Keeping a lid on cloud-based services spending requires constant vigilance and attention to detail.
The COVID-19 pandemic has been an accelerator of cloud services adoption. According to a report by International Data Corp., total worldwide spending on cloud computing, including hardware, software, and supporting services, will surpass $1 trillion in 2024, sustaining a compound annual growth rate of 16%.
Of course, most of those dollars are being sucked out of the budgets of small and large enterprises at a sometimes astonishing pace. After all, the cloud delivery model for all kinds of IT resources is one of the pillars of the digital transformation underway at many organizations. More significantly, in many companies, new cloud service purchases aren’t closely tracked.
Finance executives, previously more familiar with budgeting for server hardware and software licenses, have a new IT-related challenge: How to get a handle on and best manage the costs of burgeoning cloud services.
If that isn’t a high priority for a CFO, it should be. A 2020 study by International Data Group and IT services provider Insight revealed that public cloud cost overruns are strikingly common. The study was based on a survey of 200 U.S. business and IT executives. About 70% of the respondents said their organizations had experienced public cloud costs as much as 62% higher than initially anticipated.
A separate survey of senior enterprise IT professionals by Pepperdata found that cloud spend for 2020 was expected to be over-budget by between 20% and 40%.
Unplanned cloud adoptions, lack of merger and acquisition integration, and data egress charges (for removing data from a cloud service in a large file transfer) were the top reasons cited for cost overruns. When asked to identify the top three IT modernization challenges, nearly one-third of the executives cited the need to optimize their current cloud environment to manage cloud costs. That included the aim of leveraging cloud services more “natively” — running cloud applications that are purpose-built and tailored to take full advantage of the cloud’s benefits.
The nature of cloud services and how they’re deployed make controlling costs inherently tricky. Many organizations have adopted a multi-cloud strategy — acquiring business applications, software development capabilities, and infrastructure components from more than one provider.
Moreover, many employees and contractors potentially have access to cloud resources, which can quickly expand as needs grow. After all, the cloud, by its nature, has virtually limitless capacity, which can mean overspending if there’s no one watching.
“We’ve seen this [struggle] accelerate since the pandemic,” says Tracy Woo, a senior analyst at Forrester Research. The pandemic compressed timelines for cloud adoption and forced enterprises to provide on-demand data-access and applications to remote employees in days or weeks, not months. For some organizations, that meant spending money on the cloud without going through an exhaustive review of other vendor options and the all-in costs of operating in the cloud. That lead to the underestimation of things like security and compliance-related expenses, which are significant factors in cost overruns.
“Overestimation of product usage and architecture type contribute to uncontrolled cloud costs as well,” says Kurt Ishaug, CFO at Entrust, a provider of data protection technology.
Deciphering cloud vendors’ invoices after-the-fact requires substantial effort. “Even though cloud providers claim transparency with their line-by-line billing, what the charges mean can be very confusing,” Woo says. Bills can contain hidden fees for such things as storage for deleted or stopped instances, application programming interface (API) gateways, and undetected workload configuration changes.
Finally, adding to the lack of controls are the expectations executives have for cloud services. Even this late in the game, organizations still have the mistaken belief that moving to the cloud will lead to cost savings. “So, the focus on managing costs isn’t there,” Woo says. “We tell clients that shifting workloads from the data center to the cloud doesn’t mean cost savings, but rather should be seen as a tool for innovation.”
Cloud services deployment is typically managed and maintained by IT or business line executives. But (and it shouldn’t require mentioning) given the rising expenses and the importance of cloud services to the business, CFOs need to be involved.