In cloud cost optimization, there are two main approaches: reducing usage (usage optimization) and lowering the cost per unit (rate optimization). While many organizations focus heavily on usage optimization — scaling back resources, shutting down unused instances, and optimizing workloads — rate optimization is often overlooked.
This is partly due to the common practice of encouraging FinOps teams to prioritize usage optimization before pursuing rate optimization, as it makes demand more predictable and safer to commit.
But, if cloud services are known (and valued for) their flexibility, how will we know when usage optimization is “complete”?
Thus, the simple idea is to carry out both usage and rate optimization simultaneously, because pursuing both will result in the lowest possible cloud bill. That said, jumping directly into cloud commitment plans without fully understanding the challenges and common mistakes will result in a higher bill — and introduce undue commitment risk.
In this blog, we’ll explore the common pitfalls teams encounter when implementing long-term discount plans, and how you can avoid them to maximize your FinOps rate optimization efforts.
Lack of Understanding
Without a solid understanding of how discount instruments like Reserved Instances, Savings Plans, and committed use discounts (CUDs) work, your organization may struggle to make informed decisions.
For instance, purchasing RIs without knowing your current usage, RI pricing, regional restrictions, or transfer limitations could result in wasted commitment plans, eventually losing money. If your usage patterns change and your RIs, SPs, or CUDs are locked into a commitment, you’ll end up paying for unused capacity, leading to budget overruns.
Solution: Start by learning the basics about RIs, SPs,, and CUDs: how they work, their benefits, and potential risks. Then, you can make informed decisions about what to buy, when to buy them, and how to use them.
Decentralized and Uncoordinated Purchasing
When different teams within the organization independently purchase RIs, SPs, or CUDs without a centralized strategy, it leads to inefficiencies.
For example: Department A buys RIs for a specified region, and due to changing demands they could only utilize 60% of their RIs. On the other hand, Department B has to pay on-demand prices for the same regional instances (keeping all other configurations constant) because there’s no centralized authority managing the commitments.
Uncoordinated purchasing can result in redundant commitments, underutilized capacity, and missed opportunities for discounts through consolidated purchases. It also increases the difficulty of managing these commitments, making it harder to track expirations, renewals, and actual usage across all departments.
Solution: Implement a centralized purchasing process where all commitment decisions are aligned with the organization’s broader goals. Ensure that purchases are coordinated across teams and regularly reviewed to prevent duplication and underutilization.
Infrequent and Large-Scale Purchases
It can be tempting to make fewer, larger purchases to simplify management, but this approach has significant drawbacks. Large commitments made based on current usage patterns can backfire if workloads change over time.
Say your company commits to a large quantity of compute resources but later shifts to serverless architecture or reduces workloads. Those RIs or CUDs become a sunk cost.
This purchasing approach also reduces your ability to take advantage of fluctuating pricing, dynamic workloads, and newer resource types that could offer better cost efficiency.
Solution: Adopt a more frequent purchasing strategy that allows for greater flexibility. Regularly evaluate your usage and buy discount plans in smaller, manageable increments to better match changing workloads and take advantage of fluctuating pricing. The primary benefit of this strategy is consistent and continuous discount instrument expirations, which provide an opportunity to absorb reductions in usage.
Improper Allocation of Commitments Costs
When discount instrument costs aren’t properly allocated across departments or teams, it becomes difficult to track cloud costs and establish accountability. Without a clear strategy for tracking and distributing these costs, teams may overpay or underpay for their share of resources, leading to imbalances and disputes. Fixed or inaccurate allocations might also obscure opportunities for optimization because no team feels fully responsible for shared resource costs.
Solution: Establish a clear cost allocation strategy that fairly distributes the commitment plan investments across departments based on usage. Implement consistent tagging and Intelligent Showback to ensure transparency and accountability in resource consumption.
Failure To Continuously Measure and Adjust
A common mistake is treating commitment management as a one-time task. Without continuous monitoring and adjustments, you may find that your commitments no longer align with your actual usage, causing underutilization and missed savings opportunities.
Additionally, new discount plans or more suitable offerings may emerge, and failing to adjust leaves potential savings on the table.
Solution: Implement continuous monitoring and regular adjustments to your cloud commitments. This should include regular reviews of your usage statistics, the flexibility to adjust or exchange RIs or CUDs as necessary, and staying informed about new offers that could better meet your evolving needs.
Lack of Cross-Functional Collaboration
Successful rate optimization requires input from leadership, finance, procurement, engineers, workload owners, and other business units to accurately assess current usage and plan commitment levels. Without proper collaboration, decisions may be made in silos, leading to commitments that don’t align with upcoming changes or broader business demands. This lack of coordination can result in suboptimal outcomes and missed savings opportunities.
Solution: Establish clear communication channels and ensure all relevant stakeholders are involved in decision-making. Collaboration across functions provides a holistic view of cloud usage patterns, aligning your strategy with organizational goals and avoiding costly misalignments.
Complexity of Managing a Discount Portfolio
Manually managing a discount portfolio is highly complex, especially as demands change frequently. And at a certain scale, it becomes impossible to deal with the changing demands, complex mathematical algorithms for discount management, and organizational alignment. At scale, the sheer volume of data and commitments makes manual management impractical and inefficient.
Solution: Implement cloud rate optimization tools to automate the management of discount portfolios. Automation enables real-time adjustments that align commitments with current workloads, ensuring agility and maximizing savings.
Lack of a Unified Rate Optimization KPI
Many FinOps teams rely heavily on traditional metrics like utilization and coverage to gauge the success of their commitment plans. While these metrics provide some insight, they don’t offer a complete picture of savings performance.
High utilization can be misleading if commitments only cover a small portion of overall usage, resulting in minimal savings despite appearing efficient. And high coverage might indicate overcommitment, where unused commitments lead to higher costs instead of savings.
Solution: To get a clearer view of your cloud cost savings, adopt the Effective Savings Rate (ESR) as your primary KPI. Effective Savings Rate was introduced by ProsperOps and is officially recognized by the FinOps Foundation for its rate optimization capability.
ESR combines utilization, coverage, and discount percentages into a single metric, giving you the most accurate measure of how well your commitment plans are performing. By using ESR, you can assess the true ROI of your rate optimization efforts and benchmark savings across departments.
How do you calculate ESR?
This formula helps you evaluate how much you’re saving with discounted rates relative to what you would be paying on-demand. In addition to being a single ROI metric, it helps you benchmark and track cost optimization efforts and offers insight into how effectively commitments are managed.
ProsperOps Can Help You Maximize Your Effective Savings Rate
ProsperOps offers a streamlined solution for FinOps teams looking to optimize cloud cost management without investing extensive time and resources.
Having perfected our methods over several years, we focus on maximizing ESR: the key metric for commitment-based savings. This automation frees engineering resources for other strategic initiatives and ensures your cost savings are maximized.
Here’s how we do it:
Managing rate optimization
ProsperOps continuously tracks engineering environments in real time and automatically manages rate optimization, producing real savings outcomes instead of recommendations.
Modern workloads are dynamic, with resources constantly starting, stopping, launching, and terminating. And changes in architecture, such as shifting from Intel or AMD to ARM-based microarchitecture, need flexible, responsive discount management.
ProsperOps takes rate optimization a step further by autonomously managing the purchase, renewal, and optimization of these discount instruments. Algorithms and policy-based automation handle the processes, ensuring that the organization is always aligned with the most favorable terms without requiring constant manual oversight.
Centralizing procurement
ProsperOps also simplifies and centralizes procurement by eliminating delays inherent in traditional recommendation-based tools. Instead of generating lagging recommendations that need analyst evaluation, we use real-time automation to make precise, timely purchases.
ProsperOps removes this never-ending task from FinOps practitioners’ list of responsibilities, providing a mathematically optimal outcome for adjusting commitments. It’s a seamless process that ensures procurement decisions are made with the latest data, so you get significant savings without the need for extensive manual oversight.
Maximizing ESR
The rising complexity of cloud computing has driven the need for better automation. Now, there’s a greater emphasis on risk management and long-term savings. ProsperOps addresses this by using methods that prioritize flexibility and risk reduction. Our approach allows you to dynamically adjust commitments, ensuring savings strategies align with evolving business needs and objectives.
Your team can redirect engineering resources to higher-value tasks, as algorithms handle the complexities of maximizing ESR. We optimize the hyperscaler’s native discount instruments to reduce your cloud spend and place you in the 98th percentile of FinOps teams.
Learn how we can streamline your entire cost management process: Book a demo today.
