The three questions leaders care about when discussing cloud costs

If you can’t measure it, you can’t manage it. Hence, reporting on costs is always the first step in cloud cost management.

The challenge is that when you are working with the leadership team, their focus is on managing strategy and growth. Cost management is a necessary evil.

Your success depends on the leadership team having to spend as little time as possible on the budget, and they are looking to get an affirmative answer to these questions:

  1. Are we in control of our total spend? 
  2. If no, can you solve the problem in the FinOps (or cloud) team?
  3. If no, (deep sigh) do we need to involve other parts of the organization? And how?

The first “yes” will let them lean back and refocus on growing and developing the business. So what does that mean for what you should include in your management reporting?

What is the core of cloud cost reporting?

Your colleagues have these common elements in their cloud cost dashboard:

  • The total spending over time and compared to the budget.
  • Top 5 spenders 
  • Top 5 growth areas 
  • Top 5 savings

The total spending is the main graph to understand if spend is in control. The top 5 spenders and top 5 growth areas are looking for any signs of cost areas that may drive future costs. The top 5 savings are to see if we have made significant savings somewhere that are hiding a general increase in spending – and make sure to highlight your contributions in driving down costs.

You must be prepared for additional questions on any deviations, particularly if you experience any budget issues or your organization is under general cost pressure.

Warning

Generally, our recommendation is not to provide more detailed reporting or drill-down functionality for the leadership team. Focus on the high-level dashboard, discussing the numbers and demonstrating your knowledge and ability to find solutions.

The One Question You Must be Able to Answer.

You will eventually run into a budget problem, and the leadership team will look at you and ask question number 2, “Can you solve the problem for us?”.

Going back to the fundamental equation of cloud costs: Total spend = Price * Quantity, you are left with two options to reduce total cost. Either you can reduce the unit prices you pay, or you can reduce the quantity. (see also our recent blog post on how to take control of your cloud costs).

The responsibility for unit prices typically is with you as a FinOps professional. Hence you must be able to credibly answer if you and the team can solve the problem by applying Azure price optimization techniques. If there is untapped potential in price optimization, this is the fastest route.

But if you and the team can’t solve the problem, then what?

Warning

We strongly recommend that you have a firm grip on how to demonstrate that you are in control of prices – you don’t want to get the blame for cost overruns.

Decision time – Increase budgets or work with the business?

When you go into the budget review meeting, you already know that the meeting will require the leadership team to make one of two decisions:

  • Do we increase the budget (or allow an overrun), at least for a while? or
  • Do we go to the biggest spenders and work with them to reduce their consumption?

If the decision is the latter, get explicit support from the leadership at the meeting, and agree that they communicate it clearly to all stakeholders.

So much on the process, the next question you should consider is what could derail the discussions?

Warning

For the meeting and decision process to go as smoothly as possible, you should know which projects or departments you recommend doing a consumption review.

Some pitfalls in cloud cost reporting you are likely aware of

Firstly, let us reiterate how powerful it is to document that you control price optimization. Without this documentation, it is only too easy to point at you to find the solution. (sign-up to get a notification at the bottom of this article – we will be addressing this topic in a separate post)

Besides that, the most common issue in cost discussions is the numbers. To mention a few

  • Disagreement with Finance about what the cloud spend is in a given month.
    There can be many valid reasons for that, i.e., prepaid reservations, derived costs for licensing etc.
  • Discussions about spend changes even when the consumed quantity is the same. The reason can be that a reservation has run out or has moved to another resource. As billing is per hour, February can seem 10% smaller than January, even if there has been no change in the environment.
  • Dissatisfaction with the size of non-allocated costs. “Why didn’t WE benefit from reservations”
  • Concern about derived costs. If you bring your own license (i.e., Azure Hybrid Benefits), the license cost will not appear in your billing – only the lower price for the resource.

We will leave these questions for now and return to them in a later blog post on showback and chargeback.

Warning

These pitfalls may appear technical – and they are. However, they lead to genuine discussions about the validity of the numbers. Hence, getting to the right solution will become more challenging and reduce your credibility and impact.

How to get started?

By now, you might have a lot of ideas about what you want to do, what tools to implement, etc. But in the early phases of a cloud journey, where budget is not yet seen as a significant issue, getting funding for cost management tools is not always easy.

We recommend that you start by reporting the monthly cost in a normalized form compared to the normalized budget. It will create awareness about any increase in spending, free from month-length noise, and you can discuss some of the challenges in getting accurate reporting in place.

There are free tools in all cloud portals to help you get started, although these tools do not offer normalized costs. You can read more about the Azure tools in one of our recent blog posts, which links to Azure for additional detail. Read more about AWS Billing and Cost Management on the AWS site.

You will likely soon experience that the monthly reporting becomes a time-consuming effort, and you want a better solution. Then what?

Use Power BI or similar tools to report on cloud costs.

Even though you only present high-level data to the leadership team, you need a firm grip on the underlying data. Otherwise, you cannot answer the leadership team’s questions or present the business with relevant data on what areas they need to reduce consumption.

You must ensure that all internal reporting is consistent from top to bottom, and you only do that if you have one consolidated data source.

You can use the same Power BI tool to:

  • Produce Management Reporting
  • Investigate variances
  • Make custom reports
  • Create chargeback files for your ERP-system
  • Produce showback reports with drill down to your internal customers
  • And much, much more

The data you need is your cloud detailed billing data (read how to get data for your finops), your hierarchies for reporting, and any derived costs you want to include. We recommend you review options for third-party tools – it is not entirely trivial to build something like this yourself.

Want additional resources on cloud cost management?

Over the coming weeks, we will be issuing a handful of blog posts going into more detail about FinOps core disciplines, roles and responsibilities, and how to create a roadmap for your FinOps journey.

If you want an alert when a new post is out, leave us your name and e-mail below. You can also join our free live webinars or book a meeting if you want to discuss your specific issues with one of our experts.

All the best on your FinOps Journey.

Does AWS really save money?

Not automatically. 

AWS is not just one thing. It is many, many services. Whether you save money or spend more depends on what and how you use these services. 

  • Are you moving Virtual Machines (VMs) and NVMe disk storage from a well-run on-premises environment to AWS EC2? You will spend more. A lot more.
  • Are you architecting an environment to benefit from cloud-native services that scale with demand and turn off entirely when not needed? You can save a lot.

In both instances, savings are rarely the goal – instead, our customers are looking for benefits like increased developer efficiency, shorter time to market, etc. 

In other words, you might not save money, but you may make more – if your business can use these cloud benefits to drive more business.

What is AWS savings plan?

There are two different kinds of savings plans: 

  • Compute, which covers EC2 instances, AWS Fargate, and AWS lambda usage regardless of instance family, size, AWS region, operating system, etc. There are 88,480 different EC2 instance types at the time of writing, 44 AWS Fargate resources, and 80 AWS Lambda covered by a compute savings plan. 
  • The other kind is the EC2 Instance savings plan, which gives a slightly higher discount for specific families of instances but has far less flexibility. 

We recommend the Compute savings plan. You maintain cost control and reasonable flexibility.

How do AWS savings plans work?

It’s complicated. 

In short, a compute savings plan is a commitment to spend a certain dollar amount per hour on compute resources – both AWS EC2 instances, AWS Lambda, and AWS Fargate.

If you don’t use up the entire amount that hour, it is lost. If you use more than you have committed, you pay the Pay-As-You-Go rates. 

When it comes to prioritizing which services should benefit, AWS automatically applies the committed amount to the resources with the highest discount percentage first – within the account with the savings plan.

Once it has covered every computing resource in the account, it spreads it to other accounts, again with the highest discount first. 

Therefore, a savings plan should live in a separate account with nothing else in it – that way, it will always cover the tenant’s (or management account’s) use with the highest discount rates first.

Why is AWS so expensive?

A combination of several explanations:

  • Firstly, it is value-based pricing, not commodity pricing. If you are coming from on-premises hardware where vendors compete with virtually identical and interchangeable servers, you’re used to cost-plus pricing. With value-based pricing, vendors price according to the value you perceive to get from the solution. This price will almost always be significantly higher. 
  • Secondly, your switching costs are high, so you are less likely to leave, even as prices stay high. If you have built your solution using AWS exclusive services, where can you feasibly go? Even Kubernetes workloads are implemented slightly differently from cloud vendor to cloud vendor.
  • Thirdly, because competition hasn’t really materialized yet. Yes, there are other cloud vendors like Google Cloud Platform, Microsoft Azure, and Oracle Cloud Infrastructure, but, right now they are all just fighting to keep up with demand from customers – not yet fighting for customers. Many more companies and development teams are looking to put workloads in the cloud than people who can help them do it. We do not expect to see fierce price competition any time soon – and it will continue to be limited by the high switching costs.

All that to say, AWS is priced the way it is because they can, and they are a for-profit company.

Any other Questions?

If you have other questions about AWS and how to control your costs, please ask them below or continue reading our blog post on “How to take control of your Cloud Costs“.

What is your “one number”?

Hi, I am Kim Schroder, and I will be sharing with you my thoughts on how to take a pragmatic yet firm approach to manage your IT costs in this series of blogposts on FinOps or Cloud Financial Management. Whether you work in IT, Finance, or Procurement, I hope you will get a few new perspectives that will benefit your current job and your career.

24 years ago, as a newly appointed head of IT Nordics in Arthur Andersen, I met with the European CFO, and in many ways, that meeting shaped my career in Andersen. He advised me to focus on one number: cost per employee for delivering IT services. 

Why was this clever? Because it created a precise measure of contribution to the business (even if I was helped by constantly dropping prices on IT, also known as Moore’s law). Having this KPI gave me the recognition and platform to participate in more strategic projects with a stronger voice – and with the CFO’s support, I ended as European CIO.

Fast forward twenty years. Taking control of costs is still a robust platform for your career – but make sure you adapt your understanding to a world where cloud and services are how you buy technology. And find out “what is your one number”?

Why do cloud costs easily end up as a blame game?

The short answer is “because we get unpleasant surprises”, i.e., our cloud costs exceed our budget. A budget overrun leads to a discussion of why, and rarely everybody agrees to an answer. If you are accountable for the cloud budget, cost discussions are time-consuming and not the most robust platform for your career.

A great starting point for understanding cloud costs and for building a management structure around it is to start with the fundamental equation:

cost-efficient cloud Spend management

For decades, businesses have been roughly doubling their use of IT every couple of years. Due to falling prices spend has been stable as a percentage of revenue, and consequently not much of a battleground. 

In the cloud, to benefit from Moore’s law requires a constant effort which you can read about in our recent blog. Even the best efforts are not driving down prices at the same speed as in the good old days, and for most companies, the prices are relatively constant.

Moving from falling prices to constant prices is changing how the total spend is developing over time – from a stable cost to exponential growth. No wonder, cloud costs run over budget and end up as a blame game. But how should you navigate this?

Three Core Disciplines in FinOps

As simple as it is, the fundamental equation holds the key to three core disciplines in FinOps:

  • Spend, the primary responsibility of leadership, hence the need for “Management Reporting”,
  • Price, can be optimized through clever provisioning and use of pricing models, hence the need for “Price Optimization”,
  • Quantity, can only be managed by those “owning” the resource, hence the need for “ShowBack”

If you are engaged in FinOps, here are some thoughts on what to consider for each area.

Management Reporting (on Spend)

Leadership has their eyes on growing and developing the business, usually with a strategy containing the word digitalization somewhere in the title.

Yet, nothing slows down any digitalization project faster than cost overruns. Therefore, FinOps must ensure that leadership get the necessary information to answer the following questions:

  1. Do we need to worry about total spend? If so, 
  2. Can we handle any cost challenges by focusing on price? or
  3. Do we need to involve the business in managing quantity?

The leadership team should get only enough information to make an informed decision on these questions and support the needed prioritization throughout the organization.

We will dive further into management reporting in a later blogpost on this topic and illustrate how you can answer questions on current spend, trends, and who are spending how much.

Warning

For now, we will leave you with the advice, that if control of your cloud costs is important for your career, implement a standardized, simple management reporting to ensure that leadership understands your quest and makes necessary decisions to support you.

Price Optimization

Price Optimization is at the heart of FinOps. There are substantial savings to be made, it can be done without involving the business, and the responsibility is always very close to the FinOps team. The FinOps team must be able to answer the following questions:

  1. How are we doing?
  2. What is the improvement potential?
  3. How do we do it?

You know you are in control, when you have a standardized process and can easily tell how your prices are developing over time (are you benefitting from Moore’s law), how much you have saved already, and how you compare against other businesses (external benchmark). Also, you need to know how much more you can save on prices through reservations, shared resources, and licensing, and how to get it done.

In larger organizations, an additional layer of complexity is added where you might have procurement involved in negotiating a cloud vendor agreement. Before engaging in any negotiations or performing an annual true-up you need to understand how far down in cost you expect to come if you drive down prices and quantity.

Price Optimization is an orphan in many organizations – because it frequently sits with people who are really focused on building and operating an environment not cost optimizing it.

Warning

Hence, getting to own price optimization could be a great career move, a lot of power will reside in this function, and your direct contribution to the business is very tangible and measurable.

Showback (Managing Quantity)

Managing quantity is the second factor of the equation. This is trickier, because now we are engaging in a dialogue with the business on what and how much they are consuming – and more importantly if it can be reduced. The facts to support the dialogue is “Showback”.

While the cloud providers claim that showback is easy this is not what the practitioners experience. To highlight a few of the challenges

  1. You need to ensure a solid process for tagging, subscriptions, and resource groups,
  2. You need to have a consistent mapping of your organizational hierarchies, and
  3. You need a way to report to the business and facilitate their decision-making.

And then we have not touched on items without a price in the detailed billing, the need to allocate licensing costs, and much more.

While it is indeed important to get facts straight for the show back, never forget that the job is to support decision-making. 

Warning

Hence, make sure you do not overfocus on getting the last decimal on the showback right. Rather, build trust by helping the business in managing risk and uncertainty, i.e., by explaining reversibility of a wrong decision.

What is your “one number”?

Going back to our original question you want to be held accountable for “one number” where you have a reasonable influence and where external factors do not set you up for failure.

Hence, in the world of FinOps, neither spend, nor quantity is the measure for success you want. Rather, you want your effort to be measured on your ability to get the best prices possible. This could be:

  • Total value of savings (vs. list prices)
  • Annual price reduction on the main categories (compute, storage, and databases)
  • External cost benchmark 

Of course, you still want and need to deliver management reporting and showback, but your platform for building credibility is on price optimization.

A Framework for FinOps

Over the coming weeks we will be issuing a handful of blogposts going into more detail of each of the three core disciplines. Additionally, you can read about roles and responsibilities, and how to create a roadmap for your FinOps journey in the final two blogposts.

If you want an alert when a new post is out, simply leave us your name and e-mail below.

All the best on your FinOps Journey!