Cloud adoption is no longer a question of “if” but of “how fast” and “to what extent.” Between 2015 and 2020, the revenue of the big-three public cloud providers (AWS, Microsoft Azure, and Google Cloud Platform) has quintupled, and they have more than tripled their capital-expenditures investment to meet increasing demand. And enterprises are ever more open to cloud platforms: more than 90 percent of enterprises reported using cloud technology in some way.1
These trends reflect a world where enterprises increasingly “consume” infrastructure rather than own it. The benefits of this model are plentiful. Cloud adopters are attracted by the promise of flexible infrastructure capacity, rapid capacity deployment, and faster time to market for digital products. The COVID-19 crisis has accentuated the need for speed and agility, making these benefits even more important. From an infrastructure-economics perspective, perhaps the most attractive innovation of cloud is the ability to tailor the consumption of infrastructure to the needs of the organization. This promises greater economic flexibility by transforming underutilized capital expenditures into optimally allocated operations expenditures.
While this concept is attractive in theory, many enterprises are facing challenges in capturing the value in reality. Enterprises estimate that around 30 percent of their cloud spend is wasted. Furthermore, around 80 percent of enterprises consider managing cloud spend a challenge. Thus, even though more than 70 percent of enterprises cite optimizing cloud spend as a major goal, realizing value remains elusive.2
In our experience, a major driver of value capture is transforming the approach to sourcing and consuming cloud. Enterprises that approach this task with a traditional sourcing and infrastructure-consumption mindset are likely to be surprised by the bill. The flexibility to consume cloud as needed and cost effectively places responsibility on enterprises to maintain a real-time view of their needs and continuously make deliberate decisions on how best to adjust consumption.
Here are four ways enterprises can derive value from cloud by transforming their sourcing and consumption approaches.
Lesson 1: Sourcing and managing consumption of cloud is a dynamic exercise
Over the years, enterprises developed a robust model for sourcing IT infrastructure assets. It is episodic in nature based on asset refresh cycles and follows a structured sequence: requirements to request for proposal (RFP) to negotiations to award. Success in this model requires solid negotiation and contracting skills and the ability to engage the business at the right touchpoints in the process. The RFP juncture came to constitute the major point at which value was captured. Once the contract was signed, the organizational focus normally shifted to other areas until the next negotiation cycle.
Cloud economics mandates a fundamentally different approach. While cloud service provider (CSP) selection and negotiation are critical components of the cloud journey—determining, for example, the price of services and discount levels—many of the decisions impacting value capture come afterwards. The very flexibility that cloud provides means that enterprises must continuously make dynamic consumption decisions about which services and specifications are needed when and for how long. Each of these decisions can have significant cost implications if not deliberately managed. One manufacturing company we know was able to leverage its traditional procurement muscle to negotiate competitive discounts from its CSPs, only to be surprised by the high cloud-consumption projections—up to twice its spend commitment—a year into cloud adoption. This prompted the company to consider renegotiations with its CSPs and to accelerate the shift in its internal approach to cloud to a more demand-focused model.
The need to continuously manage cloud consumption is accentuated by the rapidly evolving vendor marketplace and its continuous introduction of new offerings, features, pricing mechanisms, and regions. For instance, AWS has changed prices—mostly dropping them—more than 60 times since its launch in 2006. It introduced more than 20 new top-level services last year alone. Sourcing and managing the consumption of cloud in this world requires a deep understanding of the cloud ecosystem and continuous engagement with the business as partners.
Lesson 2: Cloud economics is a demand rather than a supply game
With server and storage assets essentially being commodities, enterprises purchasing traditional infrastructure optimized around two variables: price and quantity. The latter is less flexible, as it is mandated by the number of assets that need to be refreshed and by fluctuations in peak and average demand. This has encouraged enterprises to focus on supply-side solutions, such as consolidating volume, standardizing SKUs, and structuring favorable contract terms.
In a cloud world, enterprises have to solve for more numerous, interconnected, and demand-focused variables. Take compute as an example: Which instance types, of the dozens offered, deliver the right balance between performance and cost? Should the enterprise preselect instance types to be used by teams or leave the decision to the teams based on the use case? Which instance regions should be selected? For example, does the cost-benefit ratio justify provisioning instances closer to the customer in order to minimize latency? How long is the capacity needed, and if the duration is predictable, should the organization purchase reserved capacity rather than on-demand, since reserved instances can be up to 60 percent cheaper? And finally, how should the enterprise dynamically adjust these choices as it rolls out new products and features or expands into new markets and geographies?
Given these variables, a deep understanding of an enterprise’s demand is critical across the cloud journey. During the CSP selection and negotiation phases, enterprises equipped with a proper understanding of the level and variability of their future demand will be able to better negotiate discounts and make calculated decisions on spend commitments, if any. Following that, on a continuous basis, enterprises that capture value are ones that take a “consumption approach” to cloud, continuously matching their demand to the best-fitting cloud services and pricing arrangements. One technology company we know launched a continuous consumption analysis focused on application-level assessment and analytical projection of demand. It was able to harmonize the number of instance configurations for related workloads from more than 20 down to three and then, leveraging the analytical projection, utilized reserved-instance pricing arrangements for the relatively predictable portion of demand.
Lesson 3: Granular visibility and forecasting are needed to optimize consumption of cloud
While visibility into and forecasting of spend are critical to any procurement category, they are particularly important to cloud given it is a continuously sourced (“consumed”) service. Capturing value from cloud requires a clear understanding of actual usage costs in order to stem any value leakage from excessive or miscalibrated consumption. However, enterprises often find themselves mired in an intractable sprawl of cloud services with inadequate visibility into the corresponding spend. The large and growing range of cloud offerings and pricing arrangements in the marketplace—as well as often obsolete managerial processes—do not make this problem easier.
To gain greater control of their cloud spend, top-performing enterprises focus on developing three capabilities (see sidebar, “Visibility, forecasting, and optimization go hand in hand”):
- understanding the business and technical drivers of consumption, then establishing granular visibility to monitor and track cloud spend, often assisted by internal analytics or third-party tools
- deriving the unit-cost economics according to the hierarchy of business and technical drivers, based on detailed historical analysis of consumption patterns, then developing the analytical model and governance to accurately forecast consumption
- optimizing consumption (through economic drivers such as reserved instances, or architecture drivers such as spot fleet) to inform business decisions (for example, through deriving cloud cost per subscriber or product)
Lesson 4: Cross-functional FinOps is essential to manage cloud sourcing and consumption
Given the complexity and differentiated nature of cloud economics, existing capabilities and organizational constructs cannot fully capture the value at stake. For many companies, sourcing organizations can bring financial and process discipline, but they often lack the technical depth and ability to stratify business demand in sufficient detail. This often leads to rigid sourcing standards that delay and constrain flexible capacity deployment. On the other hand, entrusting product or technology teams with the task can maximize agility and grant developers the freedom to flexibly and rapidly stand up capacity; however, many organizations have observed that this approach leads to fragmented decision making, poor spend visibility, and insufficient financial discipline.
Top-performing enterprises instead are deliberate about bringing together technical, financial, and sourcing talent into a cross-functional cloud financial-operations (FinOps) team to manage cloud sourcing and consumption (exhibit). In some cases, companies can be successful by supplementing their existing sourcing or technology functions with relevant talent. This team is then empowered to orchestrate across stakeholders, translate the business’s consumption needs into optimal cloud offerings and pricing arrangements, oversee and make rapid decisions around resource allocations and cloud usage, and track enterprise-wide cloud spend to ensure financial discipline. Importantly, this cloud-management team is provided with the right analytics, tooling, and automation, such as automated dashboards to better track cloud consumption in real time and advanced analytics to help project demand.
As enterprises progress along their cloud journey, transforming the way enterprises source and consume cloud will make the difference between value capture and value leakage. Success will require a mindset shift toward a dynamic model that appreciates the nuances and complexities of cloud economics, the importance of deeply understanding demand, and the benefits of a revamped organizational approach to sourcing and optimizing the consumption of cloud.