By Hamish Auld, Senior Manager at Efficio
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.
The complexity of cloud-based services, however, presents a novel challenge to procurement, finance, and engineering teams – one that simply cannot be ignored. 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 means costs can quickly spiral out of control within businesses.
This is a growing concern for the C-suite as organisations struggle to get to grips with cloud service expenses and long-term usage. 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
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 Traditional central controls are rapidly becoming outdated – it is now the developer on the front line who oversees buying that resource, creating more challenges for the C-suite.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.
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, by translating your cloud spend into a language that is understandable within your organisation. Unless every level of the organisation that is involved in the cloud understands this 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
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 – 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.
It is also important to avoid 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. 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
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 or a variety of credits, but it is vital to carefully consider these offerings against your organisation’s needs. It’s important to that 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, your organisation can commit to purchasing a service at a much lower price for several years. The benefit is that cloud service providers are more easily able to plan capacity and growth.
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. The key is understanding what portions of workloads should be reserved – forecasting is therefore critical.
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, 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.
