Lock-In

During COVID, I put some items into a public storage facility at $189/month. Next month, I will be removing them, thus saving $416/month. That's right, in less than two years, the price has more than doubled (2.2 times). That’s a CAGR of 53%. That’s a great business model!

You might wonder why I put up with this ridiculous price increase. Why didn’t I move to another facility? There are countless other storage options available. The problem is the high cost of moving items from one facility to another, which effectively locks me in until I can move everything to my final destination. This is why they could raise the price, and why I have to put up with it until I can move my boxes to my house.

After my first few months, their data likely showed that I had a very low probability of leaving, allowing them to strategically increase the price. Their data team has likely built out models to tell them exactly when to increase and by how much in order to optimize profits.

You may be asking: This newsletter is about Digital Transformation, so why are we discussing a concrete building filled with cardboard boxes? We’re not. We are discussing lock-in, which turns out to be very similar in the physical and digital realms.

Cloud

Cloud technologies provide flexibility. The foundational idea of cloud computing is that you're using someone else's computer — what could be more flexible than that? If you're unsatisfied with one service, you should be able to switch easily to another.

And a major selling point of cloud computing is the ease of porting applications, data, etc. However, companies don’t want you to leave; they profit from every day, month, or year you use their cloud. It is in their best interest to make leaving as unappealing as possible.

While long-term contracts could keep customers tied down, this contradicts that flexibility value proposition of cloud computing (i.e., that cloud is flexible, that there isn’t the same commitment as with your own data center).

The most common approach cloud providers use to create customer lock-in is through customizations. In technology, there is always a balance between standards (i.e., interoperability) and customization (i.e., optimization).

Ideally, everyone would use global standards allowing all systems to work together seamlessly. The level of governance required to achieve this is mind-blowing. Most large companies don’t even have true standardization within their own enterprises, let alone with their customers, partners, and ecosystems. One of the most strategic decisions CIOs/CTOs make is where and how to standardize—though often these decisions are made without engaging the Lines of Business even though there are significant business implications.

Cloud companies frequently offer significant opportunities to optimize on their platforms. The downside is that these optimizations generally lock you into that particular cloud platform. Yes, these optimizations can make your system operate more efficiently or effectively, but they also restrict your flexibility as much as needing a four-person crew to move my cardboard boxes to another location.

Summary

Just because something is easy to get into doesn't mean it’s easy to get out of. The business model for cloud providers is built on high volumes. They offer reduced prices because their scale is something individual companies can’t match. But to sustain this business model, they also need high usage rates. They must utilize the assets in which they've invested and predict future usage accurately to make informed capital expenditures, just as you would if you were running your own data center. They may talk about offering burst capabilities and flexibility, but they need to use their volume to make that predictable for their investment model. While they make the lock-in appealing (e.g., your applications do run more efficiently), that benefit comes at a cost.

All of this doesn’t mean not to use cloud. I can’t think of a business that shouldn’t be using at least one cloud and most should be using multiple clouds. You just want to make the right decisions on how you’re using the clouds. And this includes deciding strategically, not tactically, where to customize and where to standardize.

Brigid McDermott is a Managing Partner at GXA Advisors and the author of DX: Bridging the Divide, a substack newsletter about the business benefits and requirements of Digital Transformation. She is passionate about driving growth through systemic replication and the thoughtful application of technology rather than by brute force.