As cloud over-spending rises, look to cost optimization

As the rapid pace of change accelerates in the digital economy, organizations racing to remain competitive and enhance business value are facing significant new challenges to manage cloud spending.

While the cloud has promised enhanced speed, agility and efficiency, it has sometimes fallen short. Why? Organizations are simply failing to adapt and effectively manage a modern resource that works very little like the legacy environment it replaces.

With the cloud, consumption is often decentralized and IT departments no longer have tight control over on-site data centres and their costs. Shadow IT has become more common along the way, with users easily able to access alternative technology platforms and IT infrastructure. Wasteful cloud spending is further driven by complex billing structures, compounded in many cases by the use of multiple cloud services.

Why is waste occurring? Among numerous factors at play, we often see:

Disruption of traditional IT models;
Ongoing delivery of new services limits standardization;
Ease of procurement and limited controls over provisioning;
Complex billing and usage structures;
Limited insights around usage and spend optimization;
Complexity amid use of multiple cloud providers;
Limited tools to automate controls and corrective actions;
Limited transparency and accountability;
Failure to leverage favorable pricing models and discounts.

As for where waste is occurring, look to factors such as:

Underutilized or unscheduled resources;
Not using auto-scaling for peak periods;
Selecting the wrong storage class;
Missed volume and purchase-commitment discounts;
Software licensing in the cloud;
Poorly architected workloads.

Organizations too often fail to architect efficiently in the cloud – relying instead on simplistic ‘lift-and-shift’ migration programs that are inherently inefficient as they merely replicate what exists on-premise. Many also mistakenly believe that continued reliance on their on-premise model is an appropriate strategy in today’s fast-evolving environment.

Research shows that on average, enterprises are spending 35 percent more on cloud resources than needed to meet their business objectives¹. IT financial management processes often fall short when trying to account for cloud spending’s variable nature – KPIs are not focused on the right outcomes and reporting. Finance teams meanwhile often lack the technical acumen to make recommendations for cost savings, while engineering and development teams lack incentives to think financially.

Without the appropriate strategy, tools and governance in place, effective planning, monitoring, reporting and decision making on cloud spending and performance becomes difficult. Enterprises can repeatedly incur avoidable cloud spending unless current environments are correctly sized and ongoing discipline is established to manage technical configurations, commercial levers and active financial management.

Embed governance to enhance spending efficiency

Simply put, the race to the cloud has typically resulted in wasteful spending and insufficient oversight, leaving many organizations struggling to balance the advantages of cloud agility and innovation against the need for guardrails and enhanced transparency to control costs.

Where to begin in harnessing costs to create new efficiencies across the business? Unlocking the full value of cloud requires a cloud-first approach. Unfortunately, many businesses believe that retaining the on-premise operating model will work but this approach typically leads to cost overruns and a failure to realize significant cloud benefits such as agility and right-sizing.

A holistic, enterprise-wide approach to cloud cost optimization is critical – taking into account people, processes, governance, data and technology. Implemented strategically, you increase agility, simplify the platform architecture and lower the total cost of ownership.

Key to success is the need to embed governance that delivers significant new opportunities for cost optimization. Built-in governance enables businesses to become operational quickly without the need to worry about manual system controls. Control costs, create hierarchies and enforce a tagging strategy from the start. As KPMG professionals stress to clients on the cost-optimization journey:

Establish spending objectives and implement cost controls so teams can work at speed and remain policy compliant.
Apply policies with flexible hierarchies to multiple subscriptions with management groups and efficiently manage access policies and compliance for subscriptions.
Quickly identify systems owners and business functions with tagging and continually track cloud spending.

Our cloud cost-optimization pillars

KPMG specialists can provide a full review of your cloud estate, identifying waste and delivering necessary innovations to help minimize spending and maintain a robust environment. KPMG professionals’ holistic approach means faster and more detailed cost takeout than in-house teams or cost tooling alone can achieve. Transparency and optimization of cloud financials are both tactical and structural as we apply five cost-optimization levers, below, to help clients clearly define key objectives and how best to achieve them.

For tactical cost-saving opportunities, we review the current cloud portfolio to assess what tactical steps could be taken in the short term to help reduce costs.

Right-sizing instances for lower costs: We assess the virtual machines across the cloud estate to help ensure they are correctly resourced for their workload – typically reducing total cost of ownership by up to 7 percent. This includes consistently provisioning the right size instance for CPU memory, IOPS, network and HDD. We also enhance capacity; choose the right instance class; actively manage expiry dates; and fine tune configurations.
Reducing environments and use auto scaling: Rationalizing and scaling moves from getting instances ‘right-sized’ to consolidating opportunities to scale automatically, for up to 9 percent in TCO savings. This includes: An auto-off strategy per workload; identifying switch-off opportunities; eliminating redundant/semi-redundant environments; exploiting infrastructure as code capabilities to tear down/rebuild servers during off-periods; rationalizing public IP addresses; optimizing auto-scaling; and predictively identifying wasteful provisioning.
Managing pricing models: Cloud providers have flexible packaging and pricing that can be complex and constantly in flux. We typically see up to a 10-percent cost reduction with smarter management. This includes: Optimizing volume/reservation commitments; driving increased amounts of spot instances for non-time-critical workloads; using trusted advisor data; consolidating billing; moving workloads to lowest-cost geo-tenants; full service vs self-managed capabilities; license optimization and arbitrage regarding OS, DB, PaaS; choosing build-and-host vs buy-and-host vs SaaS; and optimizing tax positions.

For structural cost-saving opportunities we analyze the current state application architecture and governance policies to determine what structural changes could be made in the long term to modernize applications and institute automated governance:

Creating a cost-effective architecture: A cost-effective architecture regarding PaaS, storage and DevOps promotes a right-sized and consolidated storage and server estate. Combined with DevOps/CICD delivery models, it also enhances agility and speed-to-market. We typically see up to an 18-percent reduction in TCO. This includes: Architecture principles and strong governance; availability and tiering; performance regarding reserved IOPS and SSD vs HDD; standardized DevOps tooling for faster go-to-market time, faster mean time to recovery (MTTR), improved deployment frequency and lower failure rate of new releases; storage types suited for different forms of data; and optimizing data-transfer costs.
Applying continuous governance measuring and monitoring: It’s essential to automate outputs and provide insights based on the analysis used for business unit recharge and service TCO. Defined KPIs can help ensure a regular feedback loop is established and focused to drive unit costs downwards, promoting transparency on costs and consumption. This includes: automating routine checks; predictive analysis of potential waste; augmenting cost reports with TCO factors such as network, labor, licenses; publishing cost-efficiency metrics; cost transparency; CMDB accuracy; driving out FTE reallocation for non-productive staff; introducing Cloud Center of Excellence or cloud business office roles; and governing policies strictly.

Look to cloud FinOps to gain control

KPMG specialists are accelerating the journey to the cloud safely and securely by enhancing cloud investments through leading FinOps practices.

FinOps refers to financial management of cloud resources by cross-functional teams focused on spend accountability and business-value optimization. Teams from IT, finance and business units collaborate on data-driven spending decisions. Transparency is prioritized and everyone takes ownership for their cloud usage – ultimately enhancing financial control and predictability, reducing friction and accelerating product and service delivery. You can read more in our recent overview.

To avoid certain pitfalls, we advise clients to pursue these five objectives for success:

Improve and maintain cost predictability. Identify, plan and track cost and usage metrics that provide clues for optimizing the use of cloud resources. Use financial modeling powered by machine learning and cloud-based tools to predict costs and set targets.
Optimize total cost of ownership. Design the cloud architecture, right-size resources, purchase reserved capacity, and capitalize on favorable pricing models and commitment discounts to improve average cost rates and deliver a better return on cloud investments.
Increase ownership and accountability. Incentivize a culture of financial responsibility. Track and report data around cloud usage and costs to hold employees who manage cloud environments accountable for their spending.
Improve governance efficiency. Create explicit policies to govern the provisioning of cloud resources.
Improve monitoring and reporting capabilities. Boost monitoring and reporting capabilities by creating data collection pipelines for cloud-optimization metrics, automating controls and reports. Combine machine learning and human analysis to spot irregularities and find opportunities.

Our cloud cost-optimization pillars

KPMG specialists can provide a full review of your cloud estate, identifying waste and delivering necessary innovations to help minimize spending and maintain a robust environment. KPMG professionals’ holistic approach means faster and more detailed cost takeout than in-house teams or cost tooling alone can achieve. Transparency and optimization of cloud financials are both tactical and structural as we apply five cost-optimization levers, below, to help clients clearly define key objectives and how best to achieve them.

For tactical cost-saving opportunities, we review the current cloud portfolio to assess what tactical steps could be taken in the short term to help reduce costs.

Right-sizing instances for lower costs: We assess the virtual machines across the cloud estate to help ensure they are correctly resourced for their workload – typically reducing total cost of ownership by up to 7 percent. This includes consistently provisioning the right size instance for CPU memory, IOPS, network and HDD. We also enhance capacity; choose the right instance class; actively manage expiry dates; and fine tune configurations.
Reducing environments and use auto scaling: Rationalizing and scaling moves from getting instances ‘right-sized’ to consolidating opportunities to scale automatically, for up to 9 percent in TCO savings. This includes: An auto-off strategy per workload; identifying switch-off opportunities; eliminating redundant/semi-redundant environments; exploiting infrastructure as code capabilities to tear down/rebuild servers during off-periods; rationalizing public IP addresses; optimizing auto-scaling; and predictively identifying wasteful provisioning.
Managing pricing models: Cloud providers have flexible packaging and pricing that can be complex and constantly in flux. We typically see up to a 10-percent cost reduction with smarter management. This includes: Optimizing volume/reservation commitments; driving increased amounts of spot instances for non-time-critical workloads; using trusted advisor data; consolidating billing; moving workloads to lowest-cost geo-tenants; full service vs self-managed capabilities; license optimization and arbitrage regarding OS, DB, PaaS; choosing build-and-host vs buy-and-host vs SaaS; and optimizing tax positions.

For structural cost-saving opportunities we analyze the current state application architecture and governance policies to determine what structural changes could be made in the long term to modernize applications and institute automated governance:

Creating a cost-effective architecture: A cost-effective architecture regarding PaaS, storage and DevOps promotes a right-sized and consolidated storage and server estate. Combined with DevOps/CICD delivery models, it also enhances agility and speed-to-market. We typically see up to an 18-percent reduction in TCO. This includes: Architecture principles and strong governance; availability and tiering; performance regarding reserved IOPS and SSD vs HDD; standardized DevOps tooling for faster go-to-market time, faster mean time to recovery (MTTR), improved deployment frequency and lower failure rate of new releases; storage types suited for different forms of data; and optimizing data-transfer costs.
Applying continuous governance measuring and monitoring: It’s essential to automate outputs and provide insights based on the analysis used for business unit recharge and service TCO. Defined KPIs can help ensure a regular feedback loop is established and focused to drive unit costs downwards, promoting transparency on costs and consumption. This includes: automating routine checks; predictive analysis of potential waste; augmenting cost reports with TCO factors such as network, labor, licenses; publishing cost-efficiency metrics; cost transparency; CMDB accuracy; driving out FTE reallocation for non-productive staff; introducing Cloud Center of Excellence or cloud business office roles; and governing policies strictly.

At KPMG, our professionals help leading organizations streamline their cloud financial operations, helping ensure transparent and efficient cloud spending across diverse cloud providers. With a robust organization of more than 5,000 cloud specialists – complemented by our FinOps specialists – KPMG member firms can harness the leading technology tools needed to refine your cloud budgeting.