In Search of Positive FCF: The Agents and Principals Dilemma, Optimization, and Innovation in Brazil
In Search of Positive FCF: The Agents and Principals Dilemma, Optimization, and Innovation in Brazil
The journey to find a positive Free Cash Flow (FCF) in a cloud computing environment in Brazil began with the need to understand not only the technical aspects but also the deeper economic challenges. One of the first obstacles was understanding the dilemma between agents and principals. Without fully addressing the misalignment of interests between managers (agents) and shareholders (principals), any optimization strategy will face significant limitations. This directly impacts the implementation of effective solutions, from foreign exchange hedge strategies to adopting cash-neutral approaches or even mergers and acquisitions to mitigate the effects of the Brazilian economic environment.
This is the reality: while optimization tools like FinOps can be part of the solution, they do not work in isolation. In an environment like Brazil, where currency risk and high interest rates dominate the scene, more complex strategies need to be adopted, such as mergers, financial risk mitigation strategies, and a deep understanding of the long-term responsibilities of agents towards the main stakeholders.
Optimization Without Convergence With this in mind, the journey of operational optimization began with attempts to find the ideal mix between unmanaged VMs, managed DBs, long-term commitments, and opportunity cost. I tested all possible combinations: floating budget, freedom to choose any mix of VM and DB commitments, and even the possibility of shutting down non-committed instances. However, regardless of the adjustments made, the FCF never converged to a positive value.
The impact of currency risk and high interest rates (10.75%) was constant, canceling out the operational gains that optimization promised. This result brought to light the reality that operational optimization alone is not enough in Brazil. This became evident when adjusting everything by the Sharpe Ratio, which revealed the model’s limitations in the face of local macroeconomic challenges.
The Role of “A” and Positive Externalities In the Cobb-Douglas function, the “A” component represents technological progress or exogenous efficiency that drives growth without directly depending on inputs (such as VMs and DBs). However, in Brazil, this “A” is limited by the lack of incentives for innovation. Technology and efficiency do not naturally evolve in an environment where investment in innovation is low, either due to a lack of government incentives or the risk that innovation may not generate immediate returns.
Positive externalities play a crucial role here. These are indirect benefits that a company or sector generates for the rest of the economy, such as technological advancements or infrastructure improvements. Even economists from the Chicago School, known for their focus on free markets, recognize that these externalities require government intervention to reach equilibrium. In Brazil, the absence of public policies to incentivize R&D can create a poverty trap, in which the country fails to boost its “A,” keeping economic growth stagnant.
Strategies to Mitigate the Brazilian Economic Environment In addition to the need to improve the exogenous “A,” there are strategies companies can adopt to mitigate the effects of the Brazilian economic environment. Currency hedging, for example, can protect against currency volatility. Adopting cash-neutral strategies can help balance cash flow in unstable environments, and mergers and acquisitions can create synergies that help strengthen the company’s market position and reduce operating costs. These strategies, combined with innovation, can bring more resilience to such a challenging environment.
However, for these strategies to be effective, there must be a clear understanding of the agents and principals dilemma. Managers’ interests must be fully aligned with shareholders’ to ensure that the focus is on long-term value creation, rather than just short-term solutions that benefit immediate profit. This alignment is essential for the successful implementation of these financial strategies in a high-risk scenario.
Innovation and Internal Promotion: The Role of Companies While the government plays a key role in creating policies to incentivize innovation, companies themselves can be leaders in creating innovation ecosystems. The open-source movement, exemplified by Kubernetes, is proof of how technological innovation can happen through collaboration. Created by Google, Kubernetes has become a global standard for container orchestration, maintained by a global community. Projects like this show that companies can lead innovation initiatives without relying exclusively on government policies.
By adopting an open innovation mindset, companies can create internal incentives that favor technological progress. This not only improves internal efficiency but also creates positive externalities that benefit the entire economy. Investments in disruptive technologies and collaboration on open-source projects are examples of how companies can enhance a country’s “A,” contributing to economic progress as a whole.
A Reflection on Innovation in Brazil The reality in Brazil, where R&D is treated as an expense rather than an asset, creates barriers to innovation. This raises the question: how to foster innovation in an environment where financial risk is high? For the country to escape this growth trap, both the government and companies need to collaborate to create a more favorable environment for technological development.
While the government should offer tax incentives and policies to strengthen research and development, companies have the ability to create their own conditions for innovation. Building innovation ecosystems, supporting open source, and investing in emerging technologies are ways to overcome economic challenges and promote more sustainable growth.
Conclusion: A Balance Between Governments, Companies, and Innovation The optimization and analysis journey has shown that, in Brazil, operational optimization is not enough to generate the positive FCF that companies seek. The country faces challenges that require more than technical adjustments; they demand a long-term strategy that involves innovation, financial risk mitigation, and a full understanding of the agents and principals dilemmas.
The government has a crucial role in creating incentives, but companies can also lead innovation initiatives. Open-source projects like Kubernetes and technological collaborations can create positive externalities that drive growth. In the end, it is the combination of internal innovation and government intervention that will allow the increase of the exogenous “A,” promoting progress and sustainable growth in a challenging environment like Brazil.