Cloud vs on-prem: SaaS vendor 37signals bails out of public cloud

David Heinemeier Hansson, co-owner and CTO at SaaS vendor 37signals, is quitting the cloud and wants everyone to know about it. In a series of blog posts, Hansson has challenged the cloud business model, rebutted assumptions associated with cloud computing, and argued that the consolidation of power among hyperscalers is not necessarily a good thing.

It might seem counterintuitive for a SaaS vendor to be publicly taking pot shots at the cloud and suggesting that other companies reconsider their cloud investments. Has Hansson, the creator of Ruby on Rails, gone off the rails?

Hansson’s argument is simple: By pulling server workloads off the Amazon AWS infrastructure, purchasing new hardware from Dell, and running his business from a colocation facility, he will save millions of dollars.

He says, “We’ve run extensively in both Amazon’s cloud and Google’s cloud. We’ve run on bare virtual machines, we’ve run on Kubernetes. We’ve seen all the cloud has to offer and tried most of it. It’s finally time to conclude: Renting computers is (mostly) a bad deal for medium-sized companies like ours with stable growth. The savings promised in reduced complexity never materialized. So, we’re making our plans to leave.”

He adds that the cloud “makes total sense” for retailers and other companies that experience dramatic traffic spikes.  After all, that’s how AWS came into being in the first place, when Amazon built out excess capacity for the holiday season, then decided to start renting out that idle hardware. But the workloads have to be “super bursty,” says Hansson.

He argues that for the majority of enterprises with relatively stable workloads, if you are spending significant amounts of money in the cloud and you don’t at least consider benchmarking your rental bill vs. buying servers, “you’re being a bit reckless.”

Do the cloud math

37signals sells two SaaS offerings: Basecamp, a project-management application launched in 2004, and HEY, a premium email service launched in 2020.  Basecamp has been run mostly from colocation facilities, and HEY was totally cloud-based, until Hansson began running the numbers.

The company spent $3.2 million on AWS cloud services in 2022; with just under $1 million on Amazon S3 storage, and the remaining $2.3 million on application servers, cache servers, database servers, search servers, etc. The plan is to eliminate that entire $2.3 million expenditure in 2023 and to tackle the 8PB of stored data in 2024.

“After much deliberation, many benchmarks, and much aweing at the speed of AMD’s new Zen4 chips combined with Gen 4 NVMe drives,” Hansson says he ordered Dell servers to the tune of around $600,000.

Amortized over five years, that comes to around $120,000 a year for server infrastructure. He spends an additional $60,000 a month ($720,000 annually) for eight dedicated racks in two data centers operated by a colocation provider named Deft. “We purposely over-provisioned our space, so we can actually fit all of these many new servers in the existing racks without needing more space or power,” Hansson adds.

His total expenditure comes to $840,000 per year, compared with $2.3 million in the cloud, for a net savings of about $1.5 million a year, or $7 million over five years. “And we’ll have much faster hardware, many more cores, incredibly cheaper NVMe storage, and room to expand at a very low cost,” he adds.

Hansson says he has already begun migrating applications off the AWS platform and expects the process to be completed over the summer. He adds that the actual migration is no simple task. His team had to build its own tooling to make sure that key features and innovations built into his applications would port over to the new hardware and run with the same performance.

The complexity of figuring out the nuts and bolts of application repatriation raises the question of whether the experience of a SaaS vendor like 37signals, with an employee roster brimming with technical expertise, is applicable to the average enterprise.

Some question and Hansson’s answers

Hansson has been active on social media, engaging in conversations about that very issue. He seems to have an answer for every concern.

What about maintenance, monitoring, operations? Will I need to hire more IT staffers to run these servers that I now own? Hansson argues that he will not need to add any positions to his 10-person operations staff. He says IT teams can remotely manage servers no matter where they live. He goes on to say that cloud vendors have made the case that moving to the cloud would enable organizations to reduce their IT staff, but Hansson says those savings never actually materialize.

What happens if a server dies? Hansson’s answer might sound glib, but he says you just buy a new one. He points out that he is currently running servers that are six, even seven years old, which means they have been fully paid off and are still functioning.  “We run it until it can’t run no more, then we upgrade,” he says.

How about security? “Whether you run your apps in rented hardware or your own, you have to worry about security,” he says.

What about installation, configuration, etc.? Dell delivers the servers to the colocation facility, the Deft team sets them up with connectivity, power, etc., and his team never touches hardware.

Your team has years of experience running your own servers. What about companies that have never done it before? Hansson says that organizations ran their own servers for decades before the cloud came along. And today’s server hardware is more reliable, more automated and easier to manage than in the past. “You don’t need to know nuclear secrets to do it,” he says. And to be clear, he’s not suggesting that companies build their own data centers – he’s simply advocating for buying servers versus renting them.

Is cloud really the future?

Hansson said that when he talks to people about his decision, the first assumption that he has to challenge is the notion that the cloud is the future and if you’re not all-in on the cloud, then you’re somehow missing the boat or living in the past. Hansson says he has been trying to wrestle that narrative away from the cloud evangelists.

Another assumption is that the cloud is somehow vendor neutral, that there’s no lock-in. The reality is that, for example, cloud vendors offer lower rates to customers who sign storage contracts for longer periods of time.  And each cloud vendor has their own toolsets, so an organization with a hybrid cloud or multicloud environment is faced with the complexity of learning a different set of skills for each platform.

Hansson also challenges organizations to investigate the dramatic price drops for storage and the dramatic performance increases associated with today’s chipsets. He says cloud service providers don’t pass those efficiencies in server and storage hardware back to the customer; instead, they keep their profit margins high.

How should organizations proceed?

Hansson recommends this approach: “I would start by simply raising the discussion internally. What kind of business do we have? Do we have a highly volatile business where we have these huge surges? Are we a very early stage business where we can entirely get away without an operations team? Or are we perhaps in the middle just like 37signals, where we might not yet be spending $3 million a year like they are, but maybe we’re already spending a million dollars a year or maybe we’re even spending half a million dollars a year.”

He says companies should be asking themselves, “What would it cost us to buy some servers? How long would it take us to pay that back? And if we could end up in a situation like 37signals has with Basecamp where they’re still running on servers they bought seven years ago, how much more profitable could our operations be?”

37signals fights hyperscalers’ internet dominance

Hansson goes on to makes another, more philosophical, argument in favor of moving off of the hyperscale platforms. “This isn’t just about cost. It’s also about what kind of internet we want to operate in the future. It strikes me as downright tragic that this decentralized wonder of the world is now largely operating on computers owned by a handful of mega corporations.”

Hansson says the reaction among his peers has been mostly positive. “I’m simply articulating wisdom that is already there,” Hansson says.

One person Hansson has not heard from directly is Amazon’s Jeff Bezos, who is actually an investor and part owner of 37signals. But Hansson says, “I’m 100% convinced he’s in our corner when it comes to getting our costs as low as they can be.”