Managing Cloud Costs: an Introduction

Posted on: December 4th, 2017 by Paul Delehanty
Managing Cloud Costs: an Interview with Digital Fuel Solution Architect Tabby Vos


Cloud: a Simple Definition

DF: Let’s start with a very basic question. What is Cloud, and why are more and more organizations talking about moving to Cloud Services?

Tabby: Cloud sounds fancy, but in reality, it’s very simple. Cloud means delivering computing services – services like storage, email, database, network, data analytics, and software – over the internet. So, for example, if you use something like Yahoo Mail, you are using Cloud right now.

Organizations are moving to Cloud because you can deliver all sorts of services over the Cloud. You can do Infrastructure as a Service (IaaS) which is where you are renting Infrastructure, like servers, over the internet. You can do Platform as a Service (PaaS.) That is where you provide a Platform for customers to develop and manage applications over the internet. And finally, there’s SaaS, which is like Digital Fuel’s solution, which is Software as a Service. That’s another common variant of what people mean when they say they are utilizing Cloud.

What do people mean by Public versus Private Cloud?

DF: For people who are just getting their toes wet with this topic, what do people mean when they are talking about Public versus Private Cloud?

Tabby: Basically, Public Clouds are owned and operated by Third Party providers like Amazon’s AWS or Microsoft Azure.

Private Clouds, on the other hand, are computing resources that are used exclusively by your organization. A Private Cloud could be a resource that you are hosting at your own Data Center, or it could be hosted externally but it’s all on your own private network.

That’s one of the concerns that organizations take into account when they are deciding whether to use Public or Private Cloud, because if you have strict compliance or security sensitive workloads you will likely want to look towards Private Cloud because that solution best serves applications needing stringent security requirements.

However, Public Cloud has its own benefits, as well; notably, that it is more flexible. So, if you don’t have security concerns, there are advantages to using Public Cloud. For example, with Public Cloud you can do provisioning on demand which allows for better capacity planning. Public Cloud has reliability benefits, as well. For example, data can be mirrored at different redundant sites, assisting organizations with disaster recovery and backup plans because that is handled for you automatically if you are working with a Third-Party provider on the Public Cloud.

“What is Hybrid Cloud?”

DF: What are some of the questions you get, right off the bat, from customers when they ask you about Cloud?

Tabby: The biggest question that I get is, “What is Hybrid Cloud?” That’s a very common first question that customers have lately.

Basically, they may think that Hybrid Cloud means simply leveraging Public and Private Cloud as part of their Cloud strategy, which is a not uncommon perception regarding Hybrid Cloud, but, in fact, isn’t really the definition of Hybrid Cloud.

There’s a more accurate definition of Hybrid Cloud. Hybrid Cloud is a Cloud computing environment that is a combination of on premise Private Cloud and Third-Party Cloud Services in which data and applications are seamlessly shared between those Clouds through a Single Management Platform. Ultimately, this is easier for the admins because everything works together in this Hybrid Cloud environment.

So, that’s the first answer we give regarding Hybrid Cloud. Which is to make this distinction. Since the first strategy, the one organizations often think is Hybrid Cloud, is more accurately a Multi-Cloud Strategy.

And once we’ve established this definition, then the conversation naturally moves to answering the next question which is, once our software is implemented, what kind of intelligence can we can generate for a customer, regardless of where they fall in the Multi-Cloud or Hybrid Cloud distinction, about what services to put on the Private Cloud and what kind of services to move to the Public Cloud.

DF: Very interesting! How often would you say organizations are starting from Multi-Cloud, or Hybrid Cloud as you described it?

Tabby: I would say that a true Hybrid Cloud utilizing a Single Management Platform is much rarer. Maybe at 10% of implementations. Whereas most organizations are typically looking to use our software to balance their Multi-Cloud strategy. They are asking, for example, how much to assign to Amazon Web Services, how much to assign to Azure, or should they invest in capital spending and infrastructure to host internally?

Managing Cloud Costs: the Main Drivers

DF: Ok, great! Now that we’ve got that understanding, let’s take a look at Cloud Costs. What are some of the main drivers behind Cloud Costs for an organization?

Tabby: The answer to that question really depends upon the type of Cloud you are talking about, Private or Public.

Costs for Public Cloud are more usage based, and the costs will depend on if you are reserving instances or using on demand instances because that would be more variable. You also typically see costs like Vendor Training, Custom Integrations, and consulting with Public Cloud.

On the other hand, if you are talking about the costs behind Private Cloud, you are looking at Network Costs, Costs Per Rack Unit, which include Network Hardware Costs, Infrastructure Maintenance, Labor, Compute Costs, (for example, Costs per Gigabyte of RAM,) Hardware Operation and Acquisition. There are also Storage Costs, Operational Costs to operate the Storage Hardware, and costs to acquire new Storage Hardware. Further, there are shared service costs for Power and Cooling of the Platform and the Data Center, Software Licenses, and Hosting Support.

Managing Cloud Costs: Multi-Cloud Analysis and IT Cost Allocation

DF: So it seems that a large organization that is committed to Cloud Solutions, and growing their Cloud Solutions, is really going to want to look to implementing IT Cost Allocation and incorporating Showback or Chargeback as way to manage their Cloud costs, is that right? Would you say that the two go hand-in-hand?

Tabby: Yes, initiating IT Cost Allocation is very helpful for Cost Optimization with Cloud expenses. There’s a couple of ways to approach this.

First, if we get an organization’s Cloud data into the system and analyze it, we can do a Multi-Cloud analysis. This will allow you to get an understanding of what workload types to consume – on demand or reserved, for example – which helps optimize your costs.

We can also do Workload Placement Guidance for On Premise versus Public. That is reporting that would detail the rate of your public and private consumption, which would give you a view of Cloud Services by greatest consumption and cost and then let you pivot that by supplier, as well.

We can also do Multi-Cloud comparisons by environment, by applications hosted on those virtual machines, and application distribution. You can use this information to compare Cloud Provider costs and then decide, based on those costs, where you want to put your workloads.

The Future of Cloud

DF: As someone working with many different organizations and who sees multiple instances of Cloud implementations, can you give a picture of what the future of Cloud utilization looks like and what percentage of IT spend overall is moving towards Cloud?

Tabby: The bottom line is that Cloud is definitely here to stay. I think the question going forward is going to be how do organizations best leverage the Hybrid Cloud solution to be most efficient with their costs. With trends like globalization and the reality of more employees working remotely, Public Cloud Solutions become more and more appealing.

However, there will also be a portion of that mix associated with Private Clouds because security is also such a growing concern. And for organizations with proprietary data and intensive security concerns, they will definitely be looking at Private Cloud options or some variant of Hybrid where, perhaps, all of the sensitive data is run on Private in-house servers but the analysis of that data, where the data has been cleansed, can safely be run on public servers.

Right now, we typically see one quarter to one third of IT Budgets devoted to Cloud, and maybe one quarter of that would be invested in Cloud Infrastructure like virtual servers. So that would be maybe 6% of a typical annual budget being invested in Cloud infrastructure.

There’s a study that’s been published, the Computer Economics Annual IT Spending Survey, and it has showed that customers want to increase operational spending on Cloud apps at the same time as they also want to reduce investment in Data Center Infrastructure. I would say that finding supports Cloud being an increasing portion of IT spend going forward.

Managing Cloud Costs: Taming Complex Public Cloud billing

DF: For an organization that is just starting with IT Cost Allocation and is also interested in implementing an aggressive Public Cloud strategy, can an ITBM solution help them work with the complicated bills that they receive from AWS or Azure?

Tabby: Absolutely. You can load those bills directly into the system through something called a Data Adapter and we can connect via a Database Connection to AWS and Azure and collect all of that data automatically, even from multiple AWS accounts. We also have content packs – which are preconfigured dashboards – that consolidate all that information from the bills so that you can visualize the spend across IT and the entire organization. You can see, for example, from tagged data in AWS and Azure, who in the organizations is consuming the most, and which AWS or Azure services have the highest spend.

CIO task: Understanding Cloud Consumption

DF: Could you share with us a specific insight that an organization might gain into Cloud costs from their first implementation of a solution?

Tabby: A typical insight might be discovering virtual machines running in the Cloud that have been stopped and powered off that are incurring charges even though they are not in use. So, when you see that and identify that it’s happening, you have located a possible savings and waste reduction possibility.

These insights can be underutilization of resources, as I mentioned, but they can also be over-reserved instances, reserved instances that aren’t being used, or variations in provider costs depending upon the application that you are running.

All in all, CIOs who understand their Cloud consumption are in a better position to make informed decisions regarding their options. For example, a CIO with accurate consumption data is well positioned to figure out how best to leverage the mix of Public and Private Cloud to optimize costs.

Managing Cloud Costs: “Why don’t we seem to be saving money with Cloud?”

DF: There’s a frequent observation we hear from organizations that rapidly adopt Cloud Solutions in multiple Business Units, and it comes down to this question: “Why don’t we seem to be saving money with Cloud?” It’s a natural question which seems to be based on an assumption that by moving IT services to the Cloud you should see instant savings. Can you speak to that?

Tabby: I can.

First off, it’s not necessarily a bad thing if your Cloud Spend increases, if your overall business is also growing.

So, while it’s a common perception that an increase in Total Cost is undesirable, if you move the emphasis from Total Cost to Unit Cost, you can then measure the amount of money it takes to deliver a Unit of Service. In this case, as Cloud usage and consumption goes up, yes, that will result in an increase in your bill, but if your Unit Costs are static, you are, in fact, not being charged more per unit for that service so long as your revenue is continuing to scale.

This is where an ITBM solution is going to yield useful visibility into Cloud Costs. Instead of viewing Cloud simply a pooled expense, an organization using ITBM has visibility into how different business units are leveraging their Cloud usage on a Unit Cost basis. At that point, you may well be able to state that it’s a positive outcome that your Cloud Spend is increasing because you’ve optimized how you are leveraging Cloud and have visibility into how your Cloud spend accurately reflects revenue growth or opportunities.

Now, there are also instances where Public Cloud expenses can become more expensive over time. For example, if you have established a constant workload and you don’t need the flexibility or elasticity of the Public Cloud you may end up paying more for that Cloud Service on the Public Cloud than if you hosted it internally. In that case, because you are not using that flexibility, you would discover that you would pay less using Private Cloud.

Managing Cloud Costs Tip 1: Turn off services you’re not using

DF: So, you’re saying that an organization that’s embraced a Multi-Cloud solution could discover that they may be able to realize savings by moving some of their Public Cloud services back to the Private Cloud?

Tabby: Yes, there are numerous examples of massively data intensive organizations that started out on the Public Cloud but discovered that this approach didn’t scale to their needs and, because some of their data usage was so constant, they were better off moving some of those services internally to the Private Cloud. In effect, these organizations realized that there was no need to pay premium for a Public Cloud solution that wasn’t merited by their usage and their business need.

And that brings up something that applies across organizations. If you aren’t using your Cloud resources but they are running, you are going to get billed for it. In that case, you are wasting money. That’s another common reason that organizations discover that their Cloud Spend has increased, and an ITBM solution will show you that and allow you to turn off services that you aren’t using.

Initiating Cloud Cost Savings with ITBM

DF: Perfect, and that leads to the next question. How can organizations use an ITBM solution to balance their Cloud workload?

Tabby: When organizations start with ITBM they immediately discover efficiencies within their Cloud usage.

For example, they see, right away, what the on demand versus the reserved usage is. They see, right away, their unused reserved hours, and they are able to look at costs by supplier. With ITBM, organizations gain full transparency into their costs so that they can start fine tuning and leveraging the efficiencies that the reporting gives them and start saving money.

One further insight about Cloud and ITBM is this: only ITBM will allow an organization to make an apples-to-apples comparison between the total bundle of costs represented by one instance of Cloud utilization on the Public Cloud and that same instance on the Private Cloud. That kind of unit-based cost comparison is what unlocks opportunities to discover optimizations and efficiencies that impact operating costs and allow organizations to hit revenue targets.

Scaling Cloud solutions for Rapid Growth

DF: And how does that scale when you move to the larger organizations within the Fortune 500?

Tabby: The challenge large and complex organizations face is how best to map a Cloud Strategy so that they have a solution that is scalable and responsive to their business needs. Because of this, more and more organizations have researched and are interested in implementing a Hybrid Cloud Strategy. Now, Hybrid Cloud definitely requires an approach where you are implementing ITBM best practices with Cloud, for example, Digital Fuel’s Cloud Business Intelligence.

When large organizations use ITBM to start mapping the Total Cost of Ownership at multiple infrastructure layers, that helps define their strategy for IT, in general. When applied to Cloud, ITBM further allows an organization to map out a comprehensive strategy for what they want to put on Public Cloud versus what they want to host internally based on cost.

What’s essential for large and complex organizations, especially those experiencing rapid growth in Cloud utilization, is to use ITBM to define their plans and to ensure that they have an efficient and agile strategy that can be responsive to their business needs and react quickly to market changes. If they don’t do this, one outcome that happens frequently is that with the availability of Cloud, Business Units will start finding their own solutions outside of the Corporate IT department.

Managing Cloud Costs: “Shadow IT”

DF: Ah, the famous “Shadow IT” discussion! How does that conversation play out with Cloud, in particular?

Tabby: First off, it is not necessarily a bad thing that Business Unit leaders assert themselves and drive an agile strategy in adopting Cloud.

At the same time, it’s essential for IT to create an Enterprise-wide strategy for their Cloud Spending and integrate the needs of the Business in an agile manner.

Now, if the CIO doesn’t have a full picture of the tools that Business Units need, that’s where organizations run into problems.

Cloud solutions that get built without the collaboration of IT, haven’t been vetted, haven’t been properly engineered, yet IT is still responsible for ensuring security and compliance with the organization’s internal tools and processes. So, what we want, ideally, is for Enterprise IT to best serve the Cloud needs of the Line of Business in a responsive, secure, and agile manner, and we also want the CIO to be able leverage ITBM to deliver this outcome while effectively managing and optimizing Cloud costs.

Managing Cloud Costs Tip 2: Stranded Infrastructure

DF: Wow, that’s a great summary of the current evolution of the conversation about Shadow IT! Speaking of very large organizations – companies with budgets that rival a small country – stranded infrastructure is always an issue for CIOs working at such a large scale. How does this play out with Cloud?

Tabby: This is a circumstance where an ITBM solution comes to the fore. ITBM will help a CIO identify those costs, that stranded infrastructure, and highlight those costs as redundant while also accounting for them appropriately.

In the case of Cloud, an organization may have moved a service from the Private to Public Cloud, which has resulted in a stranded infrastructure cost. In that case, the organization has invested in a private infrastructure that it is no longer using yet they are still depreciating those assets and still need to include those costs in their Total Cost of Ownership (TCO) of an application. Those stranded infrastructure costs, while they are redundant, are still relevant, and the CIO still has to account for that money.

This has an impact when organizations look at Private and Public Cloud costing. If you’ve decommissioned your private infrastructure, or you are slowly decommissioning it, there is still that sunken or sub cost that you have to account for. In effect, the Public Cloud cost will be a little higher than it might appear since you have to take that stranded cost into account.

Managing Cloud Costs: Cloud Allocation for Large Scale Organizations

DF: Since we’re talking about organizations at scale, can you talk a little bit about Cloud Allocation methodology for truly massive businesses? How do Cloud costs get allocated to the Line of Business at such a large scale?

Tabby: Frequently organizations do this via direct tagging using the Public Cloud Meta Data. Azure, for example, will let you tag fields on the bill, or create a tagged field on the bill, and that tag can be the Business Unit, the Consumer or the IT Project.

Organizations can also use a number of other strategies for allocation of Cloud costs. For example, you could allocate by an application that runs on the server, i.e. Server to Application mapping and then Applications to Services, and then Services out to Business Units.

At the end of the day, usage is the most mature method; so, if an organization can assign usage directly to each Business Unit that is probably the best method. AWS, for example, has something called linked accounts, that lets an organization create billing for linked accounts.

But in terms of the approaches different organizations take, there are a number of indirect methodologies that are also used to create Cloud Allocation.

ITBM, Cloud and Agile Digital Transformation

DF: As you know the pace of Digital Transformation is only increasing, and Cloud is central to that. How can ITBM help an organization with a Line of Business that wants to move very quickly with the implementation of a customized Cloud Solution? Does having an ITBM infrastructure in place allow for greater agility in rapidly adopting Cloud solutions?

Tabby: The short answer is yes, and it’s down to having insights into Costs by supplier and instance type that will allow you to craft that strategy – in particular a Hybrid Cloud strategy – that will allow IT to be more agile in deciding where to put workloads or where to spin up new instances.

ITBM, in that case, is allowing you to make optimal decisions to support your Business Unit Owners.

DF: What are some of the challenges that you are seeing out there for organizations that have mature ITBM solutions, and are also rapidly adopting Cloud solutions?

Tabby: I think the biggest question is ascertaining the extent to which Public Cloud makes sense for the organization. As I mentioned, security and internal policy decisions are common concerns with Public Cloud.

For some very large organizations there is also scale to consider. There really is a threshold where it no longer makes sense to do most of your business on the Public Cloud and some organizations hit that.

Managing Cloud Costs: Gaining Actionable Insights with ITBM

DF: Ok, last question! Can you give an example of some of the surprising insights organizations achieve when they implement ITBM and analyze their Multi-Cloud services?

Tabby: Great question. Organizations can definitely discover surprises, especially in categories that they weren’t looking at previously. Categories like unused VMs and cost by Reserved Instance versus On Demand are very difficult to conceptualize until you are actually able to see the analysis in the reporting. It is hard for CIOs to make decisions about suppliers and their Cloud strategy when they are trying to decipher a very confusing bill. In fact, given the utilization of Public Cloud at scale, some of these highly complex bills are really not intelligible without using a tool like a dashboard to create a report to gain actionable insights.

DF: Yes, we are sending a clear message today to anyone out there struggling with complex Public Cloud bills, “You are not alone!” Thank you, Tabby, I think readers interested in Cloud and ITBM will find this interview very useful.

Tabby: I hope so, thanks for having me!

DF: Can you close by telling us a bit about yourself and what you do at Digital Fuel?

Tabby:I work out of Silver Spring, Maryland where I’m a Solution Architect with Digital Fuel. That means I’m a bridge between the Sales Department and the Professional Services delivery department. My work involves crafting SOWs. In sum, I talk to customers to find out what solutions they need and how best to craft solutions that support their business requirements.


Digital Fuel continues to grow and share valuable content on a wide variety of topics relevant to CIOs and anyone interested in managing Technology Business Value for today’s IT organization. Please follow these links for more articles on topics including Cloud, IT Cost Allocation, and other topics addressed by Digital Fuel Experts.

For more information on Digital Fuel’s software solutions, please visit our Product pages including Cloud Intelligence and Data Intelligence. To express interest in Digital Fuel’s software solutions for your organization please Request a Demo here.


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