By Dr. Manzoor Mohammed, Co-Founder and CINO, Capacitas
The London Stock Exchange Group (LSEG) and Microsoft have recently entered into a long-term (10-year) strategic partnership to architect the LSEG’s data infrastructure using the Microsoft Cloud. Under the terms of the agreement, Microsoft is to purchase an approximate 4-percent equity stake in the LSEG through the acquisition of shares from the Blackstone/Thomson Reuters Consortium.
The partnership involves the two parties jointly developing new products and services for data and analytics—and it also incorporates a commitment for the LSEG to spend a minimum of £2.3 billion on cloud-computing services over the contract period.
The use of the cloud is growing from a low base across financial services.
One of this deal’s impacts is highlighting the growing confidence of financial-services firms in adopting cloud services. Historically, trading platforms such as the LSEG have tended to stay away from the cloud due to both worries about data location and access as well as outmoded views that the use of the cloud compromised overall performance and security. That hesitancy, and those concerns, have now largely gone—especially as even the government, in all its shades, is moving towards cloud adoption, and regulators have become demonstrably more positive about using the cloud in financial services.
The latest findings from Flexera’s “2023 State of the Cloud Report”1 cite a third (33 percent) of financial-services businesses expecting to use a mixture of on-premise and cloud/software-as-a-service (SaaS) for corporate financial data. An even greater proportion (35 percent) anticipate using a blend of on-premise and cloud/SaaS for consumer data, such as protected health information (PHI) or personally identifiable information (PII), for example. Today, more than 44 percent of financial-services organisations’ data is in the cloud, with the percentage anticipated to rise to more than half of organisations (52 percent) over the coming year. It’s clear that financial services are recognising the potential of the cloud.
The partnership between Microsoft and the LSEG is one practical illustration of how financial-services organisations focus on saving money by migrating from highly expensive, managed legacy systems into the cloud. Their whole way of working has changed significantly—and it is a shift that has been going on for a considerable time.
These plans to bring together the LSEG’s analytics capabilities with Microsoft’s cloud-based machine learning (ML) skills bear witness to the fact that today’s financial institutions are shaking up the status quo.
The minimum commitment of $2.8 billion (£2.3 billion) over the partnership term is a significant figure, however, and puts the LSEG’s capacity requirements in the realm of Airbnb and Netflix. While the partnership announcement suggests that this may be leveraged to develop new services, products and revenue streams, minimum commitments are certainly something to which enterprises need to pay attention. When a particularly high figure is agreed upon, there is little incentive to search for efficiencies, particularly given that cloud-computing costs fall between 10 and 15 percent per year. Over the 10-year period the partnership is expected to last, the LSEG could find itself either using more capacity than it requires or paying for more capacity than it needs due to poor efficiencies.
Although it is common, putting in place a high minimum commitment compared to the forecasted spend can also be problematic. Some financial-services firms try to achieve a minimum spend of nearly 90 percent of the total forecast to secure the best possible discount. But searching for predictable costs inevitably leads to reduced flexibility and increased risk. Firms become exposed to extra cloud costs and lose opportunities for savings through technology and their own teams’ efforts.
A long-term financial commitment effectively means that the organisation loses the flexibility of the cloud as the organisation has little to no flexibility in reducing its obligation over time or having any opportunities to make further savings. The longer the commitment, the greater the risk that it will create cloud waste. Importantly, the cloud capacity needed today may not be required in the future.
The monthly invoice for a cloud is as capable of expanding and contracting as the cloud infrastructure itself. Minimum financial commitments break the link between invoice flexibility and cloud flexibility.
Opportunities and challenges
With any cloud-related deals of this type, the major opportunity should involve minimising waste rather than generating it. Typically, the level of waste in a given cloud environment is approximately 30 to 35 percent, so the major opportunity in such deals is removing the waste from cloud services. But companies will often instead take one-off discounts at much lower levels because a pure focus on reducing waste appears to take much greater effort to attain. That is, however, almost certainly going to be a short-sighted view.
After all, despite the great potential the cloud offers to support growth, more often than not, that potential is not realised. Too frequently, financial-services companies ultimately reach the understanding, invariably from their own bitter experiences, that costs grow more quickly than the business, availability becomes a challenge, and performance struggles to deliver a high-quality user experience.
All these factors grind away at profitability and potential from within. Organisations end up in running battles with opex (operational expenditure) costs, and internal tensions mount. The Flexera report2 found 66 percent of respondents had higher-than-expected cloud usage, while on average, organisations stated they wasted 32 percent of their cloud expenditure.
How have cloud cost predictions from the past panned out?
Looking back at perceptions from a few years ago, before the huge digitalisation effort driven by the pandemic, there were clear expectations surrounding the cloud’s financial proposition. For example, Gartner predicted back in 20153 that the cloud would deliver greater cost agility in terms of LaaS (licensing as a service) as the number one benefit of migration. This is true, although it needs to be added that agility means that the price can go up or down—a familiar caveat within the financial-services sector.
The same report looks at increased cash retention and reduced opportunity costs as key benefits; less investment in on-premises equipment naturally leaves more cash to invest in other parts of the business. The report also cautions that software licensing as a marginal cost rises over time compared to on-premises lifetime licenses, along with less cost agility in terms of SaaS. This presents a scenario of ever-increasing charges in this area and higher costs of migrating data into and out of data centres.
So, companies that have not experienced the promised financial benefits from flexible LaaS are missing the primary benefit of the cloud. To tame the cloud and pare back the volume of services to those that are necessary and support the business, a plan to reduce waste is required.
The cloud still represents enormous opportunities for financial services.
In most business cases, it is cost-effective to reduce usage and waste, and it is also likely to be a far greener and more sustainable option. Any opportunity for a company to reduce its carbon footprint should be taken.
However, for a multitude of reasons, usually stemming from apprehension about the ability to deliver benefits and fear of damaging existing infrastructure or applications, businesses may see all this as hard work. But this perception is misguided. Putting in the effort to pin the right approach down from the start will save time and reduce spending over the long term.
There is an opportunity here for financial-services firms to do their homework, assess their waste levels and work out how they can reduce spending. This will allow firms to arrive at realistic figures to commit to while accounting for the durations and terms of their contracts.
The partnership between Microsoft and the LSEG is a momentous one, marking a milestone in the development of both the financial-services sector and the cloud infrastructure and applications sector. While the vast majority of migrations are on a much smaller scale, financial-services firms can still reap enormous benefits from exploiting opportunities in the cloud. Fundamental to delivering value is working with independent experts to analyse cost and performance requirements prior to making large commitments. In this way, financial-services firms’ current positive perceptions of the cloud can become realities.
1 Flexera: “2023 State of the Cloud Report,” 2023.
3 Gartner: “The Financial Case for Moving to the Cloud,” Laurence Goasduff, August 20, 2015.