Frugality as a service: the Amazon story

4. Frugality

Almost as important as Amazon’s technical prowess is its culture. One of Amazon’s 14 leadership principles is frugality.

"We try not to spend money on things that don’t matter to customers. Frugality breeds resourcefulness, self-sufficiency, and invention. There are no extra points for headcount, budget size or fixed expense."
- AWS' leadership statement.

Jassy echoed this sentiment when speaking with iTnews: “We try not to spend money on things that our customers don’t value. That’s been a key part of our DNA.”

That frugality extends beyond the supply chain. It also means executives aren’t endowed with luxuries beyond what is absolutely necessary.

For example, the company will only pay for its employees to fly economy, and that includes its senior executives. If they feel the need to upgrade to business or first class, they must do so from their own pocket.

“If you’re flying everyone business and first class to meet customers, its a pretty substantial expense, and none of that benefits customers,” Jassy explained.

“If you look at the scale of how many staff an IT company employs, it does make a difference.”

Amazon’s obsession with cutting costs goes all the way to the top. Jeff Bezos' focus on cost-reduction is legendary. The company constantly tests the patience of its investors – Amazon generated a whopping US$74 billion in revenue for its financial year to 31 December 2013, but just US$274 million in net income, a margin of roughly 0.3 percent. It sells Kindles at cost.

Compare this with Google, which saw net income of US$12.9 billion on revenues of US$59.8 billion for the year to 31 December 2013, a margin on 21.6 percent; or to Microsoft, which posted revenue of US$77.9 billion for the year to 30 June, with a net income US$21.9 billion, a margin of 28.1 percent.

“Culture matters a lot,” Jassy said. “There is a very big difference if you have a culture that likes to invent, that is customer obsessed and is long-term orientated.”

Jassy said this focus on costs is what will make it very difficult for existing IT vendors to reinvent themselves into price-competitive cloud service providers and take AWS head-on.

“If you have a mindset, like we do, of being a high-volume, low-margin provider, you just think about everything differently,” he said. “You think about your prices, your cost models, your priorities differently. We have that DNA and operating skills.

“Whether it's having multiple providers capable of doing the work, making sure you’re getting increasing cost benefits with scale, or attempting to be more streamlined for your suppliers – there are many things in our supply chain we spend a lot of time on, because they ultimately provide value for customers via lower costs.

Jassy said the "old guard" had pushed the private cloud message in recent years in recognition of the disruptive nature of the model to any 60-80 percent gross margin business.

“But as customers have voted with their workloads, now all the technology companies are trying to build a platform like AWS has. What will be interesting to see is how many of them are good at it, or comfortable with operating on that model," he said. 

“You don’t flick a switch overnight and become great at high-volume, low-margin businesses.”