Benefits of the Cloud: The Numbers Are in

A new study describes the business value of cloud investment: more productivity and sales.

For years, most engineers have been convinced that transitioning to a cloud-based computing strategy would lead to a big boost in business. But we’ve lacked rigorous analysis to demonstrate the economic impact of the cloud investment over years and across industries. Although there are plenty of reports on the ever-increasing number of companies transitioning to hybrid and multicloud computing strategies, a systematic analysis is still needed to truly understand how the cloud transforms business outcomes.

Recently, a critical analysis titled “Cloud Adoption and Firm Performance: Evidence from Labor Demand” demonstrates the significant productivity gains associated with U.S. companies that adopt cloud computing. The study considered companies from across industries and evaluated the return on investment (ROI) for cloud adopters over a 10-year time frame. The results are reassuring for companies and engineers continuing to expand their cloud-based investments, as the data certainly indicates that it should be more than worth their while.

The research was conducted by a research fellow at the MIT Initiative on the Digital Economy, Wang Jin. The work builds on a previous publication titled “Economies Before Scale: Survival and Performance of Young Plants in the Age of Cloud Computing” from 2018, where Jin and his coauthor determined that investing in cloud-based computing increased the likelihood of survival for small- and medium-sized manufacturing companies. Something that should interest the engineering community in and of itself.

So, let’s dig into the numbers that Jin and his team have come up with.

So, What Took So Long?

It’s no secret that cloud computing is popular and is continuing to grow and change, as a recent survey commissioned by IBM found that over 70 percent of companies think that a hybrid strategy is required to achieve the full potential of a digital transformation. One cloud and one provider are simply no longer enough for most companies to achieve their goals and make the most of their data.

Over the past 15 years, Amazon, Google, Microsoft, and a few other key players have scrambled to continually provide the flexibility and utility that companies have been promised when it comes to cloud computing. Most companies can see the potential of cloud computing but have lacked the data for long-term, industry-wide trends on the technology’s adoption.

So, why has it taken so long to systematically assess the economic returns of cloud-based infrastructure? Especially with seemingly everyone in the process of transitioning something new to the cloud?

In his analysis, Jin discusses many reasons why it’s been historically so challenging to accurately evaluate the economic impact of cloud investment. One of the main reasons is that cloud and non-cloud operating costs are often calculated and reported together, making it difficult to precisely delineate the ROI for cloud infrastructure.

Instead of relying on numbers that aren’t being reported, Jin instead conducted a series of analyses based in economics that can estimate cloud investment and then approximate related increases in sales and revenue.

In the publication, Jin constructed a sample set for the past decade by merging two datasets representing all online job postings during this time frame. This is a strategy commonly employed in other economic studies that use job postings as a proxy for labor demand and then use that information to infer the technology adoption of companies. So, Jin used job postings that included cloud-related skills to infer a company’s overall investment in cloud computing.

In the study, Jin took advantage of a dataset of job posts from Burning Glass Technologies (BGT) that represents over 200 million online job postings in the United States on more than 40,000 platforms since 2007. Jin focused on any posting related to cloud skills, such as cloud computing, cloud storage and cloud solutions. This data was combined with quarterly and yearly financial and accounting information from Compustat to calculate the economic impact of cloud investment. The final dataset included over 2,500 public companies and their financial data from 2010-2019, focusing on years with reliable data prior to the volatility of the COVID-19 pandemic. The majority of the companies included in the analysis were large public firms with over 18,000 employees and nearly $2 billion in quarterly sales.

Interestingly, Jin was able to analyze this dataset to demonstrate the numbers to prove what everyone already believed: investing in the cloud can significantly boost business.

One Employee, Nearly $1.5 Million in Quarterly Sales

One exciting result from the analysis was calculating the impact of hiring just one additional cloud-related employee. The study found that if a company hires a single employee with cloud-related skills, it can generate about $1.43 million in additional quarterly sales.

Beyond that, the data also indicated that, on average, companies that adopted a cloud-based strategy had 2.24 percent higher productivity compared to companies that had not yet adopted a cloud-based strategy. Despite the difference being a relatively small percentage, this correlated to more than $38 million in additional sales. So, the result is not only statistically significant but also economically impactful and clearly indicates that cloud adoption can lead to an increase in a company’s bottom line.

In the article, Jin outlines the economic theory behind these calculations and describes the multiple approaches used to determine the economic impact of cloud adoption. Despite considering different sets of variables, all analyses indicated that cloud adoption is positively associated with productivity. Although it’s not a surprising result, it is reassuring to see years of data finally supporting the assumption that the flexibility, utility and unique capabilities of cloud computing can lead to significant benefits for businesses across industries.

Across diverse industries, cloud-based hiring has significantly increased over the past decade, showing broad interest in digital transformation (Jin, 2022.)

Across diverse industries, cloud-based hiring has significantly increased over the past decade, showing broad interest in digital transformation (Jin, 2022.)

A lot of speculation has already proposed that cloud adoption can be particularly beneficial to companies that rely heavily on research and development or for start-ups and other small enterprises. The new report showed that even for smaller public companies, the ROI for cloud computing is still significant. This is also especially true for companies that rely heavily on R&D or are in industries that are dependent on R&D.

Cloud Investment Leads to a Surge in Hiring

Another exciting result of the analysis was how cloud-based hiring creates a springboard for other advanced technologies. The research demonstrated that cloud investment positively correlated with increased hiring of people with big data and AI-based skills. Again, this is not entirely surprising, as transitioning to any advanced technologies is likely dependent on others—meaning that if a company is already investing in the cloud, they are likely interested in or actively pursuing advanced data analytics and AI-based solutions for their overall computing strategy.

The treatment effect of cloud investment on the subsequent hiring of people with AI-related skills. The data indicates that more cloud-based hiring logically leads to more hiring of those with AI skills (Jin, 2022.)

The treatment effect of cloud investment on the subsequent hiring of people with AI-related skills. The data indicates that more cloud-based hiring logically leads to more hiring of those with AI skills (Jin, 2022.)

Notably, hiring workers with cloud-based skills was also significantly associated with a company’s level of productivity. For example, the research found that a 1 percent increase in hiring for cloud-related positions was associated with a 0.005 percent increase in productivity. This translated to about $1.4 million in sales generated quarterly with each additional hiring of someone with cloud-related skills.

Invest in Cloud, Gain 7 Percent More Sales Long Term

Although previous analyses have attempted to determine the short-term impact of cloud-based investments, the long-term picture is likely where you can see an accumulation of business value. So, in the study, Jin also attempted to evaluate the long-term effect of investing in cloud-based solutions. Jin found that over the past decade, when a company has adopted a cloud-based strategy, they have achieved, on average, 6.9 percent higher sales than companies that did not invest in the cloud. This effect also continues to grow each year, indicating that the ROI for cloud investment is not slowing down.  

The Business Value of the Cloud

After the volatility of the last few years, it seems that many major companies are focused on curating their cloud-based IT infrastructure to specifically meet their needs and an increasingly hybrid workforce. With this new publication, there is now systemic data to support broad, multi-industry value for businesses to remain invested in a cloud-based digital transformation. These results provide clear evidence that cloud-based solutions can provide the necessary business value needed to justify the shift in IT strategy. As this analysis only evaluated companies during 2010-2019, it will be interesting to see how the numbers change over the next five years and whether companies that adopt a hybrid or multicloud strategy will differ from both single cloud users or companies that do not employ any cloud solutions in terms of their productivity and sales. Based on Jin’s previous research, it seems likely that they will continue to follow these exciting trends over the next few years and hopefully provide additional evidence for the ongoing business value of cloud solutions.