I hate budgets. Whether in my personal or professional life, budgets tend to suppress my creativity and limit what seems possible. Budgets are usually based on past experiences or preconceived notions – and missing a budget is often considered a failure. Although I loathe budgets, they are a necessary evil. There’s no doubt successful businesses have strong financial management practices, and they rely on them for a clear understanding of which parts of the business need investment and which need maintenance of the status quo or even a divestiture.
A critical area in most businesses today is the cloud budget. Cloud computing has accelerated growth and financial rewards in many firms that use it as a foundation for innovation and differentiation. Cloud-native firms like Google, Meta, Netflix, Instagram and Amazon continue to disrupt and define cloud models. Traditional brick-and-mortar companies also are spending aggressively on cloud capabilities as a mechanism to modernize their business. But cloud budgets are new for many firms, and there is a dearth of historical data to guide modern fiscal management. In addition, cloud spending can occur (and skyrocket) throughout an enterprise – and create cloud sprawl with outcomes that are difficult to measure.
Cloud budgets are required in every business today. Similar to utilities (electricity, networks, HVAC), cloud powers almost every part of the enterprise, and it’s critical to understand its consumption. Creating and managing cloud budgets must have multiple components to effectively understand the benefits and rewards of this investment. Below are several imperatives that must be included in creating and managing cloud budgets.
Your Cloud Strategy Should Determine Your Cloud Budget
- A cloud budget should be the byproduct of a comprehensive cloud strategy. Regardless of a firm’s industry and size, every company should have a defined strategy and operational plan. The plan should address key items:
- What is the business need for cloud technology?
- What are the upfront and ongoing costs and will the investment yield incremental revenue/profit to the bottom line?
- Does cloud computing serve as a differentiator in your market?
- Does your firm have the skills and expertise to execute your cloud strategy?
- How will cloud be managed and what is the enterprise-wide governance model?
- How will budgets be administered throughout the enterprise and does your financial processes support direct charging to each department?
- What are the KPIs to measure the success of your cloud strategy?
Lastly, a cloud strategy should be a living document. Given the rate and pace of technology and business dynamics, firms must pivot as appropriate to stay competitive.
Cloud Budgeting Is a Journey
Although many firms began their cloud implementations years ago, cloud business models and budgets are relatively immature. At the onset of a cloud migration, many firms complete a business case that outlines the business objectives as well as the financial costs and benefits. It’s important to note that a cloud budget is not a one-time event, it is an ongoing journey. Leveraging cloud technology has become vital for most businesses and must be incorporated into the fabric of the enterprise. The business case should outline benefits and costs by year as well as by critical milestones. Significant deviations from the business case should be addressed immediately.
Cloud Budget Versus Return on Investment (ROI)
There is a general perception that leveraging cloud computing is cheap and will lower costs significantly. Many cloud service providers have made it easy for anyone with a credit card to set up a server in minutes and leverage cloud resources. This is a procurement nightmare and fosters maverick buying and cloud sprawl. “Easy access” to cloud services does not always mean lower costs and, in fact, often results in the opposite.
Responsible cloud budgets must include the following:
- Balanced costs and benefits: What are the tangible benefits that result from your cloud investment?
- Alternatives: What are the costs/risks and benefits of not implementing cloud
- ROI: What is the best approach to measure the value of cloud investments with a balanced view of expenditures versus a static and traditional budget.
4 Steps to Implement Solid Cloud Budgets
Since cloud models and technical deployments are fledgling initiatives, firms often do not understand how they are billed or who is generating the cost inside the enterprise. Initial cloud contracts may include significant commitments that are not being met and could result in large usage fees or substantial termination charges. Many firms are not equipped to understand and remediate these issues, which can span across the entire enterprise.
The good news is that there are actions that firms can take to implement solid cloud budgets:
- Get external help. Many companies specialize in assisting firms with their cloud planning and budgeting. These firms can review current IT strategies, cloud contracts and usage patterns and recommend and help deploy remediation plans.
- Tag. A firm needs to understand how cloud costs are being generated as well as who is generating the usage. Many firms have leveraged cloud tagging as an effective process for associating parts of an enterprise with their cloud usage. Tags are critical to managing cloud costs within an enterprise. Appropriate tagging allows a firm to associate business functions with cloud usage to ensure they align with business value. Tagging facilitates accountability for cloud costs.
- Manage and govern. Cloud budgets must be approved by senior management and reported on a regular basis to all senior executives and appropriate management. Managing the budget should also mean measuring the benefits derived from enhanced sales and higher client satisfaction. Cloud budgets may not be adequate to fuel innovation, increased revenue and profit that cloud capabilities can unleash. Cloud capabilities should be used as a competitive weapon versus a BAU expense.
- Implement FinOps: Cloud FinOps is financial management of a company’s cloud estate. FinOps is basically the operating model for the cloud that combines systems, processes and people to enhance and increase an organization's ability to understand cloud costs. FinOps brings transparency and financial accountability for the cloud budget so companies can make informed decisions based on empirical data.
Cloud Contracts and Vendor Lock-in
Once the enterprise cloud strategy is in place, contracts must be structured and executed to meet the needs of the business. A cloud contract should be linked to the business case and financial plan for the cloud journey. Special attention should be given to how usage is billed and create a clear outline of the scope of services. Given the rate and pace of technology, a firm should be wary of vendor lock-in and long-term contracts with inflexible exit terms.
Multi-Cloud Does Not Equal Multiple Cloud Budgets
Many firms use multiple clouds from different providers. Multi-cloud estates are effective strategies that select providers based on optimizing specific applications. Companies also use multiple clouds as an effective mechanism to deal with resiliency and disaster recovery. This strategy is a hedge on preventing vendor lock-in. A multi-cloud estate can make IT management and governance complex, but budgets for these estates that are integrated into a single cloud budget and leverage FinOps practices will drive efficiency and accountability.
ISG helps enterprises build cloud budgets, contract with cloud service providers and track cloud spend and usage. Contact us to find out how we can help you.
About the author
Bernie Hoecker joined ISG in September 2021. His role is to leverage ISG’s core competencies to expand and grow ISG’s presence in the cloud market. His focus will be to implement a cohesive cloud strategy across the ISG firm that results in incremental revenue and EBITDA growth. This also includes fostering strong relationships with service providers, hyper-scalers, and additional firms in the cloud ecosystem.