Understanding Cloud Computing Expenditure and How to Manage Waste
The ongoing expansion of cloud computing has been a subject of intense discussion, especially regarding its financial implications. As businesses increasingly adopt cloud services, the costs associated with these services are skyrocketing. For instance, according to a forecast by Gartner, global spending by end users on public cloud services is expected to surge from $595.7 billion in 2024 to a staggering $723.4 billion in 2025, marking a 21.5% increase. This trend underscores the growing reliance on cloud infrastructure for various business operations.
However, a concurrent challenge that many organizations face is the significant amount of money that is wasted on cloud resources. A recent survey involving 300 companies revealed that 78% of respondents believe that between 21% and 50% of their cloud expenditures are wasted annually. This highlights a critical area of concern for businesses: how to efficiently manage and optimize cloud spending.
The overarching issue is the substantial amount of budget that gets wasted on unnecessary cloud resources. Such waste can be surprisingly large, even within a single organization. This article delves into three vital steps that can help organizations manage cloud resource usage more effectively, ensuring spending is leaner and more aligned with business objectives. We will explore these steps through a practical example of how a large insurance company drastically reduced its operational costs by modernizing its analytics model for cloud deployment.
Disclaimer: Understanding Cloud Waste
Before delving into the steps for managing cloud expenditure, it’s important to clarify what "cloud waste" entails. In some situations, maintaining extra cloud capacity can be beneficial. For certain applications, overprovisioning by 10% to 20% can prevent IT teams from constantly resizing apps or dealing with unpredictable and short-lived workloads. This approach can be better than facing potential disruptions, as the minor additional costs are often outweighed by the benefits of having excess capacity.
However, a more substantial issue occurs when applications are moved from on-premises infrastructure to the cloud without proper adaptation. This "lift and shift" approach can result in significant costs if the migration process isn’t carefully planned and aligned with specific objectives. Therefore, it is crucial for organizations to first ask themselves what they hope to achieve by migrating to the cloud and ensure that the architecture meets these expectations.
Step 1: Transitioning Applications from CapEx to OpEx
Migrating large, legacy applications to the cloud without modifications can lead to considerable waste. These applications often become cumbersome over time as new functionalities are added to outdated architectures. As a result, moving them directly to the cloud can be more expensive than maintaining them on-premises. This issue necessitates a strategic rethink of how these applications are managed.
The key to modernizing legacy workloads lies in leveraging the cloud’s "rental model." This involves transitioning from a fixed-cost, on-premises architecture (Capital Expenditure, or CapEx) to the cloud’s flexible cost structure (Operational Expenditure, or OpEx). By doing so, organizations can optimize their applications for the cloud and reduce unnecessary expenses.
A Real-World Example
Consider a large insurance company that had its core analytics system operating on-premises. This system, essential to the insurer’s business, required over 100 servers, a massive data lake, and a team of around 150 engineers to manage networking and data processes. Maintaining this system was costly and resource-intensive.
If the company had simply moved the application to the cloud without any modifications, it could have faced twice the operational costs while still requiring a large team of engineers. Instead, the insurer chose to modernize the application by re-architecting it for the cloud. This involved moving the analytics system to a cloud-based "cold storage" setup. In this arrangement, the application is only activated when needed, quickly accessing data and then returning to a low-cost storage state after use.
This transformation resulted in significant benefits. The application is now managed by just three to five people, and analytics are conducted daily rather than every few months. Sensitive data is only in active use for a short time, reducing security risks. This shift from CapEx to OpEx has led to enormous cost savings, reducing annual expenses from nearly $100 million to less than $800 per day.
Step 2: Implementing Guardrails
Cloud resources that are underutilized or unused can accumulate quickly, leading to wastage. Issues such as "zombie processes" (processes that continue running despite not being needed), orphaned resources, and unused accounts are common examples of cloud waste. Fortunately, these can be addressed efficiently through automated solutions.
For many developers and operations engineers, transitioning to cloud environments can be challenging, particularly if they have experience primarily with on-premises systems. Without proper optimization strategies, these engineers may inadvertently increase costs while attempting to re-architect applications for the cloud.
To facilitate a smoother transition, organizations can benefit from establishing a dedicated platform team that implements guardrails. This team can automate and optimize cloud resource management using techniques such as Infrastructure as Code (IaC), which replaces manual operations with consistent corporate policies. Applications can be managed through an image lifecycle management system, ensuring efficient resource allocation based on predefined policies. This approach helps teams avoid common pitfalls and build confidence in their cloud deployments.
Step 3: Aligning Cloud Spending with Business Outcomes
In many organizations, IT departments serve as centralized cost centers that oversee all technology-related expenditures, including cloud services. While these departments may support specific business functions, their budgets are often not directly tied to the business unit’s profit and loss statements. Consequently, individual expenditures may not be closely scrutinized, potentially hindering innovation.
The concept of Cloud FinOps addresses this challenge by bringing together technology, finance, and business teams to evaluate operational processes based on their financial impact. This proactive approach encourages creativity and strategic decision-making by assessing the trade-offs between cloud spending and its contribution to revenue targets and margins.
For instance, if an IT department significantly increases cloud resources to enhance an application’s global reliability, but this results in a substantial reduction in operating margins, the decision’s value must be evaluated. FinOps tools, such as Apptio and Infracost, offer solutions to help organizations manage infrastructure costs while maintaining revenue goals and risk tolerance.
Learn More
As cloud consumption continues to grow, organizations must also address the issue of cloud waste. To learn more about optimizing cloud resource management, consider exploring resources like the HashiCorp webinar on deploying policy-guarded infrastructure and creating effective guardrails.
By adopting these strategies, organizations can effectively manage their cloud expenditures, minimize waste, and align their cloud investments with business objectives.
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