It's not about whether or not the engineers can make the colocated setup work.
It's that you're going to pay a lot of hidden costs with a colocated setup. Engineers can't set up, maintain, and do on-call for the colocated setup without subtracting from their primary working hours.
Each additional engineer you have to hire to help with the colocated setup is $200-400K fully loaded out of your company's budget. If you have to hire 3 additional engineers to fill out your colocated on-call schedule and help set up and maintain the system, that's easily an extra $1 million per year on your budget. Cloud is expensive, but $1 million goes a long way.
It's easy to look at a potential AWS bill and a potential colocation and hardware bill and declare colocation the winner, but then you still have to set up and maintain it all as well as constantly train everyone on it.
With AWS, you can hire engineers with AWS experience and they'll understand the big picture of how to work with things on day 1. With a custom setup, you're at the whims of whichever employees set up the system because they know it best.
Colocated systems tend to work very well at first when the original engineers who set it up are all still at the company and it hasn't run long enough to start encountering rare failure modes. They quickly become a nightmare when your engineering staff turns over multiple times and nobody can remember who knows how to do what on the colocated system or if the documentation is up to date or not.