Cloud Economics: Cost Optimization

There are many factors that drive businesses of all scales to migrate to the cloud. We can bring these drivers under the same roof of “Value of Cloud”, and group them into 4 key improvement areas that cloud migration generates:

• Cost savings

• Staff productivity

• Operational resilience

• Business agility

It is important to highlight that the true value of cloud is not limited to cost savings, but rather relies on the strategic improvements and opportunities generated within all these areas. In this blog post, we will focus on the cost savings and cost optimization in AWS Cloud, TCO -Total Cost of Ownership- analysis in detail, and how to optimize costs.

Cost Savings in Cloud

First of all, cloud offers a huge decrease in infrastructure and IT costs through economies of scale and pay-as-you-go advantages. Companies can easily switch from huge CapEx (the capital expenses including the physical infrastructure purchases) to OpEx (the variable expenses that incur when only consumed), and enjoy the economies of scale that cloud providers already have. In general, traditional IT investments including the hardware, physical infrastructure and facilities require a huge capital investment upfront. These investments are planned upon the estimates of future usage needs, which are subject to change as the business grows or the market conditions change. For this reason, the typical CapEx structure looks like a stepped cost function in which the investment amount increases by a fixed amount as the capacity requirements increase.

However, the real demand is not a linear function as the initial predictions suggest, rather a variable function that fluctuates over time. The issue here is obvious: when the predicted (and accordingly invested) demand level is higher than the actual demand, the companies suffer from being overspent on the IT resources which means an opportunity cost that could be spent on more strategic resources for the company’s future. On the contrary, if the predicted demand levels fall short of the actual demand, the companies can’t meet the unexpected demand and this means lost opportunities due to the imprecise capacity investments. Either way, the companies suffer from the inflexible capacity decisions they have already made.

Let’s look at a more specific example to explain these opportunity costs. A company might predict their peak levels correctly and undertake exactly the needed amount of infrastructure investment to meet the peak demand. However, the peak level of demand is not permanent and the resources will be not utilized when the demand goes back to its steady state level. For this reason, typical data centers are not fully utilized in general, unfortunately. This is a huge opportunity cost for businesses of all scales: both for the newly-launched small businesses with tight budgets or large enterprises that pays billions for their IT investments.

Cloud Migration: TCO Analysis

Total Cost of Ownership -TCO- is a management accounting term that is used to describe the financial benefits and total economic value of a certain investment. TCO Analysis in our case of cloud migration is simply the comparison between the on-prem vs. AWS Cloud costs based on the estimated infrastructure needs.

With AWS TCO Calculator, you can easily compare the cost of your workloads and applications in an on-premise to AWS environment. All you need to do is typing your estimated infrastructure needs and AWS TCO Calculator produces a detailed report with various categories and cost breakdowns. Whether you are a business owner considering to migrate to cloud or a business decision maker, this report provides a good insight to the extent which you can achieve cost savings with migrating to cloud.

Based on your inputs, you can see the percentage of cost savings if you migrate to AWS Cloud and yearly total amounts of savings calculated for 4 main categories:

• Server costs

• Storage costs

• Network costs

• IT labor costs

Well, how does the TCO Calculator exactly compare the on-prem vs AWS Cloud costs when it comes to indirect costs and overheads? The TCO Calculator also includes the estimated overheads and associated indirect costs based on the input levels you provide. For instance, the backup costs, administrative costs or overheads are calculated for the level of your storage requirements. Moving on to server costs for example, the TCO Calculator also provides a cost breakdown for different pricing types of E2 and shows you alternative cost structures in AWS Cloud as well. Here is an example of estimated input levels of the example application and the TCO findings:

Starting with our estimated application needs:

The TCO Calculator gives us the expected total savings and the cost breakdown with the related cost items:

Finally, we can see the calculations for each category and the different AWS pricing types within the same category. For example we can see the on-premise server cost compared to different pricing options of EC2 Instances, namely the Reserved Instances and On-Demand:

Operating in Cloud: How to Lower TCO?

The pricing philosophy of AWS helps customers to reduce their costs while they scale and enjoy the economies of scale. First of all, the different pricing options enable customers to choose the optimal instance or storage types based on the nature of their workloads. There are many examples of lowering costs with pricing options such as on-demand vs. spot vs. reserved instances or data storage with different availability or data retrieval levels.

One of the impressive examples is the Intelligent Tiering option offered in Amazon S3 - Simple Storage Service. You can either choose the optimal data storage type for your business needs, or choose the Intelligent Tiering option if you are not sure what to choose if your data access needs are not stable! Intelligent Tiering analyzes the use of your data and automatically moves your data over the most cost effective storage option. Through monitoring and automation, S3 Intelligent Tiering option moves your data between Frequent Access Tier and Infrequent Access Tier to help you achieve cost savings.

The second example is the EC2 Right Sizing: it analyzes your EC2 instance utilization pattern and provides recommendations on how to meet your demand while also lowering your costs with right-sizing your instances. The second dimension of the pricing philosophy of AWS is volume discounts and tiered pricing, which lets you lower your costs as you scale.

Next Step: Cost Optimization For Even Lower Costs

So far, we already have mentioned instance right sizing and instance & storage optimization based on your needs. What can you do to further optimize your costs? There might be many cost items you should review and optimize based on your actual needs and utilization. The elasticity of the cloud enables you to adjust your resources easily. You can easily adjust your servers and storage classes to eliminate any unused resources. To both reduce the technical and administrative costs, you can look for serverless architectures as well. Last but not least, managed services could even eliminate the administrative costs and help you improve your performance and resilience.

Well-Architected: Cost Optimization Pillar

To fully analyze all your cost items and get recommendations on how to optimize them, you can consider undertaking a Well-Architected Assessment. The Cost Optimization Pillar in Well-Architected Assessment helps you assess your cloud expenditure, monitor your service utilization levels, gain cost awareness and take action for the most efficient cost structure. Well-Architected Assessment helps you align your cloud operations with your financial objectives through pointing out the improvement areas and recommendations. These recommendations might include more efficient pricing levels or newly introduced services that might help you reduce your costs even further. You can always optimize your costs and improve your cloud financial management with the Well-Architected Assessment.