Cloud economics is crucial for an organization to make the most out of their cloud solutions, and business leaders need to prioritize shifting their company culture to embrace accountability and trackability.
When leaders hear the phrase “cloud economics,” they think about budgeting and controlling costs. Cost management is an element of cloud economics, but it is not the entire equation. In order for cloud economics to be implemented in a beneficial way, organizations must realize that cloud economics is not a budgetary practice, but rather an organizational culture shift.
The very definition of “economics” indicates that the study is more than just a numbers game. Economics is “a science concerned with the process or system by which goods and services are produced, sold, and bought.” The practice of economics involves a whole “process or system” where actors and actions are considered and accounted for.
With this definition in mind, cloud economics means that companies are required to look at key players and behaviors when evaluating their cloud environment in order to maximize the business value of their cloud.
Once an organization has fully embraced the study of cloud economics, it will be able to gain insight into which departments are utilizing the cloud, what applications and workloads are utilizing the cloud, and how all of these moving parts contribute to greater business goals. Embodying transparency and trackability enables teams to work together in a harmonious way to control their cloud infrastructure and prove the true business benefits of the cloud.
If business leaders want to apply cloud economics to their organizations, they must go beyond calculating cloud costs. They will need to promote a culture of cross-functional collaboration and honest accountability. Leadership should prioritize and facilitate the joint efforts of cloud architects, cloud operations, developers, and the sourcing team.
Cloud economics will encourage communication, collaboration, and change in culture, which will have the added benefit of cloud cost management and cloud business success.
Where do companies lose control of their cloud costs?
When companies lose control of cloud costs, the business value of the cloud disappears as well. If the cloud is overspending and there is no business value to show for, how are leaders supposed to feel good about their cloud infrastructure? Going over budget with no benefits would not be a sound business case for any enterprise in any industry.
Out-of-control cloud spending is quite easy, and it usually boils down to poor business decisions that come from leadership. Company leaders should first recognize that they wield the power to manage cloud costs and foster communication between teams. If they are making poor business decisions, like prioritizing speedy delivery over well-written code or not promoting transparency, then they are allowing practices that negatively impact cloud costs.
When leaders push their teams to be fast rather than thorough, it creates technical debt and tension between teams. The following sub-optimal practices can happen when leadership is not prioritizing cloud cost optimizations:
Developers ignore seemingly small administrative tasks that are actually immensely important and consequential, like rightsizing infrastructure or turning off inactive applications.
Architects select suboptimal designs that are easier and faster to run but are more expensive to implement.
Developers use inefficient code and crude algorithms in order to ship a feature faster, but then fail to consider performance optimizations to execute less resource consumption.
Developers forgo deployment automation that would help to automatically rightsize.
Developers build code that isn’t inherently cloud-native, and therefore not cloud-optimized.
Finance and procurement teams are only looking at the bottom line and don’t fully understand why the cloud bill is so high, therefore, creating tension between IT/dev and finance/procurement.
When these actions compound, it leads to an infrastructure mess that is incredibly difficult to clean up. Poorly implemented bad designs that are not easily scalable will require a significant amount of development time; therefore, leaving companies with inefficient cloud infrastructure and preposterously high cloud costs.
Furthermore, these high and unexplained cloud bills cause rifts between teams and are detrimental to collaboration efforts. Lack of accountability and visibility causes developer and finance teams to have misaligned business objectives.
Poor cloud governance and culture are derived from leadership’s misguided business decisions and muddled planning. If leaders don’t prioritize cloud cost optimization through cloud economics, the business value of the cloud is diminished and company collaboration will suffer. Developers and architects will continue to execute processes that create high cloud costs, and finance and procurement teams will forever be at odds with the IT team.
What are the benefits of cloud economics?
Below are a few common business pitfalls that leaders can easily address if they embrace the practice of cloud economics:
Decentralized Costs and Budgets Knowing budgets may seem obvious, but more often than not, leaders don’t even know what they are spending on the cloud. This is usually due to siloed department budgets and a lack of disclosure. Cloud economics requires leaders to create visibility into their cloud spend and open channels of communication about allocation, budgeting, and forecasting.
Lack of Planning and Unanticipated Usage
If organizations don’t plan, then they will end up over-utilizing the cloud. Failing to forecast or proactively budget cloud resources will lead to using too many unnecessary and/or unused resources. With cloud economics, leaders are responsible for strategies, systems, and internal communications to connect cloud costs with business goals.
This issue is a culmination of other problems. If business leaders are unsure of what they are doing in the cloud, they are less willing to commit to long-term cloud contracts. Unwillingness to commit to contracts is a missed opportunity for business leaders because long-term engagements are more cost-friendly. Once leaders have implemented cloud economics to inspire confidence in their cloud infrastructure, they can assertively evaluate purchasing options in the most cost-effective way.
What are the steps to creating a culture around cloud economics?
Cloud economics is a study that goes beyond calculating and cutting costs. It is a company culture that is a cross-functional effort. Though it seems like a significant undertaking, the steps to get started are quite manageable. Below is a high-level plan that business leaders must take charge of to create a culture around prioritizing cloud economics:
Stage one consists of lots of data collecting and understanding of the current cloud situation. Company leaders will need to know what the trust costs of the cloud are before they can proceed forward. Creating visibility around the current state is also the first step to creating a culture of communication and transparency amongst teams and stakeholders.
Once the baseline is understood, leadership can analyze the data in order to optimize cloud costs. The visibility of the current state is crucial for teams and leadership to understand what they are working with and how they can optimize it. This stage is where a lot of conversations happen amongst teams to come up with an optimization action plan. It requires teams and stakeholders to communicate and work together, which ultimately builds trust among each other.
Finally, the data analysis and learnings can be implemented. With the optimization action plan, leaders should know what areas of the cloud demand optimization first and how to optimize these areas. At this point in the process, teams and stakeholders are comfortable with cross-collaboration and honest communications amongst each other. This opens up a transparent feedback loop that is necessary for continuous improvement.
The entire organization stands to gain when cloud economics is prioritized. A cost-efficient cloud infrastructure will lead to improved productivity, cross-functional collaboration between teams, and focused efforts towards greater business objectives.
When it comes to cloud economics and optimization, 2nd Watch is the go-to partner for enterprise-level services and support. Our team of experts and cloud-accredited professionals help businesses plan, analyze, and recommend strategies to create a culture of cloud economics and accountability. Control cloud costs and maximize the business value of your cloud today by contacting a 2nd Watch cloud expert.
Mary Fellows | Director of Cloud Economics at 2ND Watch
Does this sound familiar? “You will move to the cloud, for right or wrong, because of a business imperative to get out of your data center, not tomorrow, but yesterday.” Or, “You’re sold on the idea that by migrating to the cloud, you’d be able to reduce your total cost of ownership (TCO), increase flexibility, and accelerate innovation projects.” The cloud practically sells itself, and as a result, you plan to ditch your legacy, on-premises technology and begin your cloud migration journey.
However, suppose you hop into the cloud without a defined strategy and approach. In that case, you’ll experience cloud sprawl, and spiraling cloud costs will negate the touted benefits of the cloud. This sort of “blind faith” in all the cloud offers is a common mistake many business leaders make. It has prevented you from considering cloud management and economics as part of your cloud migration strategy.
Enter Innovation Scoring by 2nd Watch. Our data-driven scoring system will help you assess your applications running in the cloud environment and identify where you are overprovisioning and overspending. Innovation Scoring is the first step to establishing cloud economics and maximizing the value of cloud computing to your business in the long run.
The Importance of Cloud Economics
If O2 is how you define your cloud environment, you’ve learned the hard way about the need for cloud economics. While cost savings is a component of cloud economics, the ultimate goal of the practice is tomaximize the value of cloud computing for your organization. Implementing cloud economics will give your business insights into which departments are utilizing the cloud, what applications and workloads are using the cloud, and how these moving parts contribute to more impactful and cost effective business goals.
Without cloud economics, your business will deal with overrun cloud budgets, which are usually due to one or more of the following:
Ungoverned costs: your organization has no idea what it is spending on.
Unforecasted usage: you see more cloud projects than you had anticipated.
Uncommitted mindset: you don’t want to commit to a cloud contract (because you can’t predict its usage), so you miss out on contractual discounts.
Wasted dev/test resources: your dev team is overprovisioning their infrastructure.
Overestimated production headroom: you are not auto-scaling or have not set proper parameters for autoscaling for your applications.
Wrongsized production: your production environment is overprovisioned, and pay for the excess resources monthly.
Poor design and implementation: your architects make suboptimal design choices for cloud solutions because they are unaware of the costs to the business.
For cloud economics to work, there must be a company-wide commitment to the practice beyond simply calculating cloud costs. Just likeimplementing a DevOps practice, impactful cloud economics requires promoting a cross-functional and collaborative culture. Business leaders must encourage transparency and trackability to enable teams to work together harmoniously to manage their cloud infrastructure and prove the true business benefits of the cloud.
2nd Watch’s Innovation Scoring
Cloud economics is critical for your business to reap the maximum benefits of cloud computing. However, cloud economics is a pervasive cultural practice, so it won’t happen at the snap of your fingers. It will require time and effort for your business to establish cloud economics.
The first step in controlling your cloud budget and governing your cloud platform is to identify areas of improvement. 2nd Watch created the Innovation Scoring system, our proprietary scoring methodology, to help you identify opportunities for optimization and modernization in a data-driven way.
Our Innovation Scoring methodology will reveal the underlying problem with your cloud management. We’ll be able to identify the application needing improvement and determine why it is suboptimal. Did you set it up incorrectly and need to move to PaaS with autoscaling capabilities? Or did someone write your application in 2005, and you are in dire need of application modernization? Or is it a combination of both? 2nd Watch designed its Innovation Scoring to pinpoint areas for improvement in your database, infrastructure, and/or application. When we ascertain the source of inefficiency, we can address issues contributing to cloud sprawl and skyrocketing cloud costs.
To calculate your Innovation Score, we analyze several different dynamics related to your cloud applications. The ratings from each category are then cross-tabulated to generate a total view of your entire cloud environment. Your Innovation Score will not only reveal inefficiencies but also allow us to compare your efforts against other similarly sized companies and make sure you are up to industry standards.
2nd Watch understands that cloud economics is a cultural undertaking; therefore, when we assign Innovation Scores to our clients, we do so in a way that encourages company-wide participation. To promote engagement and commitment, we’ve gamified our Innovation Scoring: we split our clients’ technical leadership into teams and calculate each team’s score. When we check in with our clients, we reveal each team’s score to showcase which ones are being innovative and taking advantage of the cloud and which ones have room for improvement.
Sample Innovation Scoring Output
Our approach to Innovation Scoring promotes friendly competition, which fosters collaboration between teams and a transparent high-level overview of how each team is leveraging the cloud. When our clients are a part of our Innovation Scoring system, it jumpstarts a culture of innovation, transparency, and accountability within their business.
Consider the importance of cloud economics when planning to run your applications in a cloud environment. It is easy to overspend, get overwhelmed, and have no sense of direction. Therefore, cloud economics is beneficial whether you implement it proactively or reactively.
2nd Watch’s Innovation Scoring is a practical first step to getting your cloud budget in order and establishing cloud economics as a standard cultural practice in your organization. Through data and analysis, our Innovation Scoring will help you identify how you can optimize your cloud instance so that you are receiving maximum cloud value for your business. Moreover, Innovation Scoring trains your teams to be communicative and cross-collaborative, which are the traits your company culture needs to succeed in cloud economics.
You made a decision and a plan. You selected a migration partner. And you exited your traditional datacenter successfully by migrating thousands of virtual machines to the public cloud. You breathed a huge sigh of relief because it wasn’t easy, but you and your team pulled through.
While you and your teams were preparing to return to focusing on business value-driven tasks and features, the newly minted cloud estate was ticking away like a taxi meter 24 hours a day, seven days a week. The first invoice came, and it seemed a little higher than your forecast. The second monthly invoice was even higher than the first! Your business units (BUs) are now all-in on the cloud, just like you asked, and deploying resources and new environments at will like kids in a candy store. The invoices keep coming, and eventually, Finance takes notice. “What happened here? I thought moving to the cloud would reduce costs?”If this sounds familiar, you’re not alone.
As with many new technologies and strategies, moving to the public cloud comes with risks and rewards. The cloud value proposition is multi-faceted and, according to AWS, includes:
Total Cost of Ownership (TCO) Reduction
For many enterprises, the last three pillars of productivity, resilience, and agility have gotten overshadowed by the promise of a lower TCO. It’s not hard to understand why. Measuring cloud usage costs is easy. The cloud service provider (CSP) does this for you every month. The idea that migrating to the cloud is a cost-driven exercise excludes three-fourths of the potential business value – especially when migrating with a lift-and-shift approach.
The Lift-and-Shift Approach
When you consider workloads like black boxes, you start your journey without complete visibility into the public cloud’s opportunities. Maybe you had an expiring datacenter contract and had to evacuate under time pressure. That’s understandable. But were you educated and prepared for the tradeoffs of that approach? Or were you shocked by the first invoice and the speed at which the invoices are growing? Did you prepare the CFO in advance and share the next steps? So, what did you miss?
When you took a black-box lift-and-shift (BBLAS) approach, the focus was on moving virtual machines in groups based on dependency mapping. Your teams or your cloud partner, usually with the help of automation, defined the groups and then worked with you to plan the movement of those groups – typically referred to as “wave planning.” What you ended up with is a mirror image of your datacenter in the public cloud.
You have now migrated to someone else’s datacenter.
The old datacenter was predictable where fixed hardware investments dictated capacity, and efforts towards efficiency only occurred when available resources started to dwindle from new and existing services and applications being deployed or scaled. This new datacenter charges by the millisecond, has unlimited capacity, and the investment in additional capacity bypasses procurement and is in the hands of the engineers. Controlling costs in this new datacenter is a whole new world for most enterprises. Enter the FinOps movement.
“FinOps is an evolving cloud financial management discipline and cultural practice that enables organizations to get maximum business value by helping engineering, finance, technology and business teams to collaborate on data-driven spending decisions.” – finops.org
FinOps is to finance and engineering, as DevOps is to development and operations. The FinOps philosophy and approach is how you regain cost control in a BBLAS environment. Before diving into how FinOps can help, let’s look at the Cloud Cost Optimization Cycle (CCOC). The CCOC is a precursor to the FinOps framework and another black-box approach to cost efficiency in the cloud.
A black-box approach is when virtual machines are viewed as a fixed infrastructure without regard to the applications and services running on them. Seasoned professionals have lived through this traditional IT view for years, and it is what separates operations and development concerns. DevOps philosophy is making inroads, of course, but many enterprises have only begun to introduce this philosophy at scale.
The Cloud Cost Optimization Cycle goes like this. Every month your CSP makes cost and usage data available. An in-house resource or a consultant analyzes the massive amount of data and prepares recommendations for potential savings. The consultant presents these recommendations to the operations team, which then reconfigures the deployed infrastructure to achieve cloud savings.
This cycle can produce significant savings at scale and is the traditional starting point for gaining visibility and control over runaway cloud costs. The process follows the FinOps recommended progression of crawl, walk run toward a mature practice. This approach has both benefits and limitations:
Infrastructure-focused cost savings
Cost savings are limited to infrastructure and cloud configuration changes
Brings financial accountability and cloud spend awareness to the enterprise
Application architecture remains unchanged
Sets a trajectory towards FinOps best practices (crawl, walk, run)
Can create friction between Operations and AppDev teams
Accomplished primarily by the Operations team
App refactoring focused on patching instead of business value or modernization
The Black-Box Dilemma
In an ideal state, operations teams can iteratively reconfigure public cloud infrastructure based on cost and usage data until the fleet of virtual machines and associated storage are fully optimized. In this ideal state, interactions with the application teams are minimal and driven by the operation team’s needs. The approach ignores the side effects that right-sizing infrastructure can have on somewhat brittle monolithic legacy applications. What usually happens in a BBLAS environment is that the lift-and-shift migration and the subsequent CCOC reveal unforeseen shortcomings in the application architecture, and runtime defects surface.
CCOC – Mixed Results
A lack of necessary cloud skills and experience on the operations side can exacerbate the issues. For example, if the operations team chooses the incorrect cloud instance type for the workload, applications can become bound by resource constraints. When cloud skill and experience are missing from the application development side, this can cause long delays where defects are difficult for the team to triage and patch. So now, instead of cost optimization efforts gloriously precipitating savings, they are producing a mixture of saving money and addressing issues.
This combination creates an environment where engineering and operations teams begin to collide. The applications were stable in the old datacenter due to factors like:
Extremely low network latency between services
Applications and databases tuned for the hardware they were running on
Debugging and quality processes tuned over the years for efficiency
Now application teams have a new stream of issues entering their backlogs driven by fundamental changes in infrastructure introduced by the noble pursuit of tuning for cost savings. Business value, architectural improvements, and elimination of technical debt are slowed to the point that Application Development leaders start to push back on the CCOC. Operations teams don’t understand why the application is falling apart because the metrics and the cloud cost data they collect support the reduction or reconfiguration of cloud resources. Additional factors are now in play from an application development perspective with a black-box cloud cost optimization strategy:
Users are constantly communicating new feature requests to the business
Enterprise and Application Architects are pushing teams for modernization
Software Team leads are insisting on dedicating capacity to technical debt reduction
Enterprises are struggling to retain developers and are more resource-constrained than ever, causing a general slowdown in time to market for features and architectural improvements when flaws in legacy applications need patching.
Going Beyond the Lift-and-Shift
You need a different strategy to overcome these challenges. You must look inside the black boxes to move forward. The CCOC, at its best, will produce a finely tuned version of a legacy application running in the public cloud. You can address the cost pillar of the cloud value framework from an operations perspective, but additional opportunities abound in the form of Application Modernization.
Enterprises in situations like the one described here need to do two things to move forward on their cloud journeys.
Mature cloud cost optimization towards FinOps
Invest in Application Modernization
These two strategies are complementary and, combined, what 2nd Watch has dubbed “FinOps Driven Modernization.”
The amount of cost and usage data available to enterprises operating in the cloud reveals an opportunity to use that data to drive application modernization strategy at scale across all business units. The biggest challenges in approaching application modernization at scale are:
Cloud skills and experience
Analysis paralysis – where do we start
Calculating Return on Investment
Modernization efforts will be slow and costly without the resource capacity having the necessary cloud architecture and operations skills. They will not produce further buy-in through the socialization of success stories. Getting started seems impossible when an enterprise consists of multiple business units and thousands of virtual machines across hundreds of accounts and development teams. Modernization costs rise dramatically when cloud cost optimization requires changes to the software running on the virtual machines. It can add a significantly higher risk than changing instance families and reconfiguring storage tiers.
How Can FinOps Help Drive Modernization?
Let’s look at how maturing FinOps drives modernization opportunities and capacity. We discussed how an infrastructure-focused CCOC could slow down features, business value, and modernization efforts.
A potentially significant percentage of the savings realized from this approach will be diverted to triaging and patching application issues.
Do the additional development efforts overshadow the infrastructure savings?
Is the time to market for new features slowed to the point that the enterprise’s competitive advantage suffers?
Most enterprises don’t have the processes in place to answer these questions. FinOps Driven Modernization is the answer. With the data from the CSP, the FinOps team can work with the operations and development teams to determine if an optimization recommendation is feasible and valuable to the business.
How does this work at scale among all business units? When you combine cost and usage data with information like:
Process information from inside each virtual machine
Service ticket and bug metrics
Nature of the cloud service
IaaS, PaaS, FaaS
More on this in the next installment of this series
Revenue – unit economics
You begin to see a more holistic view of the cloud estate and can derive insights that include cost and much deeper business intelligence.
Sample FinOps Output from 2nd Watch
Consider being able to visualize where to focus cost optimization and modernization efforts across multiple business units, thousands of virtual machines, and hundreds of applications in a single pane of glass dashboard. The least innovative, noisiest, and most costly areas in your enterprise will begin glowing like hot coals. You can then focus the expenditure of resources, time, and money on high-impact optimization and modernization investments. This reallocation of spending is the power of FinOps Driven Modernization. Finance, operations, engineering, product, and executives are all working together to ensure that the enterprise realizes the actual value of the cloud.
Let’s dig into a hypothetical business unit struggling with cloud costs. The FinOps team has identified that their per-unit costs exceed the recommended range for their cloud cost-to-revenue ratio. The power of FinOps-Driven Modernization has revealed that the BBLAS approach has resulted in a fleet of virtual machines running commonly modernized workloads like web servers, database servers, file, or image servers, etc. In addition to this IaaS-heavy approach, the BU heavily leverages licensed software and operating systems. This revelation triggers a series of interviews with the BU leadership and application owners to investigate the potential and level of effort to introduce application modernization approaches. The teams within the BU know there is room for improvement but lack the skills and available resources to act.
They learn through the interview process that they can move licensed databases from virtual machines to a managed cloud platform. Additionally, they discover they could migrate most of the databases to open-source alternatives. Further, they can decommission the cluster of file servers and migrate the data to cloud-native storage with minimal application refactoring. By leveraging the CSP and operational data, a business case for investing in helping the BU make improvements writes itself.
Without leveraging the FinOps philosophy and extending it with a focus on application modernization, this business unit would have operated for years in a BBLAS state, costing the enterprise orders of magnitude more in cloud spend than the investment in modernization. Extending this approach across the enterprise takes cloud cost management to the next level, resulting in purpose-driven, high-impact progress towards realizing the value of the public cloud.
FinOps is the practice that every enterprise should be adopting to help drive financial awareness throughout the organization. FinOps enables an inclusive and virtuous cycle of continuously improving when leveraged as a driver for application modernization.
Schedule a whiteboard session with our FinOps and Application Modernization experts to discover how 2nd Watch’s approach can help you and your team meet your transformation objectives.
Jesse Samm, Application Modernization Practice Director at 2nd Watch