John Dabek
John Dabek

Cloud costs are escalating and wasted spend is becoming a leading issue for businesses. In the rush to shift workloads to the cloud, many organizations have not optimized costs and operations, such as automating the shutdown of unused workloads or moving workloads to lower-cost cloud providers or regions. Victory is often declared at migration. But this lack of foresight and governance is now backfiring—and it’s estimated that as much as 35% of all cloud spending could be wasted. 

In our experience, optimizing cloud costs simply boils down to two things: ensuring optimal application placement and implementing control measures through governance. These need to be top priority because as cloud use increases, the more difficult it will be to manage cloud spend. Only a minority of companies have implemented automated policies to address wasted cloud spend despite the increased focus on cloud cost management. 

Optimal application placement mostly comes down to understanding the total cost of ownership (TCO). TCO is not a revolutionary thing, but getting it right can be tricky, especially when there are many hidden factors. The key here is to take a holistic approach to costs that balances value and risk. 

For example, in comparing the cost of an on-premise solution with a cloud-based one, many organizations overemphasize the cost of hardware and software, while overlooking intangibles such as labor, quality of service, performance, flexibility, and more. In fact, labor often makes up the bulk of the cost, and taking it into account drastically changes the equation.

In general, we recommend prioritizing software-as-a-service (SaaS) as much as possible, followed by platform-as-a-service (PaaS) and infrastructure-as-a-service (IaaS). PaaS is probably the desired state for most applications as it eliminates the burden of maintaining OSes and other infrastructure. And while many applications will only run on IaaS, which is fine in the short term, organizations should have a plan to shift soon.

With waste, the underlying cause is often poor IT-business alignment. In 451 Research’s Cost Management in the Cloud Age, 40% of respondents in IT roles say their budgets and forecasts are accurate while 26% of those in finance roles say they rarely go past their cloud budgets, indicating a clear misalignment of cloud cost management between IT and Finance. 

In many companies, business units are initiating cloud projects without IT oversight, which translates to suboptimal contracts, instances, and spending. This is why we’re not advocating a cloud cost management solution as the primary step. Governance simply has to come first.

The cloud governance function should consist of leaders from IT, business, finance, and procurement—each with clear roles and responsibilities in relation to cloud. IT should act as a guide and broker, establishing best practices, tools, processes, to help the business optimize costs while maximizing performance. Business units should be held accountable for their team’s spending and take proactive steps to leverage IT’s guidelines and best practices. And finance and procurement should lead the way in negotiations, budgeting, and vendor management. Chargeback and showbacks should be instituted to relieve some of the cost pressures on IT.

Ultimately, IT must shed its reputation as a cost center and embrace its new role as a value driver. That means less time keeping the lights on, and more time innovating and driving business results. 

If you answered no to any of the questions above, it’s likely that your cloud spend is suboptimal.

John Dabek
Managing Principal

John is an award-winning, pragmatic, and innovative global technology executive with over 30 years of M&A, organizational design, and IT leadership expertise. He specializes in technology transformations and leading large-scale programs that create a step change in organizational performance.

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