SaaS providers also struggle with cloud bills

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Brief description of the dive:

Most software vendors struggle to manage cloud costs, according to a report released Tuesday by CloudZero. The FinOps solutions provider based its findings on a study of 700 SaaS companies by research firm Benchmarkit.
The report found that three in five software vendors have not implemented a cloud cost management program. Nearly three-quarters of respondents said cloud represents at least 20% of their total cost of goods sold.
“For SaaS companies, cloud is typically a top-three budget item—yet most do not have rigorous cloud performance management processes or understand the relationship to unit economics at any level of granularity,” CloudZero CEO Phil Pergola said in the report.

Diving Insight:

Businesses across industries have felt the brunt of rising cloud costs as they adapt to usage-based pricing models and struggle to align cost with value. According to the report, cloud SaaS vendors are no different.

Nine out of 10 surveyed companies admitted that they cannot trace at least 10% of their total cloud spend to the right source. Of the 39% of respondents who have implemented cost management processes, just over a quarter have optimized software code, and fewer than half have enabled chargeback processes that deduct cloud spend from departmental budgets.

Tying costs to a specific unit is complicated by the multitude of different cloud services that companies use, as well as the prevalence of shared resources, multiple cloud providers, and containerized workloads.

Without a clear picture of who to bill for a given service, cloud consumers cannot even begin to optimize usage—a key feature of FinOps cost management practices.

Most software companies rely on hyperscaler discounts, wholesale pricing, and third-party resellers to save money on cloud, which can lead to overprovisioning. Only a quarter of respondents said they regularly use discounted spot instances to reduce spending.

As technology vendors spend more on cloud solutions, those costs typically pass through to enterprise customers in the form of price increases.

According to Forrester, nearly 80% of U.S. organizations have seen their software prices rise over the past year. Most executives attribute the increase to new software features, including AI.

While AI development is a likely culprit for the cost increases, the cloud is where large language models are trained, tuned, and accessed. If SaaS providers overpay for the cloud, they can let those costs eat into revenues or pass those bills down the food chain, raising the price of their products.