Choosing the right infrastructure and making future commitments can have a huge impact on the bottom line. It can improve a company’s unit economics or increase margins for low-margin businesses, all while allowing engineering teams to use the best resources to innovate their products.
Anyone in charge of a team’s cloud services has the enormous task of sifting through all of the available hosting and purchase options to find the ideal fit for their projects, services, and products. Teams can save money by purchasing one, three, or five-year commitments for their applications, but they will be locked-in to the services for the duration of the term. The cost-cutting benefits of these contracts are enticing, but managing the savings from cloud services can be difficult. Companies risk wasting money if they don’t use or need as much of the resource throughout the term length, therefore choosing a commitment necessitates balancing the requirement for flexibility with the need for savings.
Many teams miss out on cost-cutting opportunities or waste money because they didn’t account for particular aspects of cloud service usage scenarios, contracts, or data.
Historical data alone will not be able to predict future usage, expenditures, or possible cloud service savings accurately
Data about a product’s or project’s historical resource utilization is essential for engineering and developer teams to plan and select commitments. However, it is sometimes forgotten that past resource usage does not always predict future usage. Changes in company strategy, right-sizing or relocation plans, and other external variables can all cause a significant shift in usage patterns. As a result, either too much commitment to resources is made, wasting money, or too little commitment is made, resulting in missed savings chances.
Consider modeling the impact of various scenarios on usage and costs to forecast future deviations from historical usage. Scenario planning is a complex process that involves teams from finance, engineering, and operations. To avoid over or under-commitment to cloud services, inputs such as migration, right-sizing, re-architecting, new projects, company growth, and financial best practices must be used to supplement historical data in projecting future costs and cloud service savings and consumption. Businesses can pick more flexible commitments with shorter term lengths that can be traded or resold for instances that may have variable future usage.
High coverage does not always imply quality coverage
Teams frequently aspire for high levels of commitment coverage across their infrastructure, but they do not consider the percentage savings such coverage provides. Commitment coverage is a metric used in frameworks like the FinOps Maturity Model to assess the maturity of an organization’s cloud financial operations. A higher coverage percentage shows greater maturity.
The problem with prioritizing coverage is that not all commitments offer the same amount of savings. Many of the “safest” promises with the most flexibility produce less than a third of the savings rate of a commitment with less flexibility. This can result in circumstances where the coverage is high but the savings rate is low.
Companies that are not growing may find themselves in a situation where they have limited options for increasing their savings rate and must just wait for the contract terms to end. When combined with percentage savings, commitment coverage provides a better picture of the net cost reduction that the commitment strategy is driving. This is especially significant when teams are comparing alternative purchasing strategies to see if better coverage actually saves the most money.
Different upfront spend amounts across commitments can yield incremental savings
Commitments can be purchased with a full, partial, or no advance payment, with each having a different discount rate depending on the resource covered. Typically, the highest discount is obtained by making all advance payments, while the lowest is obtained by making no upfront payments. Vendors frequently take and encourage the technique of using only one level of advance payment across several contracts. There are certain drawbacks to this strategy. When compared to the no upfront and partial upfront versions of same obligations, an all-upfront approach for all resources can result in upfront money being spent on commitments with very no extra savings lift. However, depending on the expected return a company has for the upfront money it spends, no advance spending dramatically reduces savings and can leave a lot of potentially good deals on the table.
In addition to combining different contract term lengths and commitment types, combining all, no, and partial upfront spending for commitments can help save money on cloud services while still maintaining flexibility. The aggregate of various upfront expenditures should result in incremental savings that are equal to or greater than the organization’s cost of capital. This serves as an excellent check to ensure that budgets aren’t being spent inefficiently.