How can financial-services firms maximize cloud use?

The London Stock Exchange Group (LSEG) and Microsoft recently formed a long-term (10-year) strategic agreement to use Microsoft Cloud to build LSEG's data infrastructure. Under the terms of the deal, Microsoft will buy shares from the Blackstone/Thomson Reuters Consortium to get a roughly 4-per cent stake in the LSEG.

As part of the partnership, the two companies will work together to create new goods and services for data and analytics. The LSEG has also agreed to spend at least £2.3 billion on cloud-computing services over the course of the contract.

From a low start, the cloud is being used more and more in financial services.

One effect of this deal is that it shows how financial-services companies are becoming more confident in their ability to use cloud services. In the past, trading platforms like the LSEG stayed away from the cloud because of concerns about where data was stored and how to get to it, as well as out-of-date beliefs that are using the cloud hurt general performance and security. Most of that hesitation and worry has gone away, especially since the government, in all its different forms, is moving toward cloud usage, and regulators have become more positive about using the cloud in financial services.

Flexera's "2023 State of the Cloud Report, "1 says that a third (33%) of financial-services companies plan to use a mix of on-premise and cloud/software-as-a-service (SaaS) for their corporate financial data. Even more companies, 35%, plan to use a mix of on-premise and cloud/SaaS for customer data like protected health information (PHI) or personally identifiable information (PII). Today, more than 44% of financial-services companies store their data in the cloud, and that number is expected to rise to 52% of companies in the next year. It is clear that financial services are starting to see what the cloud can do for them.

The relationship between Microsoft and the LSEG is a good example of how companies in the financial services industry are trying to save money by moving from expensive, managed legacy systems to the cloud. Their way of working as a whole has changed a lot, and this change has been going on for a long time.

Plans to combine the analytics skills of the LSEG with those of Microsoft's cloud-based machine learning (ML) show that today's financial institutions are changing things up.

Proving you are serious

The minimum commitment of $2.8 billion (£2.3 billion) over the term of the relationship, on the other hand, is a big number and puts the LSEG's capacity needs in the same league as Airbnb and Netflix. Even though the partnership announcement suggests that this could be used to create new services, goods, and revenue streams, enterprises need to pay attention to minimum commitments. When a very high number is agreed upon, there is not much reason to look for ways to save money, especially since cloud computing costs drop between 10 and 15% every year. Over the ten years that the partnership is supposed to last, the LSEG could either use more capacity than it needs or pay for more capacity than it needs because the partnership is not working as well as it could.

Even though it is common, setting a minimum pledge that is too high compared to what you expect to spend can also be a problem. Some financial services companies try to get a deal that is as good as possible by spending at least 90% of what was planned. But trying to make prices predictable always leads to less flexibility and more risk. Firms have to pay more for cloud services and lose chances to save money through technology and the work of their own teams.

When an organization makes a long-term financial commitment, it loses the flexibility of the cloud because it has little to no ability to reduce its responsibility over time or find other ways to save money. The risk that the committee will make cloud waste grows with the length of the pledge. It is important to note that the cloud power we need now might not be needed in the future.

The regular bill for cloud infrastructure can grow and shrink just like the infrastructure itself. When there are minimum cash commitments, invoice flexibility and cloud flexibility are no longer linked.

Chances and difficulties

With these kinds of cloud-based deals, the biggest change should be to reduce waste rather than make more of it. Most cloud environments have between 30 and 35 per cent waste, so the biggest change in these deals is to get rid of the waste in cloud services. But businesses will often take one-time discounts that are much lower because it seems to take a lot more work to just focus on reducing waste. But that is almost certainly a short-sighted way of thinking.

Even though the cloud has a lot of potential to help businesses grow, most of the time, that potential is not used. Too often, financial services companies learn the hard way that their costs are growing faster than their business, that availability is becoming a problem, and that their performance is not good enough to give their customers a good experience.

All of these things wear away at profits and possibilities from the inside. Organizations end up fighting over business costs (called "opex"), which causes internal tensions to rise. In the Flexera report2, it was found that 66 per cent of respondents used the cloud more than expected and that, on average, businesses lost 32 per cent of their cloud spending.

How have past estimates about cloud costs turned out?

When we look back a few years, before the pandemic caused a huge push toward digitalization, we can see that people had clear ideas about how the cloud would affect their finances. For example, Gartner forecasted in 20153 that the cloud would make licensing as a service (LaaS) more flexible in terms of cost as the top reason to move. This is true, but it is also important to note that flexibility means the price can go up or down. This is a common caveat in the financial services industry.

In the same report, the main benefits are increased cash retention and lower opportunity costs. Since less money is spent on on-site equipment, the business has more cash to spend in other areas. The study also warns that the marginal cost of software licensing goes up over time compared to on-premises lifetime licenses and that SaaS has less cost flexibility. This makes it likely that prices will keep going up in this area and that it will cost more to move data into and out of data centres.

So, companies that have not seen the financial benefits that were promised from flexible LaaS are missing out on the cloud's main benefit. A plan to cut down on waste is needed to tame the cloud and lower the number of services to only those that are needed and help the business.

Financial services still have a lot to gain from cloud computing.

Most of the time, it is cheaper and better for businesses to cut down on usage and trash. It is also likely to be a much greener and more sustainable choice. Any chance a business has to cut down on its carbon footprint should be done.

But businesses may see all of this as hard work for a number of reasons, most of which have to do with doubts about the ability to deliver benefits and fears of damaging current infrastructure or applications. But this way of thinking is wrong. Putting in the time to figure out the right method from the beginning will save time and money in the long run.

This is a chance for financial services companies to do their study, figure out how much waste they have, and figure out how they can cut costs. This will help companies come up with real numbers to agree to while taking into account the lengths and terms of their contracts.

The relationship between Microsoft and the LSEG is an important step forward for both the financial services industry and the cloud infrastructure and applications industry. Even though most migrations are much smaller, financial-services companies can still get a lot out of taking advantage of possibilities in the cloud. Working with independent experts to analyze cost and performance needs before making big commitments is a key part of providing value. This way, the good things that financial services companies think about the cloud can become true.