Cloud Cost Optimization: A Pivotal Part of Cloud Strategy

Written by Gaurav Aggarwal, Avanade.

This article was originally published on Forbes. It has also been previously published by Avanade.

Cloud has undoubtedly been one of the clear winners in the Covid-19-induced digital transformation journey for most companies. However, managing costs is one of the most pressing and debilitating cloud adoption challenges, more so in the current context.

According to a McKinsey report, "around 80% of enterprises consider managing cloud spend a challenge." As Flexera noted, "organizations waste an average of about 35% of their cloud spend."

Five challenges on the cloud cost optimization journey

Despite conceding to the benefits derived from cloud cost optimization, many organizations struggle with it.

1. Provision for peak mindset.

To maximize the cloud's value, it is essential to apply the "just in time, pay for what you need" mindset.

2. Ease of use and lack of governance model.

Often, the inherent scalability, flexibility and easy provisioning of cloud service can lead to resource sprawl and cost overruns. Lack of governance for cloud resources adds a multiplier effect to unexpected charges of resource sprawl.

3. Complex multilayered pricing and billing structures from hyperscalers.

Public cloud pricing and billing structures are multilayered and tedious to understand. Cloud consumption bills are quite challenging to understand and make it difficult to build "budget vs. forecast vs. actual usage" comparisons. The lack of a standard billing model, formats or APIs per the cloud vendors' discretion adds to this complexity.

4. Low visibility.

You can't manage what you can't measure, which often results in uncontrolled consumption.

5. Too many options in cloud feature catalog.

Complex cloud catalog options require careful consideration, and it's not easy to find the best-suited feature with the lowest cost for a given context. Moreover, cloud vendors release 600 to 800 new services and features, making it difficult for organizations to keep up with this pace and understand how each announcement affects their financials.

Seven mantras for cloud cost optimization

Below are seven mantras that can help organizations in streamlining cloud cost optimization.

1. Cloud-first mindset.

Cloud deployment entails some structural and systemic changes in an organization. Having a cloud-first mindset helps organizations become agile in bringing forth these changes, whether in business or revenue models. It also helps if IT teams can make decisions around the movement of the cloud based on the dynamic needs of various groups. Investing in PaaS capabilities and cloud-native toolsets can help here.

2. Architect solutions for cloud economics.

An organization needs to arrive at the most cost-effective cloud architecture to meet their requirements by factoring in what's on offer in the cloud catalog, including newer features, and knowing what resources to use by interpreting usage trends from billing. In the past, organizations designed for availability, performance and security to be delivered from a finite set of pre-resources planned for peak workload. The cloud reverses this paradigm and allows for a more precise design that's perfectly aligned to workload requirements. The architectural components in the cloud carry a price tag, and thus optimal cloud architectures need to be designed with cost in mind. To maximize cloud economics benefits, establish a strong automation foundation with everything as code (infra, security, configuration, network, documentation).

3. Adopt a cloud cost optimization framework.

There are three key pillars to any cloud cost optimization approach:

• Optimize resources (rightsizing, right features).
• Create visibility and control (transparency of costs, usage and forecasts).
• Establish effective governance (identify usage, ownership and department allocation).

The journey for any cloud cost optimization starts with initial analyses of current cloud estate and identifying optimization opportunities across compute, network, storage and other cloud-native features. Any cloud cost optimization framework needs to have a repository of cost levers with associated architecture and feature trade-off. Businesses would need governance — the policies around budget adherence, resource creation permissions, etc. — to maintain an optimal state.

4. Continuous cost optimization process.

How often an organization optimizes cloud depends on the speed of its cloud adoption, how quickly it develops and the alignment with its financial cycle. Given the dynamism around what is available and what is being used, cloud optimization must be a continuous process and part of an organization's operating model. Applying optimization practices right at the outset can help establish a culture of optimization and accountability. When thinking of optimization, while cost takeout is a starting point, it's crucial to think about achieving a better cost to serve.

5. Implement a chargeback model.

Cloud consumers should be responsible for what they consume. Enable them to create forecasts and pursue optimization opportunities. A good starting point would be to develop a resource tagging (e.g., usage, ownership, department and cost center) model to implement the chargeback model. With proper resource tagging, it is possible to associate resource cost to the resource owner — thus, a cost center code.

6. Use the right sourcing, pricing and discounting model.

• Choose the right sourcing model from allocation-based or consumption-based services.
• Choose the right pricing and discounting models.

7. Establish a cross-functional cloud FinOps team.

FinOps is a collaborative, data-driven way of managing cloud spend that allows finance, IT and the business to manage at speed. As McKinsey noted, most large enterprises will benefit by "bringing together technical, financial and sourcing talent into a cross-functional cloud financial operations (FinOps) team to manage cloud sourcing and consumption." A good FinOps model combined with cloud sustainability benefits is about saving money and managing the cloud's use to make money.

Cloud cost management is not just an operational concern or merely about "cost reduction"; it's a value-driven strategic move. The path toward it will not be linear and requires tight collaboration among governance, architecture, operations, product management, finance and application development to be successful. As DevOps has revolutionized the development processes, a good cloud cost optimization framework and FinOps can similarly help businesses realize the cloud's real business value.

With the right strategic interventions, control and operating model, the cloud provides excellent visibility to organizations on IT spends and is undoubtedly the most crucial and promising/futuristic technology investment an organization can make.

Find out how you can eliminate waste to reduce IT operating costs and maximize value.