When businesses decide to migrate to AWS or create new applications, they make a lot of strategic decisions, often supported by business cases developed by consultants. Initially, the effort needed to manage AWS spending was largely unknown. As adoption grew, so did the unexpected operational and financial tasks, becoming crucial as companies strive to efficiently manage their AWS environment.

The Rise of Cost Optimization

Cost Optimization has become a major focus for AWS users because it directly impacts monthly expenses. Every click and script execution is essentially a buying decision that might not have been part of an in-depth design discussion. By 2020 there were numerous third-party vendors offering tools to identify ways to reduce consumption or introduce buying recommendations. When AWS bills were smaller, the fees charged by these vendors were less noticeable. But as we approach 2025, these fees are becoming harder to justify, almost feeling like you're in a joint venture relationship with these vendors.

Exploring Beyond the Obvious

In a bit of irony, when customers started to take actions to reduce their hard cost they dramatically increased their internal soft costs to handle often complex tasks to align AWS spending to their individual organization. By 2020, many organizations had set up centralized teams to handle AWS billing, combining expertise from IT, Finance, and Cloud Engineering. 

These team members work behind the scenes, saving significant amounts in hard costs and managing soft costs that are often overlooked. They handle tasks like:

• Allocating costs to product budgets or cost centers.
• Forecasting budgets to explain billing fluctuations to business and technical leaders.
• Holding project and cloud engineering teams accountable for spending and acting on cost-saving opportunities.
• Maximizing AWS programs and accounting for them at the product or project level.
• Delays in integrating data back to systems of records. 

The members of these teams are extremely hard to find and valuable due to all the moving parts. Even in large organizations, there were a handful of people that if they moved on would be very challenging to replace. 

Understanding Your True AWS Costs - Hard and Soft Cost

Let's take an example. Imagine "Acme Corp" was spending $500k a month on AWS before optimizing. Through internal efforts or vendor outreach, a cloud operation team was formed, identifying a 30% savings potential by optimizing buying options, reducing over-provisioning, and eliminating waste. This brought the bill down to $350k, but with vendor fees of 3%, it nudged back up to $360k.

Breakdown of Costs

• Hard Costs:
• $500k pre-optimization
• $350k post-optimization, plus 3% vendor fees = $360k
• Soft Costs:
• Cloud Operation Team: 200 hours/month @ $100/hr = $20,000/month
• Additional Teams (Product, Accounting): 100 hours/month @ $100/hr = $10,000/month
• Delays in having Approved data in Core Financial Systems 10 Days @ $1k/Day = $10,000/month
• Program management (e.g., MAP/Credits): 20 hours/month @ $100/hr = $2,000/month

Transitioning from blindly paying the bill to actively managing and optimizing it saves on hard costs but introduces about $50k/month in soft costs.

The Current State (June 2024)

By now, customers should ideally be actively optimizing costs with internal teams and broader budget owners taking an interest in the AWS bill. However, many might not fully recognize the approximate $600k annual investment needed to get there. They may also struggle with engaging product teams to implement more efficient processes. Understanding where to start and how to streamline these processes remains a challenge. 

In Part 2 we will talk more about these processes and how FinOps Center can help!