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Convertible Reserved Instances: The index fund of AWS cost optimization

Chris Cochran   Chris Cochran, Co-Founder and Chief Executive Officer

We like to compare what ProsperOps Autonomous Reserved Instance (RI) Management does for AWS cost optimization to what robot investment advisors (robo-advisors), like Betterment or Wealthfront, do for personal investing. The obvious parallel is the technology. We use algorithms to help businesses save money in the same way they use algorithms to make people money. However, the analogy actually extends further into the underlying instruments the algorithms manipulate. For the robo-advisors, it's equities, like index funds, that efficiently allow their customers to generate returns from a basket of securities. For us, it's Convertible Reserved Instances, which allow our customers to continue saving as their EC2 environment changes.

As you probably know, the Reserved Instance is not an actual EC2 instance that you start, stop, or migrate to, but a billing discount that trades a 1 or 3 year usage commitment from the user in exchange for a discount from AWS. RIs come in two flavors, the Standard RI and the Convertible RI. The Standard RI has a higher discount than the comparable Convertible RI, but has less flexibility to be changed during the commitment term (i.e., if your EC2 instance doesn't match your Standard RI, you will pay on-demand rates for the EC2 instance plus your Standard RI commitment). However, what the Convertible RI lacks in comparative discount is made up for with almost complete flexibility to adapt as the underlying EC2 instance footprint changes in a region.

In our experience, the Convertible RI best balances savings power with engineering flexibility. We think Convertible RIs should be at the core of your RI strategy.

Released in late 2016, Convertible RIs changed the AWS cost optimization game relative to Standard RIs in the same way that index exchange traded funds (ETFs) changed the personal investing game relative to individual stock picking. Index ETFs allow investors to purchase a basket of securities with a single investment/commitment. That allowed investors to participate in whichever stocks drove the overall market versus assuming the risk of a single stock. While the index ETF may miss out on the upside of an individual stock, it also removes the downside risk of any single stock. Said another way, it's the difference between making an aggregate bet on the market versus an individual bet on an investment.

Convertible RIs behave similar to an index ETF. They allow the AWS user to think about cloud spend commitments in aggregate instead of by individual EC2 instance. The Convertible RI allows the user to change their commitment to different EC2 instances over the Convertible RI term in a given region. Conversely, Standard RIs force the user to think about commitments by individual EC2 instance. With Standard RIs, if the matching EC2 instance changes during the term the now unmatched Standard RI will not generate discounts although it still costs you money.

Prior to the introduction of Convertible RIs, RI commitments meant committing to a specific instance type for the entire commitment term. If prices shifted, or your app required different instance types, you were stuck with the RI commitment. In practice, the Standard RI model forced you to "rightsize" your app before making an RI commitment. Once Convertible RIs became available, RIs could be exchanged between instance families during the term of the commitment. That flexibility unlocked a new approach to AWS cost optimization that embraced the inherent dynamism of the cloud.

Convertible RIs allow ProsperOps to operate differently. Rather than capacity plan RIs around individual instances, we can make RI commitments based on aggregate EC2 spend. Rather than deferring RI savings because the app needs instance rightsizing, we can immediately use Convertible RIs for savings and exchange them in the future, as required. When you wrap the flexibility of the Convertible RI with algorithmic management, you now have one of the most powerful tools to drive AWS cost optimization. Rather than manually administering RIs on a periodic basis, the entire Convertible RI lifecycle can be automated to operate in real-time against a set of user-controlled constraints.

If you've bought into the benefits of index investing over stock picking, you should think about Convertible RIs as the foundation of your RI portfolio. If you've bought into the algorithmic approach of robo-advisors, as a service that not only optimizes your investment returns, but also saves you time and mental cycles, you should think about ProsperOps to autonomously manage your RI portfolio. To learn more or sign-up for a free ProsperOps RI assessment, please visit https://www.prosperops.com or contact us at +1-855-360-0512.

 

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