Three indicators of a cost-efficient cloud

If you are like most leaders, you and your team are busy delivering the digitalization strategy. For you, Cloud Cost management is a necessity but not a priority. So, how do you avoid suddenly having to defend the total spending on your cloud projects?

This blog post will give you three key indicators of cost efficiency when managing your Azure and AWS costs. If you get solid confirmation on all three, you have less to worry about.

What does a “cost-efficient cloud” mean?

Before we get started, let us agree on what we mean by “cost-efficient cloud”. The fundamental equation for your total spending in the cloud is:

So, when we talk cost-efficiency we refer to buying your services at the right price, i.e., that the price is as low as possible.

In contrast, reducing (or keeping down) the quantity you buy is what we would call cost-effectiveness.

And although both parameters are essential to keep your total spending down, we will focus entirely on cost-efficiency in this post. This will bring you tangible benefits, as you can read in a recent Gartner Research – and in the quote below.

“Focusing on efficient use of cloud services brings immediate and tangible financial benefits. Unfortunately, most organizations are unprepared to profit from this savings opportunity, and they’re likely to overspend.”

(Gartner Group, 2020)

Indicator 1: Are you on top of regular cloud cost reporting?

If you can’t measure it, you can’t improve it.

(Peter Drucker)

By running a cost-efficient cloud, you will benefit from following how your total cost is developing over time, what you are spending on and who.

And, if you have this standardized reporting in place, you probably have assigned clear responsibilities for monitoring and optimizing costs.

But, sometimes you may hear that you cannot get the correct data from your cloud portal. So, while the tools are not fantastic, and the data will require an effort to prepare for a meaningful management report, you should know that lack of data is not the root cause of the problem.

If you have a more profound interest in reporting, we recommend reading “The four things you want to know as a CIO about your cloud costs”

Indicator 2: Do you have a schedule for optimizing your cloud costs?

What gets scheduled gets done

(Michael Hyatt)

Your cloud environment is dynamic, and the pricing and discount models are dynamic.

Hence, keeping cost-efficiency in your cloud is an ongoing practice – not a one-time project.

The minimum frequency we recommend is quarterly reviews of your entire environment, likely supplemented with other, more frequent activities.

And, if you are interested, we have another blog post on the crucial elements in the quarterly tune-up, which tells more about what you need in place to ensure cost-efficiency in your cloud through quarterly optimisations.

Regardless, you might want to be on the lookout for typical warning signs for not sticking to the schedule, i.e.

Other priorities came up
It will slow us down
We must wait until our environment is stable
Let’s finish our overall cost management strategy first
We need to finalize our negotiations with the cloud provider

While at first glance many of these explanations are understandable and even intuitively correct, they can and should be challenged. Most of our customers have been surprised with the flexibility on some of the ways to save – which is precisely why you should not postpone your cost-saving initiatives.

Remember, only Amazon and Microsoft benefit from deferring your cost optimization.

Download this paper to learn

Indicator 3: Do you track the critical KPIs for cloud cost efficiency?

Although you may not be interested in the details of cost-efficiency, someone in your organization must be monitoring the essential KPIs related to the most important ways of saving money on the cloud.

Reservations are the single most mechanism for cost savings, and you should have a robust measure for performance on this activity. Another frequently used term for this is “Reservation coverage,” i.e., the percentage of your current, reservable resources which are covered by a reservation.

In Azure, bringing your own licenses (AHB) is a must. Savings are substantial, and you should know how large a share of licenses are covered.

But, knowing the number itself is not the key here. The key is that if you do not track the number, you do not know if you have identified all significant savings.

So, having analyzed hundreds of millions of cloud spend, we know that almost all companies are not making enough reservations and are struggling to optimize their use of licenses.

How can I measure my cloud cost efficiency?

While it is great to have some indicators of cost-efficiency, you might be looking for a way to measure it.

And two of the most relevant types of measures are: an overall cost-efficiency indicator (a bit like an energy rating) and unit costs of select primitives.

But, the most common definition of cost-efficiency is calculated like this: