This article was originally published in Entrepreneur on Aug 23, 2023
Many businesses don’t give it much thought, but there’s a huge expense lurking in their books that can easily spin out of control. I’m talking about the cost of cloud services, which almost every company needs to compete in today’s world.
Just how volatile are cloud costs? It isn’t a pretty picture. In a survey of 750 US enterprises from a wide range of industries, more than a third had cloud budget overruns of as much as 40%, and one in 12 topped that number. The global situation is equally shocking. Worldwide, businesses will invest almost $600 billion in cloud spending this year. Conservative estimates indicate that nearly 30% of that—around $180 billion—is wasted.
Most companies wouldn’t tolerate such wastefulness in any other part of their business. But runaway cloud costs remain an exception, partly thanks to opaque billing. A typical scenario: A business learns that its tab from Amazon Web Services or another big cloud provider has jumped from $100,000 to $150,000 in just one month. What gives? Cloud may be simple to buy, but good luck deciphering that invoice, which can list thousands of acronym-filled services used by company software engineers.
Having served as CFO of several tech companies, I’ve seen how quickly those costs can add up. Think of it as the Wild West of spending—massive, unpredictable costs with little or no accountability. That’s why it’s so important to have a strategy for managing cloud expenses. For entrepreneurs and their companies, taming the beast means more money to invest elsewhere.
Here’s how cloud costs became such a big problem—plus five tips for reining them in.
In the old days, businesses bought and maintained their own servers. Scaling up meant buying more hardware, a time-consuming task. Then, the cloud came along and changed all that, catering to companies’ growing appetite for on-demand computing resources. The good news: software engineers could quickly buy what they needed without waiting for lengthy approval and procurement processes, helping accelerate innovation. The bad news? Lack of control over spending, which continues to balloon as offerings grow ever more complex.
For most businesses, the dirty little secret is that they don’t understand how much cloud computing power, storage and other features they actually need. There’s often poor visibility into what other teams are doing, plus minimal accountability, with no one setting or enforcing budgets. This is compounded by a lack of tools to help them look under the hood.
Working with Fortune 1000 companies, from big banks to airlines, I’ve seen up close how dramatic the cost savings can be. Here are five ways to take action:
Reining in cloud spending starts with education and awareness. Simply sharing with employees the true magnitude of the problem can be powerful. We aren’t talking about saving a few dollars. At many companies, the waste from cloud spend amounts to one of the single biggest budget items.
Then, rather than take a Big Brother approach, sell teams on the benefits of lower costs. The more a business can control cloud expenses, the more money it will have to hire another software engineer to develop a new product, or another sales rep to penetrate a new market. The message: Everybody wins by getting it right.
FinOps (a mashup of finance and DevOps) might sound technical, but it’s just a name for the team that creates a process and framework for managing cloud costs. From sales to HR, nearly every department has a dedicated, expert operations team these days. As a major operational expense, cloud needs the same attention.
The FinOps team might be just two or three people—say, a senior finance executive and the CIO or CTO. Have them create a framework that encourages accountability by assigning ownership of cloud spending to different business units. To get a clear, detailed picture of costs, give each team responsibility for its own budget and how much cloud it consumes.
Manually reviewing cloud bills each month for overruns and inefficiencies might sound archaic. Yet far too many companies still rely on this ad hoc approach. A far better strategy: leverage the growing number of tools on the market that help companies gain visibility into cloud spend in real time, flag overruns, automatically optimize where resources are allocated, and even offer suggestions for economizing spend.
For example, an alert system to detect spending anomalies should be table stakes. Besides catching questionable purchases by staff, this alarm can catch intruders—for instance, crypto miners mooching off the company’s servers.
To avoid shelling out for idle cloud computing power, organizations can also use auto-stopping tools. Let’s say that each day from 9 pm to 6 am, usage of a subscription service drops to zero. Dispensing with manual controls, auto-stopping takes that expense off the board.
Automation of governance and approvals is crucial, too. Would a company approve the purchase of a large piece of equipment with no questions asked? Any business spending millions of dollars a year on cloud should have procurement controls. With a cloud asset policy tool, it can establish guardrails that require people to justify their cloud spending.
Like a garden, cloud costs require consistent pruning. After taking a weed whacker to the biggest, most wasteful expenses, keep tending the smaller ones, or they’ll quickly grow out of control again. Cloud cost forecasting can help reduce the uncertainty around future usage.
All that yard work is well worth the trouble, because the potential savings are enormous, as much as 30% to 50% for many businesses. That’s real money better spent somewhere else—on product development, on customer acquisition, and on the teams for whom cloud should be a means to drive innovation, not a costly headache.
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