Cloud: The Mirage of Massive Cost Savings (Ketchup on the side)

“Why are you moving to the cloud?” is a question I’ve asked more times than I can count. It’s one of the first questions posed to a potential client, for multiple reasons.

The two most important reasons are; first, I want to get a little insight into how thoughtful/educated this potential client is in relation cloud, and second, I want to understand what metrics will be used to determine success and or failure of the project we are considering undertaking. Potential clients respond to this question in various ways, but almost always, one of their first answers is around saving money and/or cutting costs. When I hear this response, I ask a couple of follow-up questions to clarify how they plan on accomplishing this ambiguous goal. More often than not, they have no idea how they will recognize cost savings and many just expect it to be a natural benefit of moving their VMs to the cloud.

This near universal acceptance of a broad notion, with little factual basis, reminds me of the story of ketchup. In the mid 19thcentury, a doctor took the ketchup of the time (which was basically fermented mushroom sauce or ground up fish innards –further reading on this if you are so inclined ) and added tomatoes to it. He made some somewhat dubious claims regarding the maladies that could be cured by his new ketchup, which were picked up by the press. By the later part of the 19thcentury, with the help of unscrupulous hucksters along the way, nearly everyone believed that ketchup cured all ills. While ketchup does have some definite health benefits and is a very tasty condiment; it’s rich in Vitamin C and anti-oxidants; a cure-all it is most definitely not.

The truth is, simple cloud migration is unlikely to produce significant cost efficiency for infrastructure that isn’t properly architected to take advantage of cloud services.

The truth is, simple cloud migration, even when instances are right sized and Reserved Instances (RIs) are purchased, is unlikely to produce significant cost efficiency for infrastructure that isn’t properly architected to take advantage of cloud services. In my last post I shared an example of two different cloud deployment strategies for a sample application. The five-year total operating costs were roughly $350k for one strategy and $14k for the other. The difference; to recognize the operational cost savings of $336k over 5 years, an enterprise would need to spend roughly $100k and several months of effort upfront. Enterprises are wary of the upfront costs, 125% of the expensive model’s projected first year operating costs, or 571% of those first quarter operating costs, so they make a short-term financial decision to proceed with the $350k option. More often than not, this decision is made in the IT department, based on their limited budget visibility, not at the executive level where greater budgetary visibility and enterprise strategy is handled.

Another dirty little secret about cloud cost management that doesn’t often percolate up to executive levels is that the flexibility of cloud allows your IT teams to immediately spin up services that generate significant cost with little or no financial oversight until the invoice comes due. For example, common compute instances at AWS can cost from $6 – $10 per hour with specialized services available through the marketplace costing several times that. An otherwise well-meaning IT employee (with no purchasing authority) could spin up a single $8/hour resource with no oversight, which by the time the bill has been received could total $6k-$7k in charges. While this situation would likely be recognized and addressed at the time the invoice was reviewed, dozens and dozens of smaller instances could take years of invoice cycles to clear up and over time have a much greater but less initially obvious impact. I have been involved in several remediation efforts for clients’ IT departments that were spending $500k+ annually in un-accounted for cloud services.

 

Cross-functional governance

The most successful way I’ve seen enterprises address this new requirement is to create a cross-functional governance committee that includes representation from finance, IT and core business units, with the charter of managing cloud related costs.

Contrast this with the IT Provisioning Model where costs were governed prior to the time of purchase. When an IT department needed additional infrastructure, a Capital Expenditure process is/was in place that required finance approval. Budgets and expenditures were relatively easily managed, and without proper authority, individual purchasing power was limited. In the revolutionary world of 21stCentury IT, we need revolutionary methods of governance. The most successful way I’ve seen enterprises address this new requirement is to create a cross-functional governance committee that includes representation from finance, IT and core business units, with the charter of managing cloud related costs. In enterprises that have Cloud Steering or Governance Committees or a Cloud Center of Excellence, this cross functional group works under their direction. My good friends at Cloudability, who have developed what is probably the most comprehensive cloud cost reporting and management toolset in the industry, refer to this committee as the Cloud Financial Office (CFO – I believe the pun is intended).

This committee evaluates the needs of the business, the reporting and cost management/containment requirements of finance, and the operational/support requirements of IT, to determine the best approach for meeting all three stakeholders. They develop strategy, policies and procedures for IT, finance, and business that lead to a deployed cloud infrastructure that is manageable from a cost perspective. As I mentioned above, there are tools that support this mission, but without the insights of the entire committee to interpret and act on the data, you will not recognize the value of the tools or succeed in being cost efficient with the capital you spend on cloud-based infrastructure. Tools are not a silver bullet.

Just like there’s a nugget of truth underlying the health benefits of ketchup, when thoughtfully planned, considered and executed, you can recognize significant IT cost reductions as well as several other powerful benefits from transforming your infrastructure to the cloud. On the other hand, just like drinking a bottle of ketchup a day won’t cure or prevent any maladies, ignoring the revolutionary nature of the cloud and how your enterprise must adapt in order to “Cloud Confidently®”, won’t lead to any promised savings. It will likely result in higher costs for fewer benefits than you enjoy now. As you approach cloud adoption, remember, not everyone making claims of free and instant IT savings has your particular best interests at heart. Many of them, much like the 19thcentury ketchup hucksters, benefit handsomely as you overspend in the cloud.

It’s the 21stCentury, don’t drink the ketchup, Cloud Confidently®!