White Paper
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.
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.
DISCOUNTS
NOTE: It’s imperative to perform price benchmarking to ensure discounts are best-in-class.
| Type | Description |
|---|---|
| Enterprise Discount | Also called a cross-service discount, this is a discount on overall platform spend. Percentages can vary from customer to customer (and often without discernible justification) – highlighting the need for price benchmarking. Customers with sizeable spend should consider a tiered-discount structure. |
| Service-Specific Discount | For specific high-usage services, customers can negotiate a specific discount outside of the Enterprise Discount. Historically, AWS has had limited service-specific discounts, but that’s changing. EC2 discounts and specific pricing for certain offerings (e.g. storage) are now available. |
| Marketplace | AWS Marketplace allows enterprise customers to easily buy IT solutions with pre-agreed T&Cs. This is often more efficient than buying direct and can be applied against monetary commitments. If the purchase is sizeable, you should negotiate discounts with both the OEM and AWS to achieve optimal discounting levels. |
INCENTIVES & CREDITS
NOTE: These should be carefully leveraged with the customer’s IT roadmap and business objectives.
| Type | Description |
|---|---|
| Training | Offered as an investment credit, AWS provides consulting or training credits that can be used to train and/or certify stakeholders on how to use/manage cloud services or to support other projects in the organization that will drive higher cloud utilization. |
| Migration Acceleration | AWS will work with customers to offset the cost of migrating applications from legacy data centers to the cloud. This is a reimbursement of professional services costs as well as duplicate technology costs for running parallel environments. |
| Modernization | Hyperscalers often offset the cost of modernizing workloads to make use of cloud-native tools. AWS is willing to reimburse/credit fees associated with workload modernization because it generally makes the application stickier to AWS. |
| Expansion & Adoption | AWS provides investment and adoption credits that reimburse clients for a variety of projects that expand the use of AWS services. This category of credit includes developing cloud native applications, expanding into other regions, etc. |
| Partner/ Reseller | Some credits and incentives are available to AWS partners and resellers as deal-making mechanisms. If contracting through these channels, customers should be sure to capture these incentives/credits in their contract. |
COMMERCIAL TERMS
NOTE: These should be optimized according to the customer’s unique current- and future-state requirements
| Type | Description |
|---|---|
| Monetary Commitment | This is the amount of money the customer commits to spend on AWS cloud services over the term of their agreement. Customers with large spend should leverage annual and term revenue commitments as part of their AWS cost optimization strategy. Monetary commitments should be optimized for flexibility and discounts that take into account the customer’s current- and future-state usage requirements. |
| Contract Vehicle | Most cloud providers offer various contract vehicles. Each includes a basic set of terms with pros and cons, and underlying terms that need to be optimized. Customers should make sure they are being governed under the contract type that best matches their organizational and usage requirements. AWS’s Private Pricing Agreement is the primary contract vehicle for AWS. |
| Marketing | This is a financial incentive for customers that are willing to be a publicly named customer. Often takes the form of a testimonial, case study or press release. |
| Term | The duration of a customer’s contract should be weighed against discount incentives, readiness, and flexibility. For example, discounts may be lower with a shorter-term contract but better suited for a customer that doesn’t have a fully developed cloud migration strategy. Currently, AWS is pushing for 5-year deals. If a customer can commit to a 5-year term, they are likely to secure better discounts. |
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.
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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.
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.
About NPI
NPI is a premier provider of data-driven intelligence and tech-enabled services designed specifically to assist large enterprises with IT procurement cost optimization. NPI delivers transaction-level price benchmark analysis, license and service optimization analysis, and vendor-specific negotiation intel that enables IT buying teams to drive material savings and measurable ROI. NPI analyzes billions of dollars in spend each year for clients spanning all industries that invest heavily in IT. NPI also offers software license audit and telecom carrier agreement optimization services.
NPI Vantage™ Pro is the newest addition to NPI’s solution portfolio – a platform developed specifically for IT Procurement Professionals to help them manage growing renewal portfolios, prepare for negotiations, and achieve world-class purchase outcomes. For more information, visit www.npifinancial.com and follow on LinkedIn.
