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Cloud cost intelligence — as opposed to mere cost optimization — can help you make more strategic business decisions. Here’s how.
In the past couple of months, after nearly a decade of huge returns and steady growth, the tech industry has officially slowed down.
For many organizations, that means instead of the “growth at all costs” mindset we’ve seen in previous years, companies are doubling down on improving their operating metrics, preserving cash in preparation for the faucet of easy capital to be turned way down.
The knee jerk reaction in this environment is often to quickly cut costs –starting with headcount, then moving on to purchases, such as software.
For engineering teams, cloud hosting costs (which are often the second highest cost after head count) are an obvious place to look for savings.
However, cutting costs in the cloud has a cost. With the exception of some simple optimizations (e.g., switching off an extra CloudTrail), many optimization projects require engineering work, like modernizing and re-architecting applications — or doing work to switch to a different service. Even for simple projects, it can take focus away from other priorities.
In other words, it may save money, but it’s far from free.
The problem is, too many teams look at optimization as just a “cost cutting” exercise, where on an incremental basis, they stop and dig into their bill to see if there are ways to save. With our customers, we call this “looking for coins in the couch”.
While there’s nothing wrong with finding areas to save on your bill (especially if you manage to find some quick, low effort wins) it’s a narrow view of optimization that can potentially lead to distraction and misplaced effort.
When you’re running in the cloud, your cloud bill should be your fuel for innovation — and spending less isn’t always the right answer.
Instead, when we work with organizations, we encourage them to think in terms of cloud cost intelligence, rather than optimization.
Here’s what that means — and how you can do it too.
Traditionally, cloud cost optimization has been about identifying ways to save money.
For example, if you look to AWS’ content resources, you’ll see that they recommend their customers start with discounting instruments like Reserved Instances, Savings Plans, and Spot Instances. Then, they suggest you look to find waste in services such as Amazon S3 or EBS volumes.
Here’s the thing — this view is only a sliver of what you could possibly do.
Imagine if you were an engineer working on designing and manufacturing cars. You get orders from your executive team that they’d like to launch a lower cost economy vehicle. Would you start by negotiating a discount from your rubber and metal suppliers? Would you look for aspects of manufacturing where you might be wasting materials?
But you’d also do much more. You’d take into consideration how many cars are being sold and at what price, then you’d think about every aspect of the car — from the stereo system to the engine — and consider how you can keep costs low while still building a marketable car.
A cost intelligence mindset means you’re looking at your business —including your products, your go-to-market model, and your costs — and optimizing the most impactful aspects.
Sometimes that means engineering work. Other times it doesn’t.
Cost intelligence isn’t about cutting costs. It’s about improving your operational metrics.
While there are a number of ways you can improve your operational metrics, there are really two main levers: reduce money going out and increase money coming in. The most valuable companies know how to balance the two while growing in a way that’s predictable and sustainable.
A cost intelligence mindset looks at your business in terms of those three categories: revenue, cost (in the context of unit economics — which we will get later), and risk.
Here’s a useful framework for areas you can consider, which we will dive into deeper.
Cost intelligence is only possible when you have a foundation of visibility — which doesn’t just mean knowing how much you’re spending. It means understanding why you’re spending and what you’re spending money on.
Many companies look at “hosting costs” in a single bucket, or in just a few buckets like “R&D vs. OpEx”. Instead, granular visibility, aligned to different aspects of your business is essential.
We won’t cover the “how to” of organizing spend into intelligence in this post, but we have many other resources like this one to help you learn more.
Now, let’s dive into what you can do once your costs are organized.
If your business is growing, your cloud bill likely is too. It costs money to support every new customer or user — so escalating cost can be a sign of a healthy business. The key is to keep an eye on your unit economics.
We often meet companies after their CFO has noticed a new zero at the end of the bill and declares they’re spending “way too much!”. But when pressed further, they’re not actually even sure what too much or too little looks like.
Unit economics puts costs into perspective, helping both technical and finance teams understand whether growth is healthy or not. In an ideal world, the average cost to support a customer, user, or whatever metric is important to your company, should go down as the bill rises.
Once you have visibility into unit economics, you can challenge your engineering team to improve them (or keep them at status quo, if they’re already healthy). Engineers are smart, and, given the right data, they will make decisions in the best interest of the business.
Here are a few ways they can incorporate cost intelligence and unit economics into their engineering culture processes:
With this kind of relevant intelligence, engineers can consider cost as a relevant data point throughout the entire software development life cycle.
It’s not uncommon, especially for SaaS companies, to have some customers with thin or unprofitable margins.
Surprisingly, it’s also rare that this data makes it to the go-to-market team, who is ultimately making the decision about pricing, packaging, renewals, and more.
One aspect of a cost intelligence mindset is ensuring that those who are deciding how to sell your products also understand the costs. Likewise, engineering should understand how a product will be sold, so costs can be appropriately constrained.
Here are a few ways cost intelligence can drive revenue:
Lastly, even if you’re growing revenue while you reduce cost, you’ll still want to ensure you’re managing your metrics for consistency and steady growth.
We recommend finance teams work as partners to other teams, especially product and engineering, to ensure there’s a tight feedback loop around cost. This starts with visibility into the cost of their work, plus a culture of openness, accountability, and autonomy.
Likewise, engineering should partner with finance to ensure they have the business-relevant visibility they need to ensure that cost is in line with the company goals and strategy.
Here are a few ways to improve predictability and reduce risk with cost intelligence:
With the right kind of visibility, finance should never be surprised by the bill, while engineering should never be making a blind decision.
Improving your operational metrics requires granular, business-relevant visibility. But achieving that level of granularity can be difficult when all you have is your cloud bill and your list of services, with no way to draw conclusions about how one affects the other.
Think of CloudZero as the cloth you need to wipe clean the dirty, opaque window of your cloud spend, and get a clear picture of what’s really going on inside.
With our platform, you can assign costs to any items you’d like, so you can understand your cost per customer, cost per feature, and even cost per department within your company — without relying on tags. When you have that kind of cost intelligence at your disposal, there’s practically no limit to the strategic maneuvers you can make to grow your business.
CloudZero is the only solution that enables you to allocate 100% of your spend in hours — so you can align everyone around cost dimensions that matter to your business.