Optimizing the Value of Cloud: The Impact of Optimization | Deloitte US has been saved
In the previous posts in this three-part series, we discussed how businesses can optimize their cloud using a framework composed of four levers: waste management, consumption management, purchasing best practices, and cost-aware architecture. Each of these levers is supported by two enablers: alerting and monitoring, and automated tagging.
Then we dove deeper into each of the optimization levers and enablers to get a better understanding of how businesses can approach cloud spend optimization. In this final post in the series, we explore the impact businesses can expect from cloud cost optimization initiatives.
Deloitte recently analyzed anonymized data from several of our recent FinOps engagements to assess the value of the savings that businesses can achieve by driving efforts toward cloud-cost optimization. Early results of our analysis suggest that businesses can save up to 45% (15% on average) on their cloud costs by optimizing those costs across waste management, consumption management, and purchasing best practices levers.
Our research indicated that, while waste management activities, such as terminating unused resources, are relatively straightforward to implement, they will also result in only limited savings (potentially from 1% to 9%). The majority of the savings typically come from consumption management and purchasing tactics levers. We also found that, based on the FinOps maturity of an organization, consumption management activities like right-sizing can bring savings up to 29% (7% on average). The research also revealed that purchasing best practices, such as selecting the right compute savings plan and reserve instances for computer and databases, can bring savings up to 15% (6% on average).
Our analysis did not consider cost savings due to cost-aware architecture because of the limited scope of this lever on the engagements we analyzed. However, the savings are expected to further improve with cost-aware architecture-focused optimizations.
In addition to reporting savings from cost optimization, it’s essential for businesses to quantify the additional value delivered. Cost optimization benefits are typically quantified in terms of lower costs per business outcome. The benefits from cost optimization, however, go above and beyond cost reduction or avoidance and encompass improvements in efficiency and business value.
Benefits in business outcomes through unit economics
Tracking the business outcomes of an effective cost optimization strategy on cloud is best done through the lens of cloud unit economics—a system that fosters profit maximization by tracking unit cost metrics specific to the delivery and development of cloud-based software or tooling against marginal revenue. The difference between marginal cost and marginal revenue helps in making informed decisions by presenting facts, such as the break-even point for the service, business-unit performance, etc. Additionally, the impact of end-user behavior on cloud costs can be measured and used to drive more cost-conscious behavior.
Unit economics can also highlight areas where usage may need to be shaped/governed. The amount of business value achieved per unit of cloud spend or metrics like cost per weekly active user or cost per million transactions can help leaders focus on key products/offerings and double down on efforts for products that they know can serve customers at the lowest cost and beat the competition. The connection between current business demand and cloud costs at levels such as per-customer, per-feature, per-product, etc. are key to driving optimization efforts.
The end goal of cloud-cost optimization efforts is to maximize business outcome per dollar spent on cloud. Often, however, certain kinds of benefits escape our purview. It is recommended that businesses quantify the additional value delivered—those that go above and beyond cost reduction or avoidance and encompass improvements in efficiency and business value.
The value delivered can be seen as either internal or external to the company. For example, a robust cloud-cost optimization strategy can help add new features without driving additional costs too much. This would also count as a direct consequence of our optimization efforts. Similarly, developer productivity is indirectly enhanced through automated cost optimization practices.
Apart from some standard KPIs highlighted above, it’s important to have a set of indicators to capture the benefits and value realization because of efforts spent on cost optimization.
The framework below suggests various KPIs that businesses can consider to track the value realized through cost optimization. Please note that the KPIs below are only representative of KPIs used by many organizations for cloud-cost optimization. Individual organizations should assess their needs and tweak as per their requirements.
Optimizing cloud costs is important for every business. In today’s hypercompetitive environment, it is very easy to lose track of cloud services and resources being used as businesses scale and develop new products to meet market needs and maintain a competitive edge. This tends to have a direct impact on an enterprise’s bottom line. Without a well-thought-out strategy to optimize cloud costs, the cloud becomes yet another cost center like traditional IT.
Cloud-cost optimization involves a combination of improving visibility and accountability of cloud spend, engaging in continuous efforts to reduce known and unattributed costs, and enhancing planning and forecasting. For effective cloud-cost optimization, businesses should start with assessing their current-state maturity levels, cloud costs, governance mechanisms, FinOps capabilities, and operating models. Depending on their maturity levels, businesses should identify gaps vs. the target state they want to achieve.
Next, enterprises should align their cloud-cost optimization efforts across four key levers (i.e., waste management, consumption management, purchasing best practices, and cost-aware architecture). Each of these levers, supported with enablers such as alerting and monitoring and auto-tagging, helps drive operational and financial improvements, with direct impacts on the bottom line and productivity. This should be aided with cost-optimization tools provided by cloud service providers and third-party market leaders to optimize.
Cloud-cost optimization is not a one-time activity; instead, it is an ongoing activity that evolves with time and grows as a business matures. A well-defined cloud optimization strategy, complemented by a robust governance structure, can help businesses improve their bottom lines, enhance business agility, and become more resilient in the face of stiff competition.
To learn more:
Read the first blog in this series, Optimizing the value of cloud: A practical guide to getting started.
Read the second blog in this series, Optimizing the value of cloud: Four crucial levers to optimize cloud costs.
Nikhil is a principal with Deloitte Consulting’s Financial Services practice. With more than 20 years of experience as a trusted technology advisor to large global banks and insurance providers, Nikhil has designed and executed multiple large-scale, global transformation programs to enable new business capabilities and drive innovation. Nikhil specializes in Cloud Strategy, guiding his clients through all phases of their technology modernization journeys, from defining an overall vision and strategy to designing and implementing new operating models aligned to modern technology delivery practices. An engineer at heart, Nikhil leads platform and application teams to deliver scalable cloud platforms and enable new use cases made possible by Cloud. Nikhil leads Deloitte’s Cloud Financial Management/FinOps offering for the US market, driving go-to-market strategy, establishing partnerships with leading ecosystem partners, and delivering engagements to help his clients measure the value from their cloud investments.