By Hamish Auld, Senior Manager at Efficio
Over the last few years, we have seen technology adoption and transformation accelerate significantly – and with it a surge in cloud-based service usage across a range of sectors. Organisations have become increasingly dependent on cloud computing – not only to scale up effectively and meet new growth demands in a continuously evolving market, but also to ensure rapid access to top technology in a world where hybrid working has become the norm.
However, despite its promise, the complexity of cloud-based services presents a novel challenge to procurement, finance, and engineering teams – one that simply cannot be ignored. While the cloud prides itself on the flexible model it offers, it also introduces complexity, volatility, and commercial risk to organisations. The surging demand for ‘pay-just-for-what-you-use’ means that services are metered by the second and with fewer built-in checks to stop rapid proliferation of resources. This leaves the door open for costs to spiral out of control within businesses.
Out-of-control costs are a growing concern for the C-suite as organisations struggle to get to grips with cloud service expenses and long-term usage. Amidst a rapidly shifting landscape and growing complexity, the challenge of effectively managing cloud services can be daunting. Yet, by setting out key cost-reduction steps and service management strategies, you can control and improve the governance of your organisation’s cloud spend.
Understanding and getting to the heart of the cloud cost problem
As dependency on the cloud grows, the C-suite must first understand what has changed, and second how vital it is to adjust the IT-spend planning process accordingly. For procurement teams, the general process for datacentre financial planning is relatively clear and easy – however, planning for cloud-based services is considerably different.
While transitioning to the cloud does bring significant benefits to organisations, the move generates one substantial challenge: decentralisation of decision-making. Traditional central controls are rapidly becoming outdated – it is now the developer on the front line who oversees buying that resource. While for many this can be seen as more effective for the organisation, it actually creates more challenges for the C-suite.
With proprietary tools being purchased based on the individual developer needs rather than the organisations, a lack of consistency has been created with regards to cost control, meaning the spend is more difficult to predict and manage – leading to out-of-control cloud expenditures. A new innovative strategy is needed to facilitate strong, accurate decisions that align with the organisation’s cloud management and spend.
The importance of cost visibility and forecasting
The first step to gaining control and improving the governance of your cloud spend is visibility. The objective here should be to help all teams within the business that affect cloud usage to be able to see their spend and interpret it correctly. You must translate your cloud spend into a language that is understandable within your organisation, whether that is for budget-holders or end-point development teams. Unless every level of the organisation that is involved in the cloud understands that premise, then the strategy of controlling and improving the cloud spend problem will not be effective.
Once your organisation can see and understand cloud spend, the next step to cost optimisation is a detailed forecast. This forecast serves as the so-called backbone of technical optimisation, purchasing optimisation, and pricing negotiations.
Determining discounted pricing on cloud services
For many organisations, forecasting cloud spend can be difficult, with many businesses jumping the gun to get an immediate pricing discount. However, it is important to avoid this at all costs. As an organisation, you want to be in the best possible position when it comes to agreeing a price for cloud services, and to do this you have to have a strong understanding of your organisation’s current cloud usage and the forecasted future growth. Once a solid understanding has been established, then your organisation can look into enterprise commitments. Enterprise discounts, also known as dollar-value commitments, are closely guarded offers so it is important to note several key variables before agreeing to any commitment:
- Amount of committed spend (term and annual spend)
- Level of growth of commitment
- Presence and scale of migrations of workload to the vendor’s cloud
- Mix or adoption of new services
- Partnership status with the service provider
While for many organisations it is tempting to agree to larger and longer cloud service commitments, many organisations miss out on significant savings. If your organisation’s sum of spend to date and forecasted spend is much higher than your enterprise commitment, then it is likely that you have significantly under-committed. To avoid this, it is important to identify this early on and use the forecast to drive renegotiation of the enterprise commitment to prevent any money from being left on the table.
The other challenge organisations need to avoid is overcommitting. This occurs when an organisation has no way of meeting its spend target and risks having to pay a significant amount of money at the end of the agreement. It’s common for businesses to under-commit, rather than overcommit, which is often due to delayed growth. The key here for businesses is to find a middle ground when negotiating the enterprise discount to avoid significant under or overcommitment.
Negotiation, negotiation, and more negotiation
Wanting to obtain the greatest possible discount for your organisation is a tough balancing act between committing to the highest possible spend to get the best discount for your business and making sure there is no risk of overcommitment. Negotiating is a key part of this process – whether renegotiating a current deal or starting a new one. The more information you can offer on your organisation’s current spend, new product plans, and business growth, the stronger your organisation’s position for a greater discount.
Once you have determined the enterprise commitment for future spend that your business is comfortable committing to, it is important to allow for multiple rounds of negotiations. Cloud service vendors can offer specific discounts, migration credits, training credits, and any other offerings, but it is important to carefully consider these offerings against your organisation’s needs. If any of the offerings provided by the cloud vendors do not serve as a benefit to your organisation, it’s vital that you push for discounts that will reduce the overall cost of your business’s current usage or future growth.
Understanding reservation strategy and capacity
Key negotiating strategies, reservations, savings plans, and committed-use discounts (CUDs) all offer organisations a simpler way to access heavy discounts – however, this is usually in exchange for a commitment of continuous usage. Rather than purchasing each service on demand, which is an option available to businesses, your organisation can commit to purchasing a service at a much lower price for several years. The benefits your organisation gains from opting for this option is that cloud service providers are more easily able to plan capacity and growth. However, the drawback is that this commitment is an hourly usage commitment, meaning should you stop using this type of resource as it will have to continue paying for the length of the original agreement.
One of the key challenges when determining capacity requirements for your organisation is understanding what portions of workloads should be reserved – forecasting is therefore critical. Many organisations rush to achieve savings targets, and this leads to poorly planning reservation purchases that can lead to increased costs in the future when machine types and requirements change.
Many organisations forget that optimisation of cloud costs is a continuous process. To ensure optimal benefits, governance policies and continuous coverage of usage and spend is essential. While there will be challenges throughout the process, with a well-planned utilisation assessment and continuous management of cloud services within all levels of the organisation, businesses can make use of all the benefits the cloud services have to offer while avoiding uncontrollable cloud costs.
For more information on evaluating your cloud service needs, read the whitepaper Battling cloud complexity: Controlling and understanding costs in the public cloud by Hamish Auld, Ben Avery, and Fabian Bodoky.
