What Is Cloud Cost Optimization? Strategy & Best Practices

Anyone who’s owned a home is familiar with the challenge of maintaining a clean garage. You start with a neat environment and what feels like limitless space for storage, a workbench, and maybe even some exercise equipment. But soon a few boxes go here, a few more go there, and the area becomes a chaotic maze with little room to walk, much less park a car.

Cloud computing can present the same challenge. As businesses take advantage of the cloud’s scalability and flexibility to provision servers and computing instances in minutes, cloud environments can quickly become cluttered with unused or underutilized resources, adding unnecessary complexity and chewing up IT budgets. After all, though cloud computing offers customers the benefit of paying for only the cloud resources they choose, cloud service providers (CSPs) may still charge customers whether they use those resources or not.

This is where cloud cost optimization comes in. Its goal: Make cloud environments more efficient and less complex, and ultimately less costly. This article examines how this process works, why it can be difficult to implement, and which best practices to follow to optimize cloud costs successfully.

What Is Cloud Cost Optimization?

Cloud cost optimization is the process of reducing the overall costs of cloud computing services while maintaining or enhancing performance. The goal of cloud cost optimization is to align costs with actual needs without compromising on service quality or performance, typically by limiting expenses such as overprovisioned resources, unused instances, or inefficient architecture. It’s a balancing act between keeping costs down and providing the appropriate cloud resources to maintain peak performance, fuel growth, and ensure compliance and data security.

Cloud cost optimization is also a dynamic process because cloud workload requirements constantly evolve, as do cloud pricing and service options. As a result, cloud cost optimization requires detailed metrics, analytics, and automated tools.

In general, cloud cost optimization involves two core initiatives.

• Intelligent procurement of cloud services: One benefit of cloud computing is that it allows authorized employees to purchase cloud services quickly to meet demand. But, despite their best intentions, IT teams can inadvertently sign up for more resources than they need. That’s why strong governance policies for cloud purchasing are necessary to help ensure that companies get the most value from their cloud investments. Governance involves setting clear budgets and reviewing billing information; leveraging cost-saving opportunities, such as discounts for volume purchasing and paying in advance; and monitoring cost anomalies to identify and address unexpected spikes or inefficiencies.
• Optimization of cloud capacity: The ease and speed with which IT teams can purchase and provision cloud resources can sometimes have costly, unexpected consequences. If companies don’t have visibility into resource usage, for example, they may unintentionally overprovision cloud resources by purchasing more server or storage capacity than they need, leading to idle or unused capacity. Teams can also forget to shut down resources they no longer require. Companies can mitigate this by continuously monitoring usage with cloud monitoring and automation tools and conducting regular optimization reviews. This process, known as “rightsizing,” helps ensure that the most cost-efficient cloud resources are allocated to each workload or application. In addition, companies should monitor for unused cloud software subscriptions, which can also add unnecessary costs.

Key Takeaways

• A crucial benefit of cloud computing is the ability to add servers, storage, and networking capacity quickly and easily to respond to usage demands.
• Cloud pricing has become increasingly complicated, which can cause companies to inadvertently overspend on unnecessary resources.
• Cloud cost optimization helps companies control cloud costs and improve budgeting, forecasting, and IT performance.
• Best practices for cloud cost optimization include setting strict budgets and using automated tools to identify and adjust cloud resources in the moment.

Cloud Cost Optimization Explained

In the early days of cloud computing, companies eagerly took advantage of the cloud’s scalability, flexibility, and easy provisioning, often without fully understanding costs. But as cloud adoption soared, pricing and service models became more complex, resulting in underutilized cloud resources and unexpected cost overruns for many businesses.

And so cloud cost optimization was born. Early attempts at cloud cost optimization involved manually monitoring usage and adjusting resource allocation, but continued cloud growth made this process a challenge. For example, cloud providers began to offer almost unlimited options for instance sizes for workloads. In addition to server size, IT teams had to select options for memory, databases, computing power, graphics, storage capacity, and data transfer speed, among other variables. With so many factors to consider, choosing the correct size instance for workloads became difficult, with many companies unwittingly purchasing more capacity than they needed.

To help customers avoid unnecessary expenditures, cloud providers have started to offer comprehensive cost management tools that provide insights into resource utilization, cost breakdowns, and recommendations for optimization. In addition to these cost management tools, many companies have developed strategies and best practices to maximize their cloud investments. These include using automation to scale resources up and down as needed, identifying discount opportunities with cloud providers, and continuously monitoring and adjusting their active cloud services.

Many companies also take a structured approach to cloud cost optimization by assigning dedicated team members to oversee the process. That responsibility can span roles, including cloud architects, cloud operations managers, cloud financial analysts, and cloud cost engineers. More commonly, companies create a cloud governance board with multiple stakeholders. Also referred to as financial operations or FinOps, this team is charged with developing and implementing best practices for cost management, maintenance, bulk shutdowns of unused resources, and other cost-cutting procedures.

Why Is Cloud Cost Optimization So Important?

Cost control is obviously a primary goal of cloud cost optimization, but it’s not the only reason this process is important. Cloud cost optimization also addresses challenges with cloud performance optimization and security, while providing other benefits.

Here are the most important reasons to implement a cloud cost optimization strategy.

• Higher cost savings: Estimates of wasted cloud spending range from worrisome to downright alarming. In a 2023 Flexera survey of global cloud decision makers, respondents reported wasting an estimated 28% of their public cloud spend. A focus on cloud cost optimization best practices and policies helps create a culture of cost awareness, teaching teams to consider the return on any cloud spending. This enables companies to base future cloud purchasing decisions on solid data rather than hunches. According to McKinsey Digital, the results of cloud cost optimization can be dramatic, allowing technology leaders to “quickly cut as much as 15 to 25% of the costs of their cloud programs while preserving their value-generating capabilities.”
• Improved efficiency: Underused or idle resources, poor application optimization, and mismanaged cloud resources can add significant costs to cloud operations. For example, an ecommerce company might pay a flat monthly fee to run several maximum server loads 24/7 during peak buying seasons. During nonpeak hours, however, those servers might run at 10% capacity, meaning 90% of the company’s spend goes to waste. Rightsizing and autoscaling tools can help companies identify and merge underutilized or overprovisioned resources to reduce costs while increasing application performance. Those cost savings can then be reallocated to other parts of the business that deliver greater ROI.
• Smarter budgeting: Cloud cost optimization strategies and budgeting have a mutually beneficial relationship. Developing and communicating detailed cloud budgets helps maintain cost controls. Likewise, cloud cost optimization strategies help companies forecast future cloud spending and manage budgets more effectively via historical usage analysis and improved cost visibility. Cost monitoring and reporting tools can provide insights into resource usage, cost outliers, and how different services or workloads contribute to overall cloud costs. This creates a more accurate baseline for budgeting and forecasting.
• Enhanced performance: Cloud cost optimization also has important implications for application performance. As noted earlier, CSPs offer seemingly limitless options for customers to set up cloud instances, which often leads companies to purchase more services than they need. A by-product of cloud cost optimization is a better understanding of the distinct requirements of different workloads. The process provides companies with operational metrics that help them select performance thresholds for each workload more accurately, which can enhance processing times and user experiences.
• Reduced security risks: Cloud cost optimization isn’t the most important component of a comprehensive cloud security program, but it can certainly help the cause. For example, by merging or eliminating overprovisioned and underutilized resources, companies can reduce their attack surfaces. In addition, the increased visibility that comes from monitoring cloud usage can help companies identify potential security threats. Cloud cost optimization tools—such as autoscaling or infrastructure as code (IaC), which automates cloud provisioning—can also help enforce security controls consistently and reduce the risk of misconfigurations.
• Improved business continuity: Cloud cost optimization encourages companies to distribute resources across multiple availability regions to enhance resiliency. This process can help improve business continuity by reducing the risk of downtime and minimizing the impact of disruptions. In the event of a disruption, cloud cost optimization tools for IaC, for example, can speed up the deployment and testing of infrastructure and applications to get businesses back online quickly.
• Greater sustainability: In general, most things that reduce waste promote sustainability. By rightsizing their cloud services and merging underutilized resources, companies can allocate cloud resources more efficiently, which can help minimize their energy consumption and reduce their carbon footprints.

Why Is Controlling Cloud Costs So Difficult?

Keeping cloud costs under control can feel like an exercise in futility. That’s because many of the benefits of the cloud, such as self-service and limitlessly scalable resources, can be a blessing and a curse if not properly managed. Complex cloud pricing models are often the root of the problem.

For example, software-as-a-service (SaaS) pricing is typically based on the number of cloud subscriptions a company purchases, requiring companies to carefully monitor their subscriptions to ensure they don’t go unused. Meanwhile, infrastructure-as-a-service (IaaS) models are often based on the amount of computing, networking, and storage capacity a company reserves on a CSP’s platform each month, creating even more complexity.

In a decentralized cloud environment, IT teams may find themselves with a newfound ability to make immediate decisions regarding new cloud resources. As more teams across an organization take advantage of this ability, the costs can quickly add up, particularly if no one monitors whether new resources are necessary or how long they’re required. Autoscaling features offered by some cloud providers can help control costs, but they’re not a panacea. Companies still need to establish clear autoscaling policies that specify scaling triggers based on performance metrics and establish minimum and maximum scaling limits.

The complexity of cloud billing can also compound the challenges of cloud cost optimization. The problem: All those countless cloud configuration options can have their own respective pricing model. As a result, the average cloud bill contains hundreds if not thousands of lines of data. As CSPs add new features and pricing structures, the complexity increases further. This is especially true for companies that use multiple CSPs, each with its own billing terminology. In most cases, the task of understanding and allocating each line from a cloud bill falls to a finance professional who likely doesn’t have the training or experience to interpret the charges. As a result, they will likely be unable to advise IT teams on how to optimize spending.

Get Started with Cloud Cost Optimization

Cloud cost optimization is a daily practice. Unlike accounting, for example, where monthly or quarterly reporting requirements dictate when companies must ramp up their activities to meet established deadlines, cloud cost optimization is proactive and constant. Ongoing cloud innovation and shifting organizational priorities make careful attention to detail vital for cloud cost optimization. With this in mind, the sooner companies can build a standing group of diverse cloud stakeholders to oversee cloud costs and policies, the easier ongoing cost control will be.

8 Cloud Cost Optimization Strategies and Best Practices

Clear policies for purchasing and implementing cloud resources are foundational to best practices for cloud cost optimization. Once these policies are in place, companies can embed them into cloud workflows to automate the process of real-time discovery and timely response.

The following eight best practices can help companies establish cost discipline for cloud spending:

1. Review pricing and billing information for anomalies: Interpreting a CSP’s often lengthy and granular cloud bill is easier when companies take the time to zero in on specific areas of high expenditure. For example, it’s important to fully understand charges for compute, storage, and value-adding managed services, such as database services, because these tend to make up the bulk of cloud costs.
   
   Most CSPs offer cost management tools that can identify trends, anomalies, and cost drivers before customer spending gets out of control. In addition, recent