Cloud costs management Archives

At Kostner, we have done countless cloud cost management workshops, and it is beyond doubt that those companies who understand and embrace the differences between managing a cloud budget and an on-prem budget are most successful.

We have taken all that experience and boiled it down to four actionable tips to help you succeed with your cloud budget.

Tip #1: Budget for growth

Cloud costs are only going one way in all the companies we are working with – up!!

Many trends are driving increased costs:

New digitalization initiatives on how to serve and interact with customers
New projects to automate existing routines and drive down employee costs
Price increases

Particularly the latter is a powerful trend, ie. Microsoft just announced that Office 365 will be 20-25% more expensive in 2022 for most bundles.

With these powerful forces a new approach to budgeting is required, so you avoid getting the blame for the growth in costs and any later budget overruns.

Tip #2: Get the framework right

As one of our client’s CIO mentioned in a workshop:

It is more about getting the right framework than getting the right number.

What he refers to is that you need to understand who can take what responsibilities in a new mode of cost management often referred to as FinOps.

In the cloud world referring to the fundamental equation is often useful:

The equation highlights the framework for managing cloud costs

Buy at the right price, ie.
- Optimize means buying the services as cheaply as possible leveraging all pricing and discount options available
- Architect means that you build with the services that gives you the lowest price.
The business should be accountable for managing quantity – but needs support to do so, ie.
- Inform them about the costs they are consuming through chargeback or showback

Manage the costs, ie. with a quarterly review of all main cost items.

Make sure that you are not assuming an accountability you cannot control. However, make sure that you can explain the main principles for who should be accountable for what and how to get there.

Tip #3: Price optimization is your “license-to-play”

Keeping the budgets used to be my “license-to-play” in the on-premises world.

In cloud, getting price optimization right – and being able to document it – is the new “license-to-play”.

Torben Kjær, Group CIO, Aller

Centralizing price optimization is about buying what you already buy as cheaply as possible. This could be using reserved instances and AHB licensing options in Azure or ensuring that your employees have the right M365/O365 license to what they use.

Centralizing price optimization is the first and most important thing to get right for several reasons:

There is a lot to save
You can centralize it because you can make changes without affecting the business
You can document cost-efficiency and benchmark yourself

Understanding price optimization allows you to build a new measure of your contribution to cost management – not only focus on budget.

As another client’s CIO mentioned as a great benefit of documenting cost-efficiency is that “it changes the discussion from how much we are spending to what we should use our budget for”.

Tip #4: Chargeback – the business needs an incentive to manage costs

With business driving more and more IT costs between budgeting cycles – how do you deal with that?

We see all larger organizations moving towards chargeback so that the unit driving the costs are also charged the costs. They should see increased efficiency elsewhere in their own cost base, or improved results ultimately driving top line growth.

Implementing chargeback gives the business owner a clear incentive to cut down costs and engage in managing quantity – as described in the framework above.

However, be aware that chargeback will drive some extra tasks in your organization. You will need a process for tagging cost items to organizational units, frequent reporting to create transparency, and support to help the business owner make necessary decisions.

Getting chargeback right requires the participation of IT and Finance as a minimum – or a dedicated FinOps person or team.

Want more information for successfully budgeting your cloud costs?

Now that you have gotten these tips and are ready to budget your cloud costs it would be interesting to see how other companies are saving on cloud. Kostner Quarterly Insights is a report that provides you with benchmark data on public cloud (Azure, AWS) usage. Get your benchmark for Q3 2021 here.

Download Kostner Quarterly Insights for Q4

Download the report to get data on public cloud (Azure, AWS) usage:

… and our comments on “How to use the data”.

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:

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:

Do we need to worry about total spend? If so,
Can we handle any cost challenges by focusing on price? or
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.

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:

How are we doing?
What is the improvement potential?
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.

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

You need to ensure a solid process for tagging, subscriptions, and resource groups,
You need to have a consistent mapping of your organizational hierarchies, and
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.

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!