It’s possible to save money on cloud computing, but it will cost you

The rise of the cloud made businesses faster, quicker and more agile. But it created a new problem: Usage-based billing models at cloud providers like Amazon AWS, Microsoft Azure and Google Cloud Platform have made it easier than ever for enterprises to lose control of computing costs.

There’s an underlying assumption that moving from on-premises servers to the cloud will help companies save money, said German Bertot, vice president and general manager of IT asset management at ServiceNow. But that’s not always the case. “The promise is there, and it is great. But companies are having a hard time realizing those savings,” he said.

“People are very surprised at how much money cloud computing is costing [them] over traditional computing,” said David Linthicum, Deloitte’s cloud strategy leader. While some of that is just the price of access to computing power, the majority of it is due to inefficiently managing spending, he said.

That’s why SaaS companies like Flexera, Apptio and ServiceNow are helping companies lower their cloud subscription costs — as long as you subscribe to their services, which, of course, aren’t free.

Out-of-control spending

The reason cloud costs can balloon so quickly is that managing expenses associated with compute power is a lot more complicated in the cloud than it was when companies bought and managed their own servers.

With data centers, it was common for CIOs to only purchase new technology every few years or so, said Flexera Senior Director Brian Adler. In response, IT employees would ask for as many resources as they could get, especially because most companies provisioned more computing power than they needed at the time. “But that was the way to do it; that was the behavior that we had because I was hoping I would grow into it,” said Adler.

Because it took such a long time to purchase and deploy infrastructure resources when operating on-premises data centers, this was fairly common behavior, said Forrester Senior Analyst Tracy Woo. The difference with the cloud is that provisioning “is something that you can demand and get online within minutes.”

However, when many customers first moved from on-premises operations to the cloud, they often brought the old data center mentality along with them. Instead of scaling up resources as needed, for example, many companies still feel the need to over-provision up-front. But with the cloud, “I don't buy the peak, I can rent the peak. So that's a new behavior that folks need to learn,” said Adler.

At other times, because there was no reason to turn off applications in data centers, customers would leave virtual machines in the cloud running. In data centers “it didn't matter if I turned off my virtual machine, the physical host was still going to run and chew up money; there was no benefit,” said Adler. But in the cloud, if you leave things running, you have to pay.

The other aspect that makes managing cloud costs difficult is that IT spending isn’t as centralized as it used to be.

For one, the ease of getting started on the cloud means it’s a lot easier to subscribe, deploy and then rack up large bills. “You don't need to get a purchase order out to your hardware provider, bring them in, pay for it up-front, get the hardware into your data center, install it and so on,” said Bertot. In fact, nearly any employee with a corporate credit card can sign up for a SaaS application and pay for a service.

The fact that most cloud providers bill based on usage also means that it's fairly easy to drive up costs if companies aren’t paying attention. Even gaining visibility into where spending is coming from can be a challenge, because a company could have hundreds of engineers using resources, but only get one bill. And those bills are so complicated that no one could look at all that data and determine if they’re being overcharged, said Adler, who has seen Flexera customers with 12 million rows of information in a single monthly bill.

That’s why software is absolutely required to truly understand cloud spend at the enterprise level, said Apptio vice president Eugene Khvostov. “By day two of the month, you're getting so much data that you can't possibly run it through without any software,” he said. “So you have to either build or buy specialized software.”

Spending to save

Although it might seem counterintuitive, the best way to manage cloud spending could be spending money on spending-control tools. That’s why the major cloud providers AWS, Azure and Google as well as SaaS companies like Flexera, Apptio and ServiceNow all offer services to help companies cut their cloud costs.

Although many of these services require purchasing yet another subscription, according to industry practitioners and analysts, the savings can be massive.

How do third-party software providers like Flexera, Apptio or ServiceNow actually help lower cloud costs? There are many different tactics, from lowering subscription tiers based on usage to turning off machines when they’re not in use or reserving instances in advance.

On the SaaS application end, understanding which users are consuming licenses, and how much they’re using, can help determine which subscription tier to purchase or who to give licenses to. If a user is consuming a license but not using it, “are there ways for us to analyze the usage patterns and suggest a lower level subscription … and in the process achieve savings?” said Bertot.

Other times savings can come from rationalizing SaaS applications. “How many different communications platforms do I have? Do I have Zoom and GoToMeeting and Teams and Citrix? What if I consolidate those?” said Khvostov.

At Deloitte, Linthicum has seen clients save as much as 200% on their cloud bills after using a spend management tool. Although that’s an outlier, “in many instances it’s going to be 30% to 50% savings,” minimum, he said. And “there’s always going to be some sort of savings 100% of the time in my experience.”

At Apptio, which owns the Cloudability spend management tool, Khvostov has seen similar results. “When we typically onboard a customer we find anywhere from 10% to 30% savings right away.”

Even incremental savings on cloud infrastructure costs could amount to significant amounts of money. While only a small number of companies spend a million per month on cloud services — Woo calls them power users — a lot of companies still spend hundreds of thousands per month, she said.

And because many of the cloud spend management tools are fairly affordable — typically, 1% to 3% of what customers spend on cloud services in a month — the return on investment far outweighs the cost of subscribing. “Generally you see an ROI for these within two weeks to three months,” said Woo.

Although the major cloud providers all offer tools that can help customers analyze their billing, they have limitations.

While the cloud service providers give visibility into how a company is spending with them, they can’t do the same across other cloud providers or with SaaS applications, for instance.

If a company analyzes its spending with just one cloud provider, that’s only going to create a silo, said Linthicum. “You're going to understand everything about a particular cloud provider, but not holistically,” he said.

When a company starts to do cloud at scale, for instance, it’s likely using a multicloud or hybrid approach. “So I might want to be handling visibility across multiple clouds and plop that in one portal or one control plane,” said Woo.

At ServiceNow, for example, the company's spend management tool connects directly into SaaS providers and also analyzes deployments that are still on-premises. “That's something that no cloud provider will ever be able to do,” said Bertot.

Cutting back

While customers who are new to the cloud will face many of these problems, over time they will get better at understanding how to manage their own spend. “Initially, it's usually a pretty big bang for the buck, and then it peters out over time,” said Adler.

But what does this mean for companies selling spend management tools? As customers become more adept at managing their own spend, could demand for these services wane? To some the answer is no, because cloud spend management requires ongoing monitoring.

In the cloud, cost governance is about the ability “to not only have observability so you can see where the costs are going, but have observability around the interdependencies, observability around how things are going to be billed moving forward, and do that across platforms,” said Linthicum.

Without spend management tools, companies would have to build their own internal processes and software to have that level of visibility over their cloud spend. While that’s possible, it’s a lot easier to buy a subscription.

This story was updated to correct German Bertot's title.