/02/18/why-do-saas-companies-with-usage-based-pricing-grow-faster/

But, we assume that behind every good SaaS company is a scalable and flexible tech platform? This isn’t often the case. There are often hidden challenges to adopting SaaS usage-based pricing models.

What are these challenges, and how do I know if my portfolio companies have a handle on this?

The problem is rooted in how business relates technical demand to business demand.

There is a strong focus in corporate IT with the overall cost of technology platforms or systems. We need to invest $x to do y. Or you need to take $xM of cost out of your platform. Translating business demand to technology demand isn’t common practice.

This problem is often compounded in the cloud.

Most companies assume the cloud will do most of the heavy lifting when it comes to scalability. The cloud won’t make your application fundamentally more efficient.

Unless you are architected in a full cloud native way and have a handle on performance, efficiency and stability then the cloud can often compound the problem.

If you don’t measure the relationship between what a user does and how much technology you use then you can’t predict it.

If you don’t predict it then how you know what targets to set or what good looks like? Cost can then quickly get out of control. What you’ll often see with large SaaS platforms is linear or exponential tech cost growth. This growth is not always related to demand.

The key to leveraging a SaaS pricing model is understanding the cost per user

Cost per user is a financial representation of the cost to service each customer. It’s the sum of logical maps of your system that detail the relationship between business > service > application > infrastructure metrics. These maps let you see at a high level how everything fits together, so you can apportion a cost to each transaction and then aggregate this to a user type.

How do I know if my portfolio companies understand the cost per user?

The simplest way is to ask them. Can they draw the logical map of their system for you? Can they back that up with data?

If they can’t, then they have some work to do.

Thomas

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TikTok is the most exciting big tech buyout in recent years.

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Could you have ever imagined an executive order from the president of the United States, saying that in 45 days all firms have to stop working with a Chinese run app?

After speculation that Microsoft would get the deal, it seems like Oracle have found the formula that works for both the US and China.

Oracle was ‘OK’ with not becoming TikTok’s parent company and was content becoming its cloud services provider, keeping US data in the US.

You can’t help but feel if it goes ahead, Oracle has got a great deal.

TikTok spends almost as much with Google Cloud as Netflix do with AWS.

Netflix’s recent earnings report showed they have committed $900m “primarily related to cloud computing costs,” over the next three years.

In 2019, TikTok signed a three-year agreement with Google Cloud (GCP) to buy more than $800 million in cloud services.

A deal anything close to the Google deal could be huge for Oracle, it represents a 5% increase in their cloud services business which had only grown 1% in 2020.

However you cut it that’s a lot of cloud services.

$ Cloud Spend p.aMonthly Users (m)$ per user
Netflix$300m200m$1.5
TikTok$266m500m$0.5
Simple $ per user model

If you asked these companies how much they spend per user on the cloud, they wouldn’t know. A crude model is taking subscribers and dividing by cloud spend.

There are much better ways to do this but even some of the biggest companies don’t even use this basic model.

So, do those numbers sound alright or like a lot of money?

On the surface they both sound like very reasonable numbers.

The reality is they are both excessively high. Nearly all organisations are spending between 50-70% more with their cloud providers than they need to. For Netflix, this could see their cloud spend per user down to 45c and TikTok to 15c.

Why should I care about the cost per user?

You could look at this two ways: 1) Spending more liberally means potentially faster products, more innovation 2) Less efficient code, less understanding of how your tech works, less innovation.

Either way, a cost per user is a good place to start. The more you understand your systems at a deep level, the fewer incidents and outages and the less they cost.

TikTok might be more worried about operating in the US or not.

What’s Netflix’s excuse?

Performance testing is a waste of time.

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Performance testing on its own isn’t useful, it’s a waste of time and money. Testing can be a great method to understanding at a deep level where you can make radical, innovative and disruptive business change. But few use it this way.

Almost every dev/product team out there can at some level of run automated performance testing, it might be very basic but it’s a start. They’ll typically:

  1. Setup a JMeter or python script
  2. Run x iterations of a user journey
  3. See if it was as quick as the last time
  4. Check-in code

If you are lucky you might get a meaningless report with response times and throughput, maybe even on a graph. But what does good actually look like?

Good companies know what response times ‘should’ be and the relationship to the throughput (users/traffic/something) on the system.

Great companies measure of application efficiency. Monitor and fix stability issues in dev. Consistently instrument their design, using data to influence the future. Create small, flexible, mutable services and applications that scale up, down and across. Forecast and provision the right type, level and placement of capacity, moving with the sun. Build scalable resilience into applications before it’s needed. And of course, know how fast their application should be and how many things it should do at any time.

I’ve talked previously about creating logical maps of systems, end to end. Using business>service>infrastructure data and map this to customer behaviours. Then using this to influence the new products that you bring to market.

Test for insight.

Testing for the sake of testing is wasting everyone’s time. Test for insight. The insight you gain will let you create great products, market to the right audience and stay ahead of the future.

Those who really understand their systems and how they work will have a superior understanding of their customer’s needs and wants. They will be able to make whatever changes they want without worrying about what the underlying tech stack is doing. How liberating would that be?

Testing is often used as a tick box exercise and in most cases, the results you get aren’t even good enough for that. Forget about testing, start thinking about how and where can I get the insight that will let me do something nobody has done before.

Thats where the real value is.

Thomas

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Start as you mean to go on.

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A common symptom of working with private equity is that the people you start the journey with are not the same as you end with. Most CTO’s will get their key leadership team post-acquisition and tell them:

  1. PE partners will have ‘some’ involvement going forward
  2. Expect ‘some’ changes in people, strategy and velocity.
  3. Don’t worry!

With 10% of key employees leaving during the first 12 months, how do you keep teams motivated and engaged? Great CTOs will give consistently give clear strategic direction to their technology leadership teams.

10 things great CTOs need to make clear to their technology teams

  1. What the vision is
  2. Why we are doing it
  3. Your role in all this
  4. How long we have
  5. How PE will be involved
  6. When PE will be involved
  7. How we will measure success
  8. The rewards for success
  9. The cascading messages
  10. How often we will review progress

Great CTO’s won’t treat this as a once and done exercise, they will make a regular commitment to their teams to continually assess and reiterate this vision.

Great Leaders understand the importance of bringing their team on the journey, making sure everyone knows their place in the new world.

Thomas

You can sign up for more ‘unconsidered needs’ below.

Thanks to Clare Eagle for the discussion that led to this unconsidered need!

Sign up if you’d like regular insights with ‘Unconsidered Needs’, a short weekly email about the trials and tribulations of tech value creation.