This article was originally published on CIO.com.
Is the cloud a good investment? Does it deliver strong returns? How can we invest responsibly in the cloud? These are questions IT and finance leaders are wrestling with today because the cloud has left many companies in a balancing act—caught somewhere between the need for cloud innovation and the fiscal responsibility to ensure they are investing wisely, getting full value out of the cloud.
One IDC study shows 81% of IT decision-makers expect their spending to stay the same or increase in 2023, despite anticipating economic “storms of disruption.” Another 83% of CIOs say despite increasing IT budgets they are under pressure to make their budgets stretch further than ever before—with a key focus on technical debt and cloud costs. Moreover, Gartner estimates 70% overspending is common in the cloud.
The need for digital innovation amid economic headwinds has companies shifting their strategies, putting protective parameters in place, and scrutinizing value with concerted efforts to accelerate cloud return on investment (ROI).
New Parameters Designed to Protect Cloud Investments
While many companies are delaying new IT projects with ROI of more than 12 months, others are reducing innovation budgets while they try to squeeze more value out of existing cloud investments. Regardless of how pointed their endeavors are, most IT and finance leaders are looking for ways to better govern cloud transformation. That’s because, in today’s economic climate, leaders aren’t just responsible for driving ingenuity, they are held accountable for ensuring the company is a good steward of its technology investments with concentrated emphasis on:
- Operationalization: The ability to effectively use and secure cloud assets as well as manage new service providers and expenses
- Sustainability: Ensuring that cloud transformation can continue to afford positive outcomes with minimal impact on the business for both near- and long-term success
- ROI: Capitalizing quickly on new cloud technology, recognizing benefits, and taking ownership of IT assets, success measurement, and feedback loops
If the past three years were dedicated to accelerated cloud transformation, 2023 is being devoted to governing it. But it’s not just today’s tumultuous times calling for executives to heed to the reason of fiduciary responsibility. The cloud also necessitates it—particularly when companies want to achieve ROI faster.
Cloud ROI Dynamics: Understanding the Economics of Innovation
The cloud can make for an uneven balance sheet without proper oversight. It needs to be closely watched from a financial perspective. Why? The short answer: variable costs. When the cloud is infinitely scalable, costs are infinitely variable, inevitably rising when not closely watched. Pricing structures are based on service usage fees and overage charges where even marginal lifts in usage can incur steep increases in cost. While this structure favors cloud providers, it starkly contrasts the needs of IT financial managers—most have per-unit budgets and prefer predictable monthly costs for easier budgeting and forecasting.
Additionally, companies aren’t always good at estimating what they need and using everything they pay for. As a result, cloud waste is now a thing. In fact, companies waste as much as 29% of their cloud resources.
As companies lift and shift their workloads to the cloud, they trade in-house management for outsourced services. But as IT organizations are loosening their reign, financial management teams should be tightening their grip. Those who aren’t actively right sizing their cloud assets are typically paying more than necessary. Hence, why overspending can easily reach 70%.
Achieving Cloud ROI in One Year
Achieving ROI in one year requires tracing where your cloud money goes to see how and where it is repaid. Budget dollars go down the drain when companies fail to pay attention to how they are using the cloud, don’t take the time to correct misuse, or overlook available tools that reduce costs and increase efficiency of use — take for instance long-term discounting opportunities and service pausing features.
But cloud cost management is not always a simple task.
The majority of IT and financial decision-makers (70%) report it’s challenging to account for cloud spending and usage, with the C-suite cite tracing spend and chargebacks of particular concern. The key to cost control is to pinpoint and track every cloud service cost across the IT portfolio—yes even when companies have on average 11 cloud infrastructure providers, nine unified communications solutions, as well as a cacophony of unsanctioned applications consuming up to 30% of IT budgets in the form of Shadow IT.
When you factor in these dynamics and consider that cloud providers have little incentive to improve service usage reports, helping clients better balance the one-sided financials of the relationship, you can see why ROI can be slow-moving.
FinOps comes in to bridge this gap.
Managing Cloud Cost Centers: The Rise of FinOps
Cloud services are now dominating IT expense sheets, and when increasing bills delay ROI, IT financial managers go looking for answers. This has given rise to the concept of FinOps (a word combining Finance and DevOps) which is a financial management discipline for controlling cloud costs. Driving fiscal accountability for the cloud, FinOps helps companies accelerate ROI from their cloud computing investments.
Sometimes described as a cultural shift at the corporate level, FinOps principles were developed to foster collaboration between business teams and IT engineers or software development teams. This allows for more alignment around data-driven spending decisions across the organization. But beyond simply a strategic model, FinOps is also considered a technology solution—a service enabling companies to identify, measure, monitor, and optimize their cloud spend, thus shortening the time to achieve ROI. Leading cloud expense management providers, for example, save cloud investors 20% on average and can deliver positive ROI in the first year.
FinOps Best Practices
As the cloud makes companies agile, managing dynamic cloud costs becomes more important. FinOps help offset rising prices and insert accountability into organizations focused on cloud economics. Best practices for maximizing ROI include reconciling invoices against cloud usage, making sure application licenses are properly disconnected when no longer necessary or reassigned to other employees, and reviewing network servers to ensure they aren’t spinning cycles without a legitimate business purpose.
Key approaches include:
- Auditing: The ability to granularly collect and maintain service information across the broader cloud ecosystem, analyzing real-time usage data in a central system using AI-powered analytics
- Cost Optimization: The insights to recognize cloud waste and quickly reduce inefficiencies, adjusting services and reallocating unused app licenses or infrastructure resources
- Vendor and Expense Management: The ability to validate spending and use automation to reduce the management burdens of bill pay, chargebacks, and allocation
- Professional Services: Strategic and tactical help at key moments including cloud migrations, cloud service discovery, contractual negotiations, and IT budget forecasting and spending
Is the cloud a good investment? Yes, as long as the company can effectively see and use its assets, monitor its expenses, and manage its service. The cloud started as a means to lower costs, minimize capital expenses, and gain infinite scalability, and that reputation should payout even after being pressure tested by the masses. With a collaborative and disciplined approach to management, companies of every size can recognize quick ROI without generating significant waste or adding unnecessary complexity.
Learn more about Tangoe’s FinOps solution, helping you control cloud costs.