Cloud Cost Management: 5 Best Practices to Consider

COVID-19 shifted cloud adoption into high gear, as the abrupt transition to remote work created an urgent need for secure, reliable, scalable, and cost-effective off-premises technology solutions. But developing an effective cloud cost management strategy remains a key challenge for enterprises trying to realize the value of their public cloud initiatives.

Cloud technologies have become embedded in enterprise strategies, with 92% of organizations reporting at least part of their IT environment on the cloud. Even as emergency cost containment plans caused IT spending to fall 8% last year, Gartner called cloud spending the only “bright spot” – increasing 19% in 2020 and predicted to grow 23.1%  to $332.3 billion this year.

When managed properly, cloud computing can be the most cost-efficient method for using IT infrastructure - offering pay-as-you-go packages and no need to purchase, install, and maintain pricey server equipment, network devices, and licenses.

But most organizations fail to create a cloud cost management strategy when they start their cloud journey. And complex, fast-changing cloud pricing, lack of organizational insight into what impacts costs, and the ability of business units to spin up cloud services with little or no accountability can quickly lead to unexpected and uncontrolled overruns.

Nearly 65% of IT leaders cited “cost management and containment” as the biggest pain point to running cloud technologies and applications. One in 12 said they end up spending an alarming 40% more than they budgeted - with 30% of total cloud spend wasted on unused resources.

In this blog, we will show you the secret to developing an effective cloud cost management strategy. With the right FinOps (Financial Operations) strategy in place, your organization can maximize cloud efficiency while managing spend and planning for future consumption.

A cloud cost optimization starts with 2 important objectives

A strong FinOps strategy for the cloud has two essential goals:

Resource optimization 

Think for a minute about your house, which uses electricity as the main resource. Optimizing this resource involves digging into specific details surrounding the electricity your house requires for daily operation. For instance, if you turn on a lightbulb, you will want to closely monitor how much of the lightbulb is turned on and for how long – and whether you really needed to use it at that time of day.

That way, you can build a budget and adjust to the most efficient usage - ensuring you don’t waste money but can always access what you need.

The same “right-sizing” tactic is essential to cloud cost management. Right-sizing your cloud configuration is the process of upgrading, downgrading, or terminating cloud resources based on utilization metrics and automation. It’s critical to preventing overprovisioning that leads to idle instances or underprovisioning that impacts performance.

Organizations can correctly size cloud resources by continually matching instance types and sizes to their workload capacity and performance requirements. The process can be challenging, considering the daunting array of choices cloud providers offer and ever-evolving resource needs.

But ensuring the configuration you pay for is the right fit is key to effectively managing cloud costs and achieving optimal performance.

Pricing optimization

Cloud computing offers unlimited scalability and lowers costs by only charging for the resources you use. But once you understand your resource needs, you can invest in pricing optimization strategies like Reserve Instances (RIs) that offer heavy discounts for prebooking capacity.

RI savings can reach as high as 75% compared to on-demand pricing models, based on the upfront payment and time commitment you select. Flexible pricing models known as Saving Plans are a newer alternative, offering similar cost management opportunities based on committed spend.

But while a proactive pricing strategy is essential to FinOps, there is a caveat: you can only earn a substantial reduction on your cloud bills if you don’t overcommit. The ability to properly analyze your past usage and prepare for the future holds the key to significant savings.

5 key considerations for effective cloud cost management

Yet while the end-goals of resource and pricing optimization may be clear, most organizations struggle to achieve them effectively.

Visibility is power when it comes to implementing a cloud cost management strategy. Unlike the fixed, upfront investment that characterizes traditional on-premise infrastructure, cloud consumption must be monitored closely as an everyday operational expense.

Better insight into cloud costs and usage gives companies the ability to track and optimize spend, enforce accountability, and improve the performance of their cloud technology.

With IT leaders expecting their cloud spend to increase 39% over the next 12 months, it’s no surprise 61% cited cloud cost optimization as their top priority in Flexera’s 2021 State of the Cloud Report. But as cloud complexity increases, costs also become more opaque and harder to track.

These 5 strategies offer a roadmap to effective cloud cost management through resource and pricing optimization:

Utilize tagging to organize cloud costs

Tagging is an essential tool for gaining visibility into cloud spend and usage across functions. Essentially, tags are metadata labels that you assign to each of your resources to better categorize them for cost allocation, reporting, cost optimization, and more.

Consider our house analogy. By tagging and grouping every item that consumes electricity in the kitchen, for instance, you can achieve a clear understanding of kitchen electrical use and appropriately assign costs.

Tagging cloud resources deliver the same clarity. It allows organizations to show back or chargeback usage to appropriate departments and easily reallocate resources as demand changes.

Most organizations will want to customize tagging reports for cloud costs, usage, performance, and availability in several ways - and their needs may change over time based on the requirements of different stakeholders. Before assigning tags, it’s good practice to get a handle on what aspects of cloud spend the business wants to view to help users make the most effective use of cloud infrastructure.

Consolidate cloud accounts for true visibility

From the website host to communication solutions, most businesses utilize multiple cloud providers and services. Consolidated reporting of your cloud costs offers increased visibility across all accounts –enabling you to understand your business’ entire cloud portfolio in a unified manner.

By accessing information regarding your total cost and usage in a single location instead of a piecemeal approach, you drive accountability of your cloud bills and can better recognize areas that require tweaking.

Consider investing in a cloud financial management solution

Most cloud providers offer native cloud cost management strategies that can benefit smaller environments. But as environments increase in size and complexity, many companies struggle to stay on top of their cloud spend as invoices transform into lengthy documents accompanied by complicated usage files.

Investing in a cloud financial management solution can provide visibility into complex cloud expenditures – incorporating tools like budget management, tagging strategies, trend analysis, invoice verification, and detailed dashboards and reporting.

With greater insight, business units can operate resources more effectively and responsibly - making informed buying decisions so money isn’t wasted and controlling over-consumption.

Implement budget allocations and quotas to keep costs under control

Budget allocations can help you avoid nasty surprises on your cloud bills by allowing you to track actual spending against planned spend. The budget scope is customized to business needs: setting limits for the entire billing account, for instance, grouping multiple projects, or narrowing the focus to a specific instance.

After the budget is set, monitoring tools trigger alerts when cloud resource consumption approaches a predetermined threshold.

In some cases, it can also benefit the business to guard against runaway costs by establishing budget quotas, or limits. Reaching the quota will trigger an alert that automatically stops spend – requiring an approval process to change.

Gain valuable insights through reporting and visibility

While regular spend analysis may sound obvious, organizations accustomed to the relatively stagnant expense of traditional data centers can be caught off guard by the variable nature of cloud costs. While 83% of IT leaders in the Flexera survey said their annual cloud spend exceeds $1.2 million, it’s too often a mystery where it all goes – with as much as a third of cloud spend untracked.

Unfortunately, failing to monitor and analyze costs and usage can cause unpleasant budget surprises at the end of the month.

Setting up spend analysis with customized cost reports and dashboards controls cloud costs by giving you the information you need to take action before it’s too late. The best strategies offer drilled-down cost views of cloud spend associated with attributes chosen by the business, such as users, tags, geographic regions, instance types, data transfers, cost trends that can predict future spend, and more.

Manage your cloud costs with greater visibility

Cloud computing is a proven method for reducing IT infrastructure costs – if it is monitored and managed properly. But lack of insight can trigger considerable financial consequences, including unexpected spikes in cost, overpaying for unused resources, and inadequate cloud performance.

Creating a culture of cloud cost savings delivers the visibility you need to identify mismanaged resources, eliminate waste, reserve capacity for higher discounts, and right-size computing services. Employing a well-structured cloud cost management strategy enables you to make the most of your cloud infrastructure while keeping expenses under control.