Understanding cloud cost optimization
News alert: Cloud computing will not lower your cloud costs. However, it will help you optimize your costs.
Confused? Let me explain.
Ever since the cloud started going mainstream, the message from cloud providers has been that the cloud cuts the cost of running your own on-premises IT infrastructure. The rationale was that the cloud allows you to move to a consumption-based model and relieves you from the burden of managing the infrastructure below the OS. Both of those messages are correct; however, some very important details are missing from their statements. Details like:
- If your workloads require a certain amount of CPU, RAM, and disk, they will still require this in the cloud.
- Because of the volume they are buying at, cloud providers might get that CPU, RAM, and disk for a better price than you, but you still need to pay for their margin. Let’s assume that is a wash.
- Consumption-based computing is great, with the right controls, governance, and management structures. Otherwise, consumption-based models can be more expensive. The premise around consumption-based models is to only pay for the computing resources you use. When you run an on-premises infrastructure, strict monitoring of resource use is not a priority as costs will be incurred whether you are using the resources or not. This means internal IT and dev teams are not accustomed to “turning the light off when they leave the room.” This behavior can drastically increase consumption and create surprising invoices when leveraging external cloud.
- There are ways to add the necessary controls to prevent cloud cost-bloating. They incur costs as well, and thus another wash.
So back to my point: cloud computing will not lower your costs and might even increase your costs if not managed appropriately. However, that does not mean there are not cost optimization opportunities in the cloud. To understand this, we need to adjust our way of thinking about IT costs.
Traditionally, IT has been viewed as a cost center and thus to optimize costs, companies had to take costs out. They tried to take costs out by finding ways to reduce assets and maintenance costs, or even reduce labor. This led to IT organizations trying to operate with inadequate budgets, aging systems that required growing maintenance, and IT staff that was over-utilized and thus reactive. All this just fed the perspective of IT as a cost center.
This is where the cloud delivers opportunity.
The cloud allows companies to shift their resources in terms of assets, facilities, and labor. This shift allows a company to change its IT focus from maintenance to innovation. Companies partner with providers to manage their infrastructure while using SLAs as controls to ensure IT delivery. The resources previously managing the infrastructure are now shifted to utilize their expertise in innovative ways to help the company grow. Resources shift from reactive to proactive, from routine to creative, from cost center to growth center. This is how we define cloud cost optimization.
Let me explain:
- Brunker Inc. has an annual IT budget of $100M and is managing an on-premises infrastructure.
- It has a few resources focused on innovation and has determined that every $1 spent on innovation creates $3 in revenue.
- As we can see in the chart, the company’s $100M budget is generally allocated to CPU, RAM, disk, internal IT maintenance labor, and internal innovation labor.
- Its labor costs are $40M, of which 75% is attributed to maintenance, and only 25% to innovation.
- The innovations costs of $10M create $30M in revenue to the company.
- Though the company has a $100M budget, its adjusted IT cost is $70M once you factor in the $30M in revenue.
OK, so this is not too bad. But now let’s look at how the cloud can further optimize our costs.
- Same company, Brunker Inc., has decided to move to the cloud.
- Its CPU, RAM, and disk costs do not really change.
- It does incur some additional costs by having an MSP manage its cloud environment, believing that the MSP has the experience to best control the cloud costs.
- Brunker Inc., however, still has $40M in labor costs.
- Due to some legacy systems that could not migrate to the cloud, the company decides to have 25% of the labor stay focused on maintenance and the other 75% shift to proactive and innovative projects.
- Because of the addition of the MSP, total IT costs expand to $120M versus the previous $100M.
- However, because Brunker Inc. can shift 75% of its labor to innovation, the company generates $90M in revenue.
- Its adjusted IT cost is now only $30M versus the $70M in cost for the on-prem.
- By moving to the cloud, Brunker Inc. optimized its costs by $40M.
The cloud offers a wealth of opportunity and benefits, and can definitely optimize your IT costs, however, not in the perceived traditional way. It not only requires a migration of technology but also a shift in thought, mission, and resources toward innovation. Innovation is conceived from business pain and desired business outcomes.