Cloud Prison Break Series – Part 1:
Breaking Cost Escalation Cycles

Cloud Prison

Executive Summary

To avoid the pitfalls of compounding costs, it’s crucial to enter long-term cloud contracts (e.g., AWS, Google Cloud, Azure) intelligently. Without a strategy, long-term contracts can lead to 50% or more overspending in just 3 years. Use cases, analysis of hidden costs, and strategies to keep your spending sustainable are provided.

Read on for detailed strategies and insights to make your cloud spending efficient and manageable.

Introduction

In today’s rapidly evolving tech landscape, cloud computing offers scalability, flexibility, and reduced time to market, making it attractive to businesses. However, long-term cloud agreements with fixed spending commitments can trap organizations in a costly “cloud prison.” Cloud Providers’ intelligent contracts, lack of transparency and pricing strategies often easily lead to overspending.

In this article, we will explore the hidden costs of long-term cloud agreements and provide strategies to avoid overspending and maximize savings.

Compounding Hidden Costs

Long-term cloud contracts may offer initial cost or other benefits, but they often lead to hidden costs that can escalate over time. Understanding these pitfalls is crucial for effective cloud cost management.

Promoting Inefficiency: A fixed cloud spend signals to engineering teams that resource inefficiency is acceptable. Staying within agreed limits reduces the incentive to optimize, leading to resource-heavy systems and wasted resources.

Discouraging Cost-Saving Efforts: Locked into fixed spending agreements, efforts to cut costs don’t translate into real savings during the contract period, stifling innovation and perpetuating inefficiency.

Loss of Negotiation Power: Approaching contract renewal, you lose leverage if your cloud usage has grown inefficiently. Vendors exploit this, pushing you towards more expensive agreements, making it hard to negotiate favorable terms.

A Cycle of Increasing Costs: This creates a cycle of escalating costs. Each renewal brings higher spending commitments, entrenching your organization in the vendor’s ecosystem and turning predictable expenses into financial burdens.

1) Promotes Inefficiencies, 2) Discourage Savings Efforts, 3) Loss of Negotiation Power, 4) Increase Contract Renewal

Long-Term Contract Benefits?

There can be benefits to signing a cloud agreement, but it’s important to be strategic. We will explain later in the article how to get the best of both worlds. Typically, long term contract benefits with cloud vendors can include:

Discount compute: The biggest benefit most long-term service agreements provide are discounts on compute costs. This can vary from 10-50%, depending on the spending commitment and contract length.

Bundled Support: Some cloud vendors do offer enterprise support as a bundled offering with these contracts, this is valuable as they usually have set SLA’s and response times for support tickets.

Other Benefits:Other benefits could include invitations to exclusive events and training, guaranteed response times, architectural reviews or other discounts.

Financial Analysis & Use Case:

Understanding the financial implications of these agreements is crucial. Let’s delve into a use case to illustrate the potential costs and savings associated with long-term cloud contracts.

Let’s say a client has a cloud spend of $1.2M per year. They negotiate with the cloud vendor and commit to a 3-year contract which gives them a discount of 30%. So, their committed spend is 840k per year.


Scenario 1: No Cloud Optimization

In this scenario we look at what happens if none of the savings are reinvested in cost optimization. What we typically see is that systems grow in cloud resource usage over time, especially if there is no FinOps culture and little incentive to save costs. The growth percentage is variable, but we typically see cloud resource growth of 15% per year.

Costs Year 1 Year 2 Year 3
Committed
$840K
$840K
$840K
Overage
$126k
$145K
$167K
Total
$966K
$1,111K
$1,278K

At the end of 3 years, the company is spending $1.28M in cloud costs a 52% increase from the original $840k.

Costs Year 1 Year 2 Year 3
Committed
$840k
$840k
$840k
Optimization (15%)
$126K
$126K
$126K
Total
$966K
$966K
$966K
Freed Resources
$126K
$252K
$378K

The company is still spending $966K in cloud costs after 3 years. However over that same period $756K in freed cloud resources were available for other projects.

Scenario 2: Savings Reinvestment

In this scenario, we explore the impact of reinvesting 15% of the total cloud spend into cost optimization.

Just like in the previous example, the normal cloud cost of a system is $1.2M per year. The company signs a 3-year enterprise agreement with a 30% discount, reducing their spending to $840K per year.

They allocate half of these savings (15% of the original spend), towards cloud optimization. With a FinOps culture in place and incentives for saving costs, the optimization team can deliver $2 in savings for every $1 invested.

Analysis

In the example above, reinvesting only 15% of your cloud spend into cost optimization provides three key benefits:

1) Prevent Usage Overages: Avoid the usage overages seen in the previous scenario and stay within your committed spend.

2) Free Up Resources: Optimize existing spend to free up $756K in cloud resources for other projects, such as compute-intensive AI initiatives, without additional costs.

3) Achieve Significant Renewal Savings: Position yourself for substantial savings at contract renewal, potentially reducing costs by up to 64%.

Overall, investing in optimization saves about 14% in total contract costs, with the major savings realized at contract renewal, reducing the fixed cost to $462k or 64% savings.

No Optimization: 15% Increase in cost YOY, Optimization: 64% savings at contract renewal.

3 Year Summary

No Opt Opt Savings
Total Spent
$3.35M
$2.89M
14%
Renewal Cost
$1.28M
$462K
64%
Freed Resources
$0
$756K
1)Adopt FinOps Practice, 2) Engage Optimization Experts, 3) Make Cost Optimization Experts Accountable, 4) Diversify Your Cloud Strategy.

Strategies for Breaking Free

The example above illustrates how you can still achieve cost savings throughout the contract period. However, much like an investment that matures, any optimization work you do now will reap significant benefits at contract renewal time.

Here are some strategies to help you break free from the cloud overspend cycle:

Adopt a FinOps Practice: Implementing a FinOps (Financial Operations) practice is crucial. FinOps involves actively monitoring cloud resource utilization and optimizing systems to stay within budget. It’s a cultural shift that requires training and upskilling your engineering teams. By fostering a mindset of financial accountability, you can drive significant cost savings.

Engage Cost Optimization Experts: Partnering with specialists in cloud cost optimization can be a game-changer. These experts can quickly identify inefficiencies and implement solutions to reduce spending. They can also train your teams to adopt FinOps practices, ensuring long-term sustainability and efficiency.

Make Your Cost Optimization Experts Accountable: Whether managed in-house or via a vendor, ensure your cost optimization efforts provide tangible ROI. If teams spend $1 million but only return $400K, re-evaluate. Demand that your cost optimization team delivers at least $2 in savings for every $1 invested. Regularly review performance to guarantee accountability and financial efficiency.

Diversify Your Cloud Strategy: Avoid relying too heavily on a single cloud vendor. By diversifying your cloud infrastructure across multiple providers, you can mitigate the risks of vendor lock-in and maintain greater flexibility. This approach allows you to take advantage of competitive pricing and avoid being at the mercy of one provider’s pricing model.

Conclusion

Escaping cloud prison requires a proactive approach and a willingness to rethink your cloud strategy. Long-term, fixed-spend agreements may seem like a safe bet, but they often lead to inefficiency, escalating costs, and reduced negotiating power. By adopting FinOps practices, engaging cost optimization experts while making them accountable, and diversifying your cloud strategy, you can break free from this cycle and achieve sustainable, cost-effective cloud operations. This can all be done while benefiting from the perks that long term contracts with providers like AWS, Google Cloud and Azure have to offer.

If you need help optimizing your cloud spending and escaping the cloud prison, contact us today. We guarantee to deliver at least $2 in savings for every $1 invested, giving you peace of mind and empowering you to make the most of your cloud investments.