Pound Wise Cost Management
…Penny wise but pound foolish…
…Tripping over dollars to pick up pennies…
It’s foolish to give up $100 to save $1. Yet that’s what happens when we over-invest in cost optimization. We save $1 and miss an opportunity worth $100.
And to make matters worse, that $1 savings may only be an illusion. We may never make up for the time invested in achieving the $1 reduction.
Even if that $100 opportunity isn’t lost forever, we can’t ignore the financial implications of delaying revenue.
Over-investing in cost optimization is an easy trap to fall into. So how do you avoid it?
How do you know when investment in cost management or optimization is worthwhile? You may have an outsized opportunity to save money. You may free critical resources for your organization, with a significant return on your investment. How do you evaluate this opportunity before you invest?
You can evaluate your investment by considering three factors:
1. Costs are Significant
Are your cloud infrastructure costs significant for your organization? What is significant will vary across organizations and industries. Here are some ways to gauge this:
Consider the expense as a percentage of revenue. Revenue may be tracked in the form of Annual Reoccurring Revenue (ARR), or some other indicator. If costs are a whole percentage of this number (>1%), then building solid practices to manage these costs is worthwhile.
You’ll need to adapt for the size and scope of your organization. If revenue numbers aren’t available to you then you can look at how the expense compares to others. Is this cost tracked and reported on individually from other technology-related expenses? Is it scrutinized at a high level within your organization? If yes, it is probably a good idea to invest in a strategy managing it.
2. Maturity of Existing Practices
Assessing current practices can help gauge your potential return on improving your practices.
Our experience, as well as industry analysis, shows immature practices can lead to 35% or more in waste.
The Pareto principle, where you attain 80% of the benefit with only 20% of the investment, usually applies here for organizations with immature or non-existent management. If you have effective practices, the remaining gain may not be worth the effort of further investment.
Gauging this can be tricky, and required experience. It requires an understanding of what goes into cost-management practices.
Do you have costs broken-down1 and attributed2 to business value and outcomes? Are Unit Costs understood, where you can map costs to metrics such as revenue or user count? Are responsibilities for management and optimization clear and identified3? Is usage transparent and visible to those who have an impact on consumption? Is value understood across the organization? Are contracts negotiated to full value, with trust established to support long-term commitments for deeper discounts? All resources utilized at their fullest potential?
An often overlooked indicator of cost-effectiveness is engineer competency with your platform. A shallow understanding of the services used is a sure path to wasteful spending.
We’re working to standardize and improve assessment practices in this space. Reach out if we can help you gauge your organization’s opportunity for improvement.
3. Revenue Growth Opportunity
If your organization is pursuing a disruptive rate of growth then you’re probably pretty busy. If your technology products are central to that growth, then that takes an intense focus from your engineering teams.
Most engineering efforts will likely be supporting this growth. It will be difficult to justify the ROI of the time spent on cost optimization activities.
Companies in this mode of growth do not generally see expenses such as cloud infra costs as a high-priority constraint.
Be careful that you do not completely disregard cloud cost management. A baseline of management practices are critical to avoid accidental cost explosions and surprise bills, and even in supporting innovation and growth through increased confidence in understanding the growing expense.
Additionally, prepare for attitudes toward cloud costs to change. Consider preparations for if markets turn or the growth opportunity becomes less clear. If expense growth outpaces revenue growth, cost optimization may become a priority.
Summary
Staying in tune with these factors will help guide your investment in cost optimization and management practices. You can ensure you’re providing the best value to your organization, and not hindering better investment.