A Guide to AWS Contract and Cost Optimization

Multiple inflection points over the last several years have fundamentally changed enterprises’ appetites for cloud infrastructure services. The increase in demand driven by digital transformation initiatives was bolstered by COVID-19, which added new urgency and shifts in business behavior. Along the way, generative AI has emerged from the background to become one of the most disruptive and game-changing advancements in enterprise IT.

AWS continues to dominate the hyperscaler market, capturing one-third of total spending.1 Revenues are expected to jump higher in the near-term as companies bring new AI workloads to the cloud and alliances between AI model makers and cloud providers drive higher customer spend. Many enterprises are already feeling the pressure to choose between using a single hyperscaler’s AI ecosystem at a potentially lower cost or a multi-provider strategy that mitigates the risks of vendor lock-in.

Higher Cloud Spend Reveals Cost Management Vulnerabilities

As enterprises spend more on cloud, particularly with market leaders like AWS, most are discovering they are ill-prepared to manage surging cloud costs. Many companies have seen their cloud spend grow by as much as 20 or 30% per year without the traction of AI.2 It’s become alarmingly clear most cloud cost governance processes and tactics are still too immature, decentralized, and unfocused.

There is an urgent need among enterprise IT and tech procurement leaders to improve how cloud costs are managed and contained. Growing demand for cloud services is driving faster purchasing cycles as well as shadow spend that doesn’t leverage existing hyperscaler commitments. There is also the issue of compliance, where product use rights for certain products are often affected by which hyperscaler is running the workload.

In this guide, we reveal what large enterprise AWS customers need to do to eliminate the risk of cloud overspending and improve cost containment as their cloud commitments grow.

1 https://www.srgresearch.com/articles/quarterly-cloud-market-once-again-grows-by-10-billion-from-2022-meanwhile-little-change-at-the-top

2 https://www.mckinsey.com/capabilities/mckinsey-digital/our-insights/more-for-less-five-ways-to-lower-cloud-costs-without-destroying-value

The Most Common Mistake in Cloud Cost Management

Historically, enterprise cloud cost governance strategies have focused heavily on one activity – service optimization. When performed effectively, service optimization can yield savings in the 10 to 25% range. Typical tactics include:

• Identify and remove unused or underutilized resources
• Right-size resources according to current and future-state workload requirements
• Choose best-fit pricing models (e.g. spot vs. reserved instances, savings plans, etc.)
• Analyze spend to identify cost-saving opportunities and assist with demand forecasting

While service optimization usually has the potential to reveal the greatest opportunity for savings, companies often leave significant dollars on the table by not performing it optimally or regularly. Another area of focus is compliance monitoring. It includes tasks like invoice auditing to identify and remediate billing errors, as well as ensuring adherence to agreed-upon discounts and incentives. Compliance monitoring is resource-intensive and typically delivers savings that are materially less than service optimization. For many enterprises, cloud cost governance stops with service optimization and compliance monitoring – and that’s a serious mistake.

The Importance of Contract Optimization

One overlooked area of cloud cost control is contract optimization. It’s essentially the first step in an effective cloud cost governance strategy and includes the optimization of pricing, discounts, credits, incentives, and business terms. It ensures the customer spends the lowest amount possible from day one of their commitment with AWS and amplifies savings in other areas of cloud governance (including service optimization and compliance monitoring). Hard-dollar savings can be material and there are several soft-dollar benefits as well (e.g. reduced migration and training costs). Failure to perform cloud contract optimization is one of the biggest mistakes in cloud cost governance – and one more way companies leave money on the table during the contracting process.

AWS Cloud Contract Optimization – Focus on These Contractual Elements

With the potential to eliminate millions of dollars of cloud overspend, why do companies overlook cloud contract optimization? The short answers are resource constraints and internal expertise. IT and IT procurement teams have been overstretched, and many lack detailed familiarity with AWS’s current contractual elements and the degree to which they can be negotiated. Some organizations have invested in FinOps – an evolving cloud financial management discipline – but these efforts are still relatively nascent.

To move the needle on cloud cost management and containment with AWS, enterprises need to understand key contractual elements and how they can be leveraged for savings.

Maximize Your Cloud Potential with AWS – Not Your Spend

As large enterprises pursue growth and innovation, AWS will continue to be an indispensable and trusted partner. Customer spend on AWS services will likely skyrocket over the next decade as a result. This serves as a wake-up call to companies who have taken a less-than-rigorous approach to cloud cost management. Now is the time to understand how and where costs can be optimized for savings, and to prioritize related activities accordingly.

For AWS customers, contract optimization is foundational to cloud cost containment. Knowing which contractual elements to focus on during negotiations and how to leverage them effectively can deliver material savings.

If you’re interested in optimizing your cloud contract for savings and flexibility, NPI can help.

Failure to perform cloud contract optimization is one of the biggest mistakes in cloud cost governance – and one more way companies leave money on the table during the contracting process.