Why Cloud Costs are the New Danger to Your Business

The cloud is everywhere, and it doesn’t come cheap. Organizations are quick to adopt the cloud without always realizing its financial implications. Many find themselves locked in with a cloud provider, paying more and more using complex pricing models they do not fully understand. 

In this article, I’ll introduce cloud computing and its pricing, show how cloud costs can become a significant financial risk for any organization, and provide some critical considerations you can use to avoid the next financial crisis.

What is Cloud Computing?

Today’s business climate is evolving. Employees are increasingly mobile, and need to access information wherever they are and via multiple devices. Data volumes are growing, and organizations need to provide increasingly sophisticated digital services. Solutions to all these problems can be found in the cloud.

Cloud computing is a general term for various forms of computing services, including: 

• Cloud storage—services organizations can use to store files for day-to-day access or long-term backup and archive. Files can be synced and shared across devices.
• Disaster recovery—the cloud makes it easy to store and remotely launch business applications in case of a disaster or cyberattack on the on-premise data center.
• Software as a service (SaaS)—web-based software services such as Google Apps, Microsoft Office 365, and Salesforce CRM.
• Infrastructure as a Service (IaaS) and platform as a service (PaaS)—solutions that allow organizations to host applications, servers, and even infrastructure services like networking and access control. Cloud providers can offer only the infrastructure (IaaS) or a fully managed solution the organization can own and customize (PaaS).

The Big Three Cloud Providers

Amazon Web Services (AWS), Microsoft Azure, and Google Cloud are known as the “big three” cloud providers. All three of these providers today have hundreds of services and tools. 

AWS pioneered the cloud as we know it today, starting with the still-popular Amazon Simple Storage Service (Amazon S3) and Amazon Elastic Compute Cloud (Amazon EC2). Over the years, it added many more services from infrastructure hosting to databases and analytics, and improved the purchasing flexibility of its services. 

Google was the second primary provider, launching a limited cloud service based on its internal cloud infrastructure in 2008. Microsoft followed suit, launching the Azure cloud in 2010. scrambled to offer similar services, but to date, have not fully caught up with Amazon’s breadth of offerings.

The big three now dominate the global cloud market. According to industry estimates, AWS now has 30% of the worldwide market, Azure 20%, and Google approximately 9%. In addition, other players like Tencent and Alibaba have emerged in China. In addition, Oracle and IBM built their own clouds and are trying to compete with the major providers.

The Dark Side of Cloud Pricing

Most cloud services are charged on a pay-per-use basis—you pay only for the resources you use. The stated benefit of pay-per-use is to minimize IT expenses because an organization doesn’t need to purchase and maintain physical infrastructure. 

Pay-per-use also allows organizations to shift IT expenditure to operational costs rather than fixed, capital costs. This provides tremendous flexibility, letting organizations add or remove IT infrastructure according to changing business needs.

However, organizations can easily overspend in the cloud. In addition, it can be challenging to track cloud service usage and the associated costs. Cloud providers and third parties offer cloud calculators to help you estimate your expenses, but these estimates are far from accurate.

Additional risks include failure to decommission idle workloads, data egress fees, and over-provisioning resources. 

Cloud providers have complex pricing models with rates that change according to service, region, and many other parameters. When an organization doesn’t fully understand a provider’s pricing model, or how it will evolve with their usage of the service, it may incur unexpected, hidden costs.    

Why Cloud Costs are a Looming Financial Risk

In the wake of the COVID-19 pandemic, many employees began working from home, and organizations shifted products and services to digital form, primarily using the cloud. According to Gartner, global cloud spending grew by over 40% in the year of the pandemic. By 2024, cloud costs will grow to 14% of enterprise IT budgets.

However, as cloud usage grows and starts to dominate budgets, many organizations often adopt a reactive approach to cost management. Organizations tend to commit to pre-purchasing a designated amount of cloud services, a model known as reserved instances.

Pre-purchasing grants has deep discounts, but it also assumes the organization has a clear plan for its future use of the cloud. As a result, much of the prepaid capacity can be misused or wasted without a rigorous cost management cycle. 

Another danger of the cloud is that self-service capabilities make it possible for employees to ramp up cloud usage on their own and spend more than the allowed budget. In some cases, staff provision cloud resources according to an approved budget, but fail to shut them down when no longer needed.

In either case, the organization unknowingly pays for unneeded computing resources. These hidden costs add up and can become a significant financial risk.

7 Hidden Cloud Expenses

The cloud is often touted as a wonder that will improve efficiency and save costs for any organization. But, in reality, several critical hidden costs can surprise you in a cloud project:

1. Cost per hour—everything in the cloud is charged according to when you use it. So while capital expenditure is low, ongoing operating expenses can be higher than in your on-premises data center.
2. Lack of predictability—in an on-premise data center, if you purchased a server, it had a fixed cost and a well-known operating cost. However, you cannot predict its costs when you start using a cloud service like Amazon EC2. EC2 lets you run 100 or 1,000 servers for a specific period of time and shut them down. Staff can also run servers and forget about them, but you’ll keep paying for them. This creates enormous unpredictability in cloud costs. 
3. Complex pricing models—most cloud services have multiple pages of complex price tables. They charge for multiple factors like time of use, data volumes, compute capacity used, data transfer, etc. These price factors change across numerous dimensions like cloud region, instance type, or overall data volume. 
4. Vendor lock in—once you transfer workloads to the cloud, you will find it complex to leverage additional clouds. Many organizations end up using only one cloud for many workloads, meaning they are locked into the pricing and features of that provider.
5. Data access and transfer fees—in most cases, cloud providers charge a small fee for transferring data out of their systems, and even for accessing or modifying the data. Unfortunately, this can become a significant expense, which most organizations don’t factor into their budgets.
6. Cost of analytics—if you run multiple analytics jobs on the same data, you will pay additional fees for data use and access.
7. Cost of managed services—cloud providers offer a myriad of convenient services, which can reduce workloads for in-house teams, but come at a premium. In addition, costs are not always transparent, and it is difficult to determine if the overall price of the service is really lower than operating the same systems in a house.

Critical Considerations When Planning Your Cloud Budget

Take the following into account to avoid surprises in your cloud costs further down the line:

• Consider what happens if you go over the limits stated in your contract (in terms of storage, computing resources, or data transfer). 
• Prepare a business case for increased cloud usage 1-2 years into the future. Will the cloud still be an attractive option as your data volumes and workloads grow?
• Consider the costs of cloud migration, which is a large and risky undertaking.
• Consider the cost of having in-house or outsourced staff to manage cloud systems, ensure they are secure, and interface with cloud providers.
• Study your cloud provider’s cost structure and discounts, and see how to take advantage of offers like reserved instances, spot instances, and savings plans.

Conclusion

This article explained the basics of cloud pricing and showed why the cloud represents a significant risk to any company’s financial management. Cloud services are inexpensive to start with but can become a substantial financial burden, due to unpredictable costs, complex and non-transparent pricing, and vendor lock-in.

As a result, a cloud can quickly become the new “black hole” in your budget.

By all means, use the cloud. But use it responsibly. Build your business case and put measures in place to monitor and control your costs. At least once per quarter, conduct a review of your actual cloud costs and how they compare to the original plan. There will be deviations from the plan, and they will be big.

Catch them in time and work with operational teams to ensure that you only spend what you intended and get everything you expect.

Image Credit: Joslyn Pickens; Pexels; Thank you!

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