Hybrid cloud, on-premises workloads spend their day in the sun, but the forecast remains cloudy

Some workloads just won’t move to the cloud, but the debate is intensifying over what percentage remains on-premises. Over the past few weeks, we’ve heard about the paradoxes of cloud costs, workload repatriation, and earnings results from companies like Dell Technologies and HPE that indicate data center equipment is in demand.

This debate on whether to reassess the move to public clouds has reached its climax with a blog post by Andreessen Horowitz. The argument in a nutshell: some companies can do better if they manage their own infrastructure. Think of Snap, which pays billions of dollars to public cloud providers but becomes more efficient. Think about Dropbox, which took its workloads in-house and weaned itself off from AWS. And think of companies where infrastructure is at the heart of what they do.

For the rest of us, the cloud vs on-premises decision is a little trickier. What is clear is that public spending in the cloud is moving out of the drunken sailors phase, as Patrick Moorhead, director of Moor Insights & Strategy, puts it.

Add it up and this cloud vs on-premise debate is really about the percentage of mix. Will 25% of workloads stay on-site or 40%? And which mix optimizes costs? According to Flexera’s State of the Cloud 2021 report, cloud costs are the hardest thing to manage. Over the past five years, optimizing cloud costs has been the # 1 initiative cited in Flexera surveys.


Repatriation no, rethink the cloud eventually

Andreesen Horowitz’s argument was that companies that don’t use the cloud to the fullest can increase their profit margins.

There is a growing awareness of the long-term financial implications of the cloud. As the cost of the cloud begins to contribute significantly to the total cost of revenue (COR) or cost of goods sold (COGS), some companies have made the dramatic decision to ‘repatriate’ the majority of workloads (as in the example of Dropbox) or in other cases adopting a hybrid approach (as with CrowdStrike and Zscaler). Those who did have reported significant cost savings: In 2017, Dropbox detailed in its S-1 a huge cumulative savings of $ 75 million in the two years leading up to the IPO due to the overhaul. optimization of infrastructure, the majority of which involved repatriation of public cloud workloads.

Yet most businesses find it difficult to justify moving workloads out of the cloud given the scale of these efforts and, quite frankly, the dominant and somewhat singular industry narrative that “the cloud is awesome”.

The number of companies that will repatriate workloads from the cloud will likely be counted on the one hand. But rest assured, more thought will be given to the data and applications that remain on-premises versus migrating to the cloud. In addition, edge computing and multicloud deployments are also rewriting part of the cloud playbook. The big question is whether multicloud can give businesses more leverage over vendors.

Jefferies analyst Kyle McNealy has become optimistic about Hewlett Packard Enterprise, largely based on the idea that not all workloads will be cloud. In recent years, the case for hybrid cloud from IBM, Dell Technologies and HPE has often been dismissed.

McNealy in a research report noted the following:

  • The remaining on-premises applications are increasingly difficult to lift and migrate to the cloud.
  • Companies are already approaching their long-term on-site footprint by 25-40%.
  • Edge computing, low latency, and big data applications require on-premises infrastructure.

McNealy’s baseline scenario for HPE is that long-term on-site workloads are 30%. The advantage for HPE is that the on-premises infrastructure is used for 40% of the workloads. In the upward scenario, HPE would benefit from “some repatriation of computing capacity”. McNealy noted that the workload gap between the public cloud and on-premises will narrow.

This narrowing of the cloud-to-data center gap is reflected in the financial results of Dell Technologies and HPE. Dell CFO Thomas Sweet said:

We believe demand will continue to improve over the year as customers step up their IT investments by focusing on hybrid cloud solutions.

HPE CEO Antonio Neri said:

The overall demand environment is improving and we are seeing traction across our portfolio. We are seeing an improvement in IT demand. It is a pent-up demand to modernize this infrastructure.

Not everyone agrees with the hybrid approach and the repatriation argument.

Cowen & Co. released the company’s 9th annual public cloud survey in May of 654 US respondents and more than 800 European respondents. “COVID-19 has accelerated SaaS / Cloud migrations, with much of the impact likely to be permanent,” Cowen’s team of analysts said.

Indeed, US respondents said spending with public cloud providers will increase by 39% in 2021, up from 38% in 2020. European respondents see public cloud spending increase by 32%, according to Cowen.

An interesting nugget of the Cowen report is that respondents often underestimate the percentage of workloads migrating to the cloud. Respondents predict that 30% of workloads will stay put in 2023 in the Cowen survey.

It remains to be seen whether this hybrid cloud and data center renaissance will continue. NPD data shows growth in networking and storage and is declining elsewhere. On-premise technology spending may return to 2019 levels. NPD said:

According to NPD, sales of the data center ecosystem in Q1 2021 were virtually flat compared to 2020 and 2019. Q1, networks and security saw the only combined growth of 7% and representing slightly less 50% of total category revenue during the quarter. . In the first quarter, combined data center hardware sales fell more than 5% year-on-year, mainly due to declines in SSDs (-15%), hyperconverged systems (-11%) and racks , supports and frames (-14%). Data center ecosystem software continued to gain momentum with a 5% year-over-year increase in Q1 revenue and 15% from Q1 2019. Software growth was again strong. mainly driven by networks (+ 24%) and security (+ 8%).

In 2021, NPD said data center spending will continue to accelerate, in part thanks to cutting-edge computing and analytics, machine learning and the Internet of Things.


The Monday Morning Opener is our opening salvo for the tech week. Because we operate a global site, this editorial is posted on Mondays at 8:00 a.m. AEST in Sydney, Australia, which is 6:00 p.m. EST on Sundays in the United States. It is written by a member of ZDNet’s global editorial board, which is made up of our editors in Asia, Australia, Europe and North America.


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