Editor’s note: This story is part of a series on the trends that will shape the industry in 2021. You can find all the articles on our trendline.
Many CFOs can credit cloud computing for helping them weather COVD-19 by cutting fixed costs, moving to remote work and adapting to a surge in online demand.
Yet when reviewing their cloud spending, some financial executives may discover they've bought too much of a good thing.
The typical company wastes as much as 35% of its cloud budget, according to some estimates. Small- and medium-sized companies are especially prone to excessive spending. Many of them were slow to shift to the cloud and, when the virus struck, rushed their transition without close attention to cost, Randy Armknecht, managing director and global cloud practice leader at Protiviti, said.
"It was a case of, 'How do we serve our clients, how do we serve our customers without ceasing to exist?" he said. Now the companies "have put on the docket for 2021 efforts to go back and say, 'Ok, we responded to the emergency and now let's go and see if we can tighten things up.'"
Spending has gotten out of hand in part because cloud adoption recasts a company's IT cost structure. Technology spending that was once an on-site capital expenditure requiring several approvals and allotted by financial executives is now often an operational expenditure incurred by mid-level engineers and developers.
Staff can quickly spin up a new service or innovation into the cloud. Ease of use, while spurring creativity and experimentation across a company, can also blow a hole in a CFO's budget.
Cloud costs can quickly soar, Scott Grossman, CFO at Ensono, a hybrid IT service provider, said. Prior to hiring Ensono to manage public cloud services, some Ensono clients "went from spending $100,00 a month to $200,000 or $500,000 a month," he said. "A lot of waste is generated because it's so easy."
Cloud computing may be one of the most high-impact, "new, new things" in recent decades, but it poses a business challenge as old as the CFO role itself — how to spark innovation at the lower levels of a company without giving up the central financial controls essential to long-term viability.
"The further away from center you push the decision-making and give the autonomy, the more at risk you are of losing control of your spend," said Brendan Dolan, CFO at CloudCheckr, a cloud cost management and governance company. "You open yourself up to uncontrolled spending." (CloudCheckr tells companies it can cut their cloud costs by 30%.)
Many companies have identified lax budgeting as their No. 1 problem when using the cloud. Before the pandemic, 73% of firms said cost savings was their top cloud initiative, ahead of moving workloads off of in-house computers, according to Flexera.
Without tighter budgetary discipline, the amount of wasted dollars could grow along with a surge in spending on the cloud. Worldwide expenditures on public cloud services will balloon to $362.2 billion in 2022 from $257.5 billion last year — a 41% increase, according to estimates by Gartner.
Money channeled to the cloud will represent 14.2% of total IT spending by 2024 compared with 9.1% in 2020, Gartner said.
Companies waste money in several ways, including by storing useless or obsolete data, overestimating needed capabilities, or paying for services that sit idle for hours on end.
A better way
CFOs and consultants identified best practices and organizational structures that help financial executives ensure that every dollar spent on the cloud counts.
Make customer service, business strategy and revenue growth the focus of cloud budgeting
Rather than pursue a generic, category-by-category effort at minimizing costs, financial executives should collaborate with engineers and other stakeholders in tagging each type of cloud spending based on how it serves customers and boosts revenue.
"More of my clients have embraced tagging in the cloud" and can now see how every cloud system links to a source of revenue, Armknecht said. "They can analyze and say, 'Hey, every system involved in this revenue stream cost X and our revenue was Y.'"
By taking a granular approach, a CFO can get a clear, immediate grasp of cloud spending and make quick, well-informed spending decisions, Dolan said.
"It's all real-time data, so you're not waiting for the end of the month to get a bill from Amazon or Microsoft or Google" in order to understand your spending, he said. "You're constantly, constantly optimizing."
Financial executives with a detailed understanding of how cloud spending generates revenue will sooner recognize a jump in cloud spending as a signal of opportunity from greater customer demand rather than an indication of inefficiency or waste. They can budget with confidence and more accurately calibrate future cloud use.
"The better tagging you have, the more accurate forecasting you can do," Armknecht said.
Set up a center of cloud excellence
Company structure and complex billing can undermine efforts to get a complete understanding of spending. Cloud services often bill business units separately. Also, many companies use more than one cloud provider, each with different pricing models and discounts.
By creating a core team of software developers, DevOps engineers and other stakeholders, a CFO can identify potential savings, build cross-company consensus and refine the tools for monitoring spending — and potential savings — in real time.
"The engineers want to go out and build cool stuff, and they may not understand the implications of their spending" if they don't have regular contact with financial executives, Grossman said.
In many cases, the center of excellence meets monthly, oversees cross-functional working groups that collaborate in real time, and reports to an executive committee at least quarterly, Armknecht said.
"The cloud center of excellence is a structure that I think has worked really well at a wide swath of companies," he said.
Before the onset of COVID-19, 69% of organizations relied on a central cloud team, according to Flexera.
Get a grip on cloud concepts
Given the growing reliance on cloud computing, financial executives should understand the technology's structures and language, as well as its advantages and risks.
"I don't know that you've got to match with the engineers and the DevOps guys, but you do need to know the terminology that drives buying decisions," Dolan said. "Do your own research and training and learning."
Challenge software developers, DevOps engineers and other cloud users to find wasted spending
Rather than punitively trimming fat, CFOs should encourage staff to identify potential savings. Financial executives can make headway by creating incentives for removing waste among employees at the front lines of engineering and innovation, CFOs said.
Dolan said he presents a challenge to his head of DevOps, asking, "How do you get my costs down 15%?"
With the right approach, CFOs can view cloud computing as a tool for understanding and optimizing spending rather than as a budgetary threat, financial executives said.
"The cloud provides unprecedented granularity and visibility into technology spend," Armknecht said.
Clarification: This story was updated with Ensono's clarification on clients' timing of cost increases.