Propelled by the pandemic, cloud services and their adoption have gone into overdrive. Businesses transformed to meet the surge in digital demand and new ways of working and, as a result, have become increasingly dependent on the cloud to remain competitive within the evolving market.
Now, cloud services are rapidly consuming large amounts of corporate IT budget, and businesses are struggling to maximise the benefits of the cloud while managing its cost. Organisations are drawn to the flexibility the cloud offers; however, many underestimate the complexity, volatility, and commercial risk that the cloud’s flexible model brings. Cloud services are metered by the second and with fewer built-in checks … while at first this can seem easier to manage and less cash-intensive for businesses, without key cost-reduction steps and service management strategies in place, cloud service costs can spiral out of control, as leaders underestimate expenses and long-term usage.
Understanding and identifying cloud costs
As dependency on the cloud grows, the C-suite must first understand how things have changed, and second how vital it is to adjust the IT-spend planning process accordingly. For procurement teams, the general process for data centre 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 Traditional central controls are rapidly becoming outdated – it is now the developer on the front line who oversees resource sizing and resource buying. While for many this can be seen as more effective for the organisation, it actually creates more challenges for the C-suite.
With lots of individual purchasers with varying approaches to risk-benefit , there is a lack of consistency of approach 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.
Making cloud services visible
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.
Maximising your commercial deal
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:
1. Amount of committed spend (term and annual spend)
2. Level of growth of commitment
3. Presence and scale of migrations of workload to the vendor’s cloud
4. Mix or adoption of new services
5. 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.
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.
Optimising purchasing strategies
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.
Cloud adoption has proven to be a resourceful method for reducing IT infrastructure costs but only if managed and monitored properly. However, lack of insight can trigger significant financial consequences, including unexpected spikes in cost and overpaying for unused resources. It is important to create a culture of visibility when identifying mismanaged resources and reserving capacity for higher discounts. Employing a well-structured cloud cost management strategy enables businesses to make the most of their cloud infrastructure while keeping expenses under control.
