Cloud spending commitments can create a different mindset in the grander context of cloud costs – instead of focusing on what you’re spending money on (and why), you might naturally think more along the lines of “Well, we have to spend this money now.”
This can produce significant effects, including increased susceptibility to the sunk cost fallacy and other potential inefficiencies.
But let’s back up for a moment and define the term: In the world of cloud, “committed spend” refers to when an organization (the cloud customer) agrees to spend a minimum amount of money with a cloud provider – typically within a specified time period – in exchange for discounted pricing on their usage. (An enterprise agreement could also include other benefits, such as dedicated account management services.)
[ Related read: 5 things CIOs should know about cloud service providers. ]
Committed spend can go by slightly different terms, such as “committed use” (or committed use discounts) and “consumption commitment.” By any name, committed spend entails volume-based discount on cloud usage – by agreeing to use X amount of cloud services, you reduce your unit cost by Y. This is typically the purview of large enterprises and some midsize companies – though it’s the size of the cloud bill that matters more than the company – once it gets big enough, it may behoove the company to use spending commitments to manage its long-term costs.
Committed spend is also a straightforward but significant pivot away from the pay-only-for-what-you-use model that underpins many cloud sales pitches. With committed spend, you’re agreeing to pay a certain amount whether you use it or not.
How to get the most from your cloud investment
This can generate more predictability and consistency in your cloud costs – but it also comes with a different set of considerations for IT leaders. Here are four ideas for making sure you’re getting the most out of your committed spend.
1. Don’t treat committed spend like an all-you-can-eat buffet
The biggest fundamental change with committed spending is that it turns a prospective cost – one that could be incurred but is still variable (or even non-existent) based on future decisions – into more of a sunk cost – one that has already can no longer be changed.
We say “more of a sunk cost” because: A) This isn’t an Economics 101 class, and B) it’s debatable as to whether committed cloud spend truly meets the textbook definition.
But by agreeing to spend a certain amount on cloud services in a given year (or other timeframe), you’ve certainly created the conditions for the IT version of the sunk cost fallacy, in which otherwise rational people make inefficient or poor choices – like going back for a seventh plate of prime rib at a Vegas buffet – because they’ve already paid the cost of admission.
The sunk cost effect “occurs when someone chooses to do or continue something just because they have invested (unrecoverable) resources in it in the past,” write David Ronayne, Daniel Sgroi, and Anthony Tuckwell in Harvard Business Review.
Committed spending by definition puts IT leaders and teams in the position to potentially make technical and/or business decisions solely because “they have invested resources in [the cloud] in the past.” (It should also be noted that, unlike the Vegas buffet, committed spending agreements are usually minimums – they don’t necessarily prevent overspending.)
And that’s the first bit of advice about getting the most out of committed spend: Don’t let the sunk cost effect lead to inefficiencies, waste, or other poor outcomes that you would have likely avoided on a pay-as-you-do model. This requires ongoing vigilance – and feeds into our next tips.
2. Check out the full menu of what’s available to you
Just as cloud itself is no longer largely about core infrastructure, committed spend is not just about compute reserve instances and how much storage you have. You can usually use it on a wider array of services than ever.
Have you checked out what’s in the cloud marketplaces of your providers lately? If not, it’s probably worth your time to take a closer look at what’s on offer, says Stu Miniman, director of market insights on the cloud platforms team at Red Hat. “The cloud providers have hundreds of partners with options there that can be part of my committed spend,” Miniman says.
If you have committed spend with AWS or Microsoft Azure, for example, you can use it to pay for Red Hat OpenShift. There are plenty of similar examples – the principle to keep in mind is to think beyond reserved instances, in the same way that you likely think (well) beyond compute when it comes to cloud in general.
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3. Buy yourself some flexibility
While committed spend is commonly sought out as a means of creating predictability, that doesn’t preclude flexibility. The cloud providers in general are becoming more flexible with your spending, Miniman notes.
“One example is you used to make a commitment on the spend and you’d lock yourself into a specific type of compute instance,” Miniman says. “The problem: Over the course of a year, your application usage changes, and new technology comes out.”
Miniman further notes that with AWS, for example, you used to commit to a specific type of server for a year: “You were committed – even if three months later, AWS came out with a new server that was faster, and which would allow you to use fewer servers, for less money.”
This has changed to allow for more flexibility within a long-term usage commitment.
“Currently, you can choose plans with AWS where you make a 1-3 year commitment, but it’s flexible as to which compute instances you can use, rather than committing to one type,” Miniman says.
Bottom line: You don’t have to sacrifice flexibility (if you want it) in the pursuit of predictability.
4. You should still turn off workloads you no longer need
Like the Vegas buffet connoisseur, it may be tempting to stop paying as close attention to what you’re eating – er, running – and why. If you’ve agreed to spend a certain amount no matter what, what’s a zombie instance or three?
This is again the sunk cost effect coming to pass. You should still be hawking your cloud usage and looking for opportunities to optimize. “One of the things people always need to be looking at is: what do I have running?” Miniman says.
And once you’ve answered that question, you then should ask two more.
“First, should it be running? The best way to save money in the cloud is to turn things off that you don’t need anymore,” Miniman advises. “Second, has something else come out so that I can now shift to a less expensive option?”
This is why “committed spend” is probably the right term of art instead of alternatives – you are in fact committing to spending a certain amount of money, but with more flexibility and options in what you use that money towards than in the past.
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