There’s a common perception that moving workloads to the cloud can reduce IT costs by eliminating investments in on-premises infrastructure and adopting pay-per-use models. When properly governed, that’s certainly the case. However, left unchecked, cloud costs can rise unexpectedly, compromising ROI and consuming constrained IT budgets.

Measuring return on cloud investments is a rising concern as organizations actively ramp up cloud migration. According to IDG’s 2020 Cloud Computing research, 81% of organizations have shifted at least one application or some element of their computing infrastructure to the cloud, up from 73% in 2018. More than half of cloud-based applications (54%) were migrated from an on-premises environment, while 46% were purpose-built for the platform, the IDG research found.

There’s good reason for the mass migration. Among the myriad functionality, agility and ease of deployment benefits associated with a cloud architecture, a report from Nucleus Research found cloud deployments delivered four times the ROI vs. on-premises workloads over the period from January 2018 to November 2020. What’s more, organizations were able to recover the cost of their initial investments 2.5 times faster than for on-premises deployments, Nucleus found.

Challenges remain, however, with optimizing cloud costs. As organizations extend their investments across multiple public clouds — the IDG cloud survey found more than half (55%) of organizations employ multiple public clouds, with 21% relying on at least three — IT leaders are dealing with greater complexity in how they manage multi-cloud and hybrid cloud environments. More complexity can lead to hidden costs, and, more specifically, struggles with maintaining a hybrid environment within the promised constructs of a predictable cost structure.

“A well-managed, cost-optimized cloud can be cheaper for most clients than on-premises, but if you skip that step of establishing good cost governance and optimization of cloud architecture, you’re not going to achieve good results,” says Tim Rehac, a principal in Ernst & Young LLP’s Technology Consulting practice and EY Americas Cloud Infrastructure & Strategy Leader. “An unmanaged cloud is an opportunity to have runaway costs.”

Hidden trouble spots

The proven cost governance models that chief information officers (CIOs) have long used for on-premises IT are largely tied to capital appropriation and project portfolio selection. Managing capital expenses against a quarterly or annual budget makes it relatively easy to manage costs. But this model doesn’t translate well to the cloud, with its pay-per-use mechanisms and elastic demand. As a result, several factors can contribute to hidden costs, including:

• More architecture options, offering a broad mix of functionality and costs. Access to a variety of new services and applications can open up a floodgate of unexpected demand, which translates to a surge in usage and related costs. The cloud also makes it easy to add new services, such as disaster recovery, that weren’t cost effective for on-premises applications, are cheaper in the cloud, but add to the overall cost.
• Cloud sprawl, resulting from a lack of governance for commissioning and decommissioning cloud services. “It’s so easy to stand up a VM or database for an experiment or proof of concept, but if that is still running six months or a year later, that’s a problem,” says Rehac.
• Egress costs. As multi-cloud environments grow, organizations may not pay enough attention to workload placement. For example, an organization that has a dozen HR applications spread across four clouds and on-premises systems can run into unforeseen egress charges because they are continually moving transactional data across different environments.

Cloud services require a governance structure whereby companies not only set a budget and track spending against it, but also establish alerts when true costs exceed predicted costs.

Leading practices for optimization

The good news for CIOs struggling to rein in cloud costs is that a number of leading practices have emerged to help IT organizations establish proper governance controls that lay the groundwork for cloud cost optimization. Among them:

• Establish a well-balanced migration strategy. Many organizations have followed a lift-and-shift approach to migrating legacy applications and workloads to the cloud, assuming it was the quickest path to ROI. That’s not necessarily the case. The sweet spot for cost optimization likely lies with a mix of lift-and-shift and cloud-native application development. “The maximum ROI is not found at either extreme,” says Rehac.
• Implement and enforce a tagging strategy. When resources are commissioned, tag them appropriately and connect them to a specific program or business unit. This will provide a basic accounting of resource utilization by business unit, application and individuals using those services. It also establishes a foundation for implementing a charge-back program, which is critical to long-term ROI.
• Set up thresholds and alerts. Working with the business, set up thresholds for use of a particular app or cloud resource — for example, expected usage at $10,000 a month. If a department goes over budget, it triggers an alert that can be investigated to determine whether the extra cost is legitimate —to accommodate increased sales transactions, for example — or tied to a miscue with decommissioning.
• Appoint an optimization team. Create a small team (think center of excellence) focused on cloud cost optimization. Its role is to look for opportunities to optimize architecture across the entire business, to determine when and where assets run, and to decide if prepaying for assets or investing in auto-scaling is the most cost-effective strategy.
• Adopt a charge-back model for cloud resources. Many organizations aren’t yet at this stage, but it’s important to move beyond “show-back” to a full charge-back model so IT isn’t the only group carrying risk. If a development team is creating e-commerce apps using poorly conceived queries that consume significant resources, the cost for those resources should live with the e-commerce team, not IT.

There is no “easy” button to maximize cloud ROI. With the proper governance and controls, however, CIOs can find new ways to optimize costs as the pace and scope of their cloud migration efforts increase.

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Disclaimer: The views expressed by the authors are not necessarily those of Ernst & Young LLP or other members of the global EY organization.