Cloud FinOps: How to Build a Commitment-Based Discount Strategy

In the era of digital transformation, cloud services have become a go-to solution for businesses looking to innovate and scale. However, the challenge of managing cloud costs cannot be ignored. A well-defined strategy is essential to ensure that businesses can continue to leverage cloud services without breaking the bank.

One effective approach is to implement a commitment-based discount strategy for cloud resources. By incentivising long-term commitments, businesses can optimise costs while ensuring reliable access to essential services.

Understanding the Concept

A commitment-based discount strategy for cloud resources involves committing to a certain level of cloud usage or spending in exchange for discounted rates. This could include options such as Reserved Instances, Committed Use Discounts, or Savings Plans offered by cloud providers. The objective is to encourage long-term commitments, thereby maximising cost savings and operational efficiency.

Types of Commitment-Based Discounts:

Reserved Instances: Cloud providers offer Reserved Instances (RIs), which allow customers to reserve capacity for specific instance types in a particular region for a 1 or 3 year term. In return, customers receive significant discounts compared to on-demand pricing. e.g. A company that runs its web application on AWS EC2 instances can purchase RIs for a certain instance type and region, securing lower hourly rates for the duration of the reservation.

Savings Plans: AWS and Azure providers offer Savings Plans, which provide flexible pricing discounts in exchange for committing to a consistent amount of usage (measured in dollars per hour) over a 1 or 3 year term. Unlike RIs, Savings Plans offer discounts across a broader range of instance types and regions, providing more flexibility. Example: A company that has a variable workload on AWS can purchase a Savings Plan that covers a certain amount of usage per hour, ensuring discounted rates regardless of which instance types or regions are used.

Committed Use Discounts: Google Cloud Platform (GCP) offers Committed Use Discounts, where customers commit to using a certain amount of resources (such as virtual CPUs and memory) for a 1 or 3 year term. In return, they receive discounted rates for those resources. e.g. A company that regularly runs data processing workloads on GCP’s Compute Engine can commit to using a certain number of virtual CPUs and memory for a year, receiving discounted rates for those resources.

Steps to Building a Commitment-Based Discount Strategy

• Implement Cost Allocation and Tagging: Implement robust cost allocation and tagging practices to track cloud usage and costs across different departments or projects. By implementing cost allocation tags, an organisation can evaluate cloud usage patterns, track cloud costs associated with specific projects or departments, allowing for better accountability and optimisation.
• Evaluate Cloud Usage Patterns: Analyse your organisation’s cloud usage patterns to identify opportunities for long-term commitments. Look for services or resources that are consistently utilised at a steady rate. For example, a company may find that its web hosting services experience consistent traffic throughout the year. or A SaaS company analyses its cloud usage data and identifies that its database instances experience consistent usage levels, making them suitable candidates for a commitment-based discount.
• Explore Cloud Provider Options: Research the commitment-based discount options offered by your cloud providers. Compare offerings such as Reserved Instances, Committed Use Discounts, or Savings Plans to determine which best aligns with your usage patterns and financial goals. e.g. Amazon Web Services (AWS) offers Reserved Instances that provide significant discounts in exchange for committing to a 1 or 3 year term for specific instance types in a particular region.
• Forecast Usage and Costs: Use historical usage data and business forecasts to estimate future cloud usage and costs. This analysis will help you determine the appropriate level of commitment needed to maximise cost savings without overcommitting. e.g. Based on historical data, a company forecasts an increase in cloud usage during peak seasons and adjusts its commitment levels accordingly to maximise savings during these periods.
• Negotiate Terms with Cloud Providers: Engage in negotiations with your cloud providers to secure favourable terms for commitment-based discounts. This could involve committing to a certain level of usage or spending in exchange for discounted rates.
• Monitor and Optimise: Continuously monitor your cloud usage and costs to ensure that you’re realising the expected benefits from your commitment-based discount strategy. Identify areas for optimisation and adjust your commitments as needed to align with changing business requirements. Regularly review cloud usage reports and cost dashboards to identify underutilised resources or opportunities for optimisation. Adjust commitment levels or instance types accordingly to maximise savings.
• Educate Stakeholders: Educate key stakeholders within your organisation about the benefits and implications of commitment-based discounts for cloud resources. Ensure that teams responsible for provisioning cloud resources understand how their decisions impact cost optimisation efforts. Conduct training sessions or workshops to educate teams on the importance of optimising cloud costs and how commitment-based discounts can contribute to overall cost savings.
• Integrate with Financial Processes: Integrate commitment-based discounts into your organisation’s financial processes and budgeting cycles. This alignment will help ensure that cost savings from these discounts are accurately reflected in financial reports and planning.
  Include committed cloud spending as part of the annual budgeting process, allowing for better visibility and control over cloud costs.
• Regularly Review and Renew Commitments: Regularly review your commitment-based discount agreements with cloud providers to ensure they continue to meet your organisation’s needs. Renew or adjust commitments based on changes in usage patterns, business priorities, or cloud provider offerings.

Conclusion

A commitment-based discount strategy for cloud resources can be instrumental in driving cost optimisation and operational efficiency for businesses operating in the cloud. By following above steps and aligning your strategy with the principles of cloud cost optimisation, you can maximise cost savings while ensuring reliable access to essential cloud services. Embrace the opportunity to leverage commitment-based discounts to achieve greater predictability and control over your cloud spending, ultimately driving business success.