Pitfalls for unchecked cloud spending and how to avoid them

Subsequently, in today’s rapidly-evolving digital landscape, cloud adoption has understandably become a strategic priority for CxOs (Chief Experience Officers, Chief Information Officers, Chief Technology Officers, etc.). While the cloud offers agility, scalability, and cost-efficiency, it also presents significant challenges. Some of the biggest hurdles CxOs face while adopting cloud strategies, include:

• Data security and compliance
• Cloud skills gap
• Cost management
• Vendor lock-in
• Cultural resistance
• Legacy system integration

Let's dive deeper into one of the most pressing challenges: Cost Management.

What are the cloud costs?

The latest forecast by Gartner, Inc. states that public cloud services spending will grow by 20.4% to $675.4 billion in 2024, up from $561 billion in 2023.

With such a significant upward surge in cloud spending, it has become critical for the CxOs and all the cloud stakeholders to understand and control these costs. Let’s explore the significant cost-spending categories and discuss solutions for some of them.

Cloud costs typically fall into several major categories, depending on the services you use and your chosen cloud provider. Some of these categories include:

1. Compute costs: Cost of running cloud instances or Virtual Machines (VMs), often billed by their usage time; serverless computing, based on the number of requests; and the cost of managed container services.
2. Storage costs: Fees for using block storage services like AWS Elastic Block Storage (EBS) or Azure Disk Storage, which store large amounts of data in the cloud, with pricing based on the amount of stored data. Additional storage costs include backup, archival, and data replication.
3. Networking costs: Charges incurred to move data within the cloud, between regions, or to/from the internet; costs for using content delivery networks (CDNs) such as AWS CloudFront or Azure CDN for global content distribution; charges to distribute traffic across multiple instances using services like AWS Elastic Load Balancer (ELB) or Azure Load Balancer.
4. Database costs: The cost of fully managed databases, such as AWS RDS and Azure SQL Database, is usually based on storage, computing, and usage patterns. Alternatively, the cost of NoSQL databases like AWS DynamoDB or Azure CosmoDB is based on throughput and data storage.
5. Scaling and High Availability costs: Although scaling helps optimize costs, enabling auto-scaling features for services like instances or storage increases costs based on resource usage. Further costs get added when you have multi-region setups, backups, and failover mechanisms to ensure high availability.
6. Licensing and Marketplace costs: Additional charges are incurred if you run licensed operations systems in your environment. These include the costs of third-party applications and services you may have purchased through the cloud marketplace.
7. Support costs: Cloud providers offer various levels of support with varying costs based on the service levels.
   
   

What Factors Contribute to Rising Cloud Costs?

Cloud costs can be challenging to manage as they depend on not just one but many factors that go into their pricing. Additionally, not all the costs are immediately obvious. Costs can increase due to several factors, often stemming from how resources are used, scaled, and managed. Some of the common reasons for unchecked cloud spending that raise costs include:

Cloud costs can be challenging to manage as they depend on not just one but many factors that go into their pricing. Additionally, not all the costs are immediately obvious. 

Costs can increase due to several factors, often stemming from how resources are used, scaled, and managed.

Some of the common reasons for unchecked cloud spending that raise costs include:

A. Cost visibility challenge  

1. Scalability and variability: Cloud resources are scaled up or down automatically, leading to unpredictable and fluctuating bills. It also makes it difficult to track the services that drive most of the cost changes.
2. Multiple services and accounts: Organizations often use a mix of cloud services from different providers or have multiple accounts within the same provider. As a result, it is hard to get a consolidated view of cloud spending across the organization.
3. Shared responsibility: In large organizations, cloud management responsibility is often shared across different teams, which often leads to decentralized control and oversight, of costs.
4. Siloed data: When cloud data and resources are shared, managed, provisioned, and reported across multiple departments or teams, having a consolidated view of cloud expenses can be challenging.
   Siloed data prevents the accurate tracking of cloud costs for specific services, teams, or projects, and makes cost allocation even more difficult.
5. Inconsistent reporting: Different teams may measure cloud costs using different tools or metrics, leading to inconsistent reporting. Without standards for aggregating and reporting cloud expenditures, organizations are left with inaccurate or incomplete information, which hinders their ability to monitor costs effectively. 

B. Cost optimization dilemma 

1. Visibility vs. Complexity: Cloud environments can be highly complex, with multiple services, regions, and pricing options. It is difficult to achieve visibility into how and where the cloud costs are being incurred, which in turn makes it tough to identify optimization opportunities.
2. Right-sizing vs. Performance Needs: Right-sizing involves adjusting the cloud resources (such as VMs or containers) to the optimal level. However, reducing resource allocation to save costs might impact application performance and end-user experience. Hence, finding the right balance between cost savings and maintaining performance standards is always a significant challenge.
3. Elasticity vs. Budget Predictability: The cloud’s elasticity allows organizations to scale resources either up or down based on demand, which is one of its primary benefits. However, the on-demand scalability can lead to unpredictable spending, complicated budgeting and financial planning.
4. Reserved Instances vs. Flexibility: Purchasing reserved instances can save costs significantly compared to on-demand pricing. However, this strategy reduces flexibility, as workloads must remain predictable, and changes in workload requirements could make the reserved capacity either surplus or deficit and thus less useful.
5. Tooling vs. Effort: Many tools, from native cloud providers to third parties, are available for cloud cost management. However, implementing and managing these tools requires effort, expertise, and sometimes additional costs, which creates a trade-off between automation and the manual work of cost analysis.
6. Decentralization vs. Centralized Control: Many organizations decentralize cloud spending to create autonomous teams. However, this could lead to a lack of centralized cloud spending visibility and control, which increases the likelihood of inefficient spending and makes it harder to enforce cost-saving best practices. When cloud spending data is separate for different teams, it becomes challenging to analyze cloud usage patterns, identify over-provisioned resources, or eliminate unnecessary services. 

C. Cost unaccountability  

A culture of cost-consciousness involves a mindset where all the stakeholders understand and prioritize the financial impact of their cloud usage. Such stakeholders include professionals from the development and operation teams to the business leaders.  A cost-conscious culture ensures that cloud costs are considered at every stage of planning, developing and operating the cloud infrastructure.

The absence of a cost-aware culture leads to several consequences for the organization such as: 

1. Lack of accountability: Missing transparent ownership or accountability for cloud costs, leads to little or no incentives for the teams to monitor and control their spending. The lack of responsibility leads to cloud waste and inefficiency, as no one takes responsibility to optimize cloud usage or reduce expenses.
2. Operational inefficiency: A lack of cost-awareness can result in the teams using inefficient cloud configurations or over-provisioning resources. Such inefficiency not only increases the cloud costs but can also decrease the overall performance of cloud applications.
3. Uncontrolled cloud spending: Without a focus on cost, cloud resources are often provisioned without considering their financial impact. If teams overprovision or fail to decommission unused cloud resources, it results in unexpected and escalating costs.
4. Untracked and decentralized usage: Projects or teams might independently provision cloud resources without visibility to central IT or finance teams. This decentralized and untracked usage leads to unexpected costs and creates difficulties in managing the overall cloud budget.
5. Missed optimization opportunities: Projects or teams may fail to take advantage of cost-saving options like reserved instances, savings plans, or serverless computing. As a result, the organization misses the opportunity to lower cloud spending and make better use of available resources.
6. Inability to scale cost-effectively: When the cloud costs are not managed well, scaling up cloud services can become financially unsustainable. The organization may be reluctant to expand or scale up due to concerns over unpredictable or high costs, thus hindering growth.

All the factors detailed above inflate the cloud costs contributing to a cloud trap. The cloud trap refers to the challenges and pitfalls organizations face when they do not have a proper and complete understanding of the cloud costs, their types, and how to control them. As a result, they unknowingly overspend.

How to overcome the cloud trap?

Given the lack of cost visibility or awareness and the resulting cost optimization dilemma or ineffective optimization strategies, the organizations become stuck with high and unsustainable cloud costs. As a result, they face various negative consequences as detailed earlier.

Without proper cloud governance and cost management practices, it becomes challenging to predict and manage cloud expenses effectively and hence, cloud spending quickly exceeds the budget. The lack of predictability makes it an arduous task to forecast budgets, plan future investments or strategies. Apart from the ramifications on the overall organization’s financial health, cloud overspending also leads to delays or cancellations of other projects.

To avoid falling into a cloud trap or to come out of one, it is important to understand and implement strategies for:

1. Maintain and enhance cloud-cost visibility
2. Optimize cloud usage and cost
3. Foster a cloud cost-aware culture

1. Maintain and Enhance cloud-cost visibility 

To avoid the cost visibility challenges in cloud cost management, organizations can implement policies, practices, and tools to achieve transparency and granular insights into their cloud spending. Some strategies to enhance the cloud cost visibility are:

FinOps practices 

• Implement Cloud FinOps Tools to optimize cloud spending by providing real-time visibility into costs and usage. These tools also help analyze and lower the total cost of ownership (TCO) in different ways such as tagging, right-sizing, removing waste, and so on. Managing cloud costs manually can be difficult; however, there are several tools available in the market for all types of cloud environment. Whether it is a single cloud service provider such as AWS, Azure, GCP, or a multi-cloud or hybrid cloud environment, these tools help you to efficiently manage cloud costs.
• Adopt FinOps Practices to focus on enabling financial accountability for the variable spend model of cloud. Such an approach fosters collaboration among finance, operations, and engineering teams, provides cost visibility, and ensures that all stakeholders understand how their actions affect cloud spending.

Configurations and Automations 

• Tag and Label Resources with a consistent and comprehensive tagging strategy for all cloud resources. Include information in tags such as project name, owner, environment (for example, development, testing, production), and department. These tags enable you to easily track and allocate costs to specific teams or projects, improve accountability, and visibility.
• Centralize Cost Dashboards that consolidate cloud spending data from multiple cloud accounts and services. Such dashboards provide an overview of cloud spending at different levels (for example, team, department, project) to the stakeholders and allow them to quickly identify trends and anomalies.
• Automate Cost Reporting and Alerts that are shared with relevant stakeholders regularly. Enable flagging budget alerts and spending notifications when costs exceed a defined threshold or when there are unusual spending patterns, to enable quicker intervention.
• Role-Based Access to Cost Data for different stakeholders, such as finance teams, engineering teams, and executives. This ensures everyone has visibility into cloud costs that are relevant to their roles, to make informed decisions.
• Implement Real-Time Monitoring of cloud costs and usage. Many cloud management tools provide real-time insights, and thus help the teams to quickly spot unexpected spikes in their spending and take corrective action before it leads to budget overruns.
• Setup Cost Anomaly Detection in the Cloud FinOps tools to identify unexpected surges in cloud spending. Some cloud providers and third-party tools offer AI-driven anomaly detection, which can help spot unusual cost spikes in real-time, allowing teams to investigate and resolve issues quickly.

Business Alignment and Periodic Reviews

• Align Cloud Spends to Business Metrics, such as revenue generated, or customers served. This alignment provides a clearer picture of the value derived from cloud spending and helps justify expenses while identifying the areas of cost reductions.
• Communicate Business Impact by relating cloud costs with the business outcomes, such as revenue, cost per customer, or cost per transaction. Such information helps the teams to understand the financial implications of their cloud usage in a business context.
• Conduct Periodic Reviews and Optimization Meetings that involve engineering, operations, and finance teams. These meetings should focus on understanding spending trends, identifying areas of waste, and discussing optimization strategies. 

2. Optimize cloud usage and cost

Recovering from the cost optimization dilemma in cloud cost management involves addressing inefficiencies and building a sustainable strategy to manage cloud costs effectively, while still meeting operational and business needs. Some points to help recover from this dilemma are:

Assess Current Cloud Usage and Costs

• Perform a Cloud Cost Audit or a review of your current cloud usage to identify underutilized resources, redundant services, and cloud waste. This information will help you to pinpoint the areas for cost reduction.
• Identify Key Cost Drivers to understand which services or resources are the biggest contributors to cloud spend. The focus should be on both indirect costs (for example data transfers, licensing) and direct costs (e.g. compute, storage, so on).

Set Clear Goals for Cost Optimization

• Define Optimization Metrics to evaluate the effectiveness of cost optimization efforts, such as cost per workload, utilization rates, or savings percentage. You can align these metrics with business objectives to ensure relevance.
• Prioritize Cost-Saving Opportunities with the Highest Impact without compromising performance. For example, focus on high-cost services or workloads where cost optimization will deliver significant savings. 

Implement Right-sizing and Resource Optimization

• Right-size Resources by adjusting the instance sizes of virtual machines, databases, and other cloud services based on their actual respective usage. You may use tools like AWS Compute Optimizer or Azure Advisor for recommendations.
• Terminate Unused Resources, such as unattached storage volumes, inactive VMs, or unused IP addresses. Create automation rules for such processes or resources to save cost and effort.
• Automate Cost Optimization: Use automation to reduce human error and improve efficiency. For example, automate tasks such as shutting down idle resources, right-sizing instances, or moving data to lower-cost storage tiers. You can also implement autoscaling to automatically adjust the scaling of resources, based on demand. You can also use scheduled scaling to ensure that environments are scaled down during off-hours.

Leverage Discount Programs

• Purchase Reserved Instances and Savings Plans for workloads with predictable cloud usage. This significantly helps to lower costs as compared to on-demand pricing.
• Use Spot Instances for non-critical workloads that can tolerate interruptions. This is especially useful for batch processing and in testing environments.

Instill collaboration and accountability

• Start Collaborations Across Teams by creating a cross-functional FinOps team that includes finance, operations, and engineering. This team should work together to create and enforce cloud cost policies, provide financial insights, and ensure that cost optimization is a shared responsibility.
• Establish Accountability and allocate ownership of cloud costs to specific teams or departments. Such steps encourage better cost control and motivate the teams to use resources more efficiently.

Redesign for Cost Efficiency

• Redesign Cloud Architecture, such as, applications and workloads to use cloud-native services and serverless architectures, which provide cost savings through better resource utilization.
• Look for scenarios to Use Managed Services to reduce operational costs and overhead management, when compared to running similar services on your own infrastructure.

3. Create a cost-aware culture

To create a cost-aware culture in the organization, the FinOps principles suggest utilizing a cloud cost optimization approach and joining the finance, IT, procurement, and business functions together. It requires a deliberate approach to educate, empower, and encourage teams to make cost-effective decisions.

Some guiding steps to foster a cost-aware culture are:

• Transparency: Provide visibility into cloud costs across teams and projects, which can be achieved through dashboards, cost reports, etc. Transparency leads to granular insights into cloud spending.
• Ownership: Assign accountability for cloud costs to individual teams or departments, which encourages the teams to better manage their cloud budgets and optimize its usage.
• Education and Training: Ensure that all teams understand cloud pricing models, cost optimization best practices, and how their actions impact overall spending.
• Governance: Establish policies and controls to monitor, enforce, and optimize cloud spending; and ensure everyone in the team is aware of these policies and understands their importance. For example, you can create policies to:
         - Provision cloud resources
         - Decommission unused cloud resources
         - Choose cost-effective instance types

• Make Cost-Conscious Decisions: Encourage using cost-effective cloud services, adopting reserved instances or savings plans, right-sizing resources, and identifying areas for cost optimization during architecture design.
• Incentivize Cost-Conscious Behavior: Offer recognition or rewards to teams or individuals who successfully reduce cloud costs or innovate ways to save them. This can include bonuses, certificates, or public acknowledgment within the organization. You can also gamify this process and increase engagement by creating a friendly competition among teams to optimize costs.
• Lead by Example: Ensure that leaders advocate for cost awareness and communicate its importance to the organization. Leadership support is crucial to drive cultural change and to ensure that cost management remains a priority.

Conclusion

The strategies mentioned above can help your organization:

• Improve cost-spending visibility
  • Allocate costs accurately
  • Act timely to prevent overspending
  • Optimize resource usage
• Recover from the cost optimization dilemma
  • Balance cost control and business needs
  • Create a sustainable approach to cloud cost management
• Build a cost-aware culture
  • Make teams responsible for cloud costs
  • Making informed decisions
  • Seek continuous opportunities to optimize
• Inspire a cultural shift in the organization and align spending with business goals to deliver the best value.

For avoiding unchecked cloud spends, the FinOps tools act like a compass, guiding teams through the storms of unforeseen cost challenges. They bring real-time clarity to help you navigate efficiently, ensuring no overspend sneaks through. FinOps tools also highlight underused resources and optimize performance without draining the budgets. They bridge the gap between finance, business, and IT, and ensure every cloud expense serves your ROI.

In essence, FinOps tools turn cloud chaos into a well-oiled, cost-controlled marketing machine. And the facts narrate the story better. See how our FinOps experts discovered over $400K+ in cloud savings potential for one organization.

Please note that this is our first article in the blog series on Conquering the cloud cost conundrum via FinOps cloud cost optimization. The next blog will be on FinOps tools and how they help leverage cloud systems in an efficient, profitable, and cost-effective way.