Microsoft Cloud President Asks Leaders to Find 20% Cost Cuts

Microsoft has discussed making significant cost reductions in its Azure cloud-server-rental unit, according to a person with direct knowledge of the situation. Girish Bablani, president of Azure, in recent weeks told senior leaders in his group, which has about 11,500 employees, to come up with ideas to reduce costs at least 20%, though it isn’t clear if such a reduction would include layoffs, according to the person.

The discussion comes even as Azure’s revenue growth has accelerated, a sign of how heavily Microsoft’s data center spending is weighing on its finances.

The company hasn’t finalized any cost-cutting measures and they could change, this person said. Bablani oversees just one unit within Azure; the broader cloud division has around 60,000 employees total. Bablani’s unit develops software for the cloud server business and isn’t part of the Azure data center team.

A Microsoft spokesperson said in a statement: “Azure leadership has not directed teams to develop cost-cutting plans. Every responsible company prepares for a range of scenarios and market dynamics, both positive and negative. This is inaccurate and careless reporting.”

To lower some costs, Microsoft could part ways with contractors who work for the cloud unit, said the person with knowledge of the discussions.

In recent months, some leaders at Azure have privately pointed to another reason for the potential cuts aside from the costly data center spending: the costs of talent retention. As Microsoft’s AI rivals such as Anthropic and Meta have hired or tried to hire the company’s employees, Microsoft has had to counter such competitive offers, said a person with knowledge of the situation.

Azure chief Scott Guthrie has also discussed a desire to increase AI spending budgets for existing employees as the company automates more tasks, this person said. Microsoft has been increasing its spending on AI per employee in recent months, and has been encouraging staff to use AI to increase productivity in realms like sales and software development. Microsoft’s total headcount was slightly lower as of June compared to a year earlier, following several waves of job cuts and voluntary buyouts.

Other major cloud providers including Oracle and Amazon Web Services have also made cuts, including layoffs, despite boosting revenue growth after their rising capital expenditures for AI data centers have hurt their respective free cash flows.

The discussions at Microsoft come as the company reorganizes the cloud unit around senior executive Arun Ulag. He is among a small group of leaders CEO Satya Nadella has been elevating in recent months as numerous longtime senior executives have pared down their roles or retired. Ulag, who previously oversaw Azure’s database products, will now also oversee executives who work on Azure Core, which provides computing power to customers such as OpenAI. The executives include Bablani, Billy Anders, Douglas Phillips and Mark Russinovich, the people said.

As Microsoft’s AI rivals such as Anthropic and Meta have hired or tried to hire the company’s employees, Microsoft has had to counter such competitive offers.

Guthrie, who announced the changes internally Monday, said Ulag will continue to report to him.

Charlie Bell, who previously led Microsoft’s security business before stepping into an advisory role earlier this year, will also now join Ulag’s leadership team while still reporting to CEO Satya Nadella, said the person with direct knowledge of the reorg. That’s another sign of Ulag’s rise at Azure.

Azure has long been a key growth engine for the company, but Microsoft only started breaking out the unit’s revenue in dollar terms last month. It said Azure generated $101.9 billion in revenue in the 12 months ending in June, up 40% from the previous year and 43% in the June quarter alone. In comparison, AWS generated nearly $150 billion in revenue in the same full-year period, including 37% growth in the second quarter of this year.

While Azure’s 40% revenue growth was impressive, it has been negatively affected by Microsoft’s decision at the start of last year to pause a slew of data center projects, The Information has reported. Still, the unit now represents about 31% of Microsoft’s total revenue.

At the same time, spending on AI data centers is taking a toll on its cash generation. The company generated $20 billion in free cash flow in the June quarter, up more than $4 billion from the cash it generated in the first quarter but down 20% compared to its free cash flow in the second quarter of last year.