Global spending on public cloud services is expected to increase by 20.4%, reaching $675.4 billion in 2024, up from $561 billion in 2023, according to Gartner, Inc. Rising cloud costs will continue to be a significant concern for growing businesses. Over the last few years, the list prices on cloud services from giants like Amazon Web Services (AWS), Google Cloud, and Microsoft Azure have gone up due to greater demand for compute, data storage, and AI/ML capabilities.
As businesses rely increasingly on cloud services, these cloud costs become much harder to keep under control. This phenomenon, known as Cloudflation, highlights the increasing challenge of managing and optimizing cloud spending effectively.
In this article, we will discuss what causes Cloudflation, how it impacts cloud-reliant enterprises, and strategies to optimize your cloud expenses. Read on to explore the details.
What is Cloudflation?
Cloudflation (“cloud” + “inflation”) is the rising cost of cloud services driven by various factors such as inflation, increasing demand, and investments in AI and other advanced technologies. This phenomenon is analogous to general inflation, where the prices of everyday items like groceries and gas increase over time, similarly, Cloudflation reflects the rising costs of cloud services.
It represents the financial pressures businesses face as cloud service costs escalate, particularly from major providers like Amazon Web Services (AWS), Google Cloud, and Microsoft Azure.
What are the causes of Cloudflation?
With so many businesses relying on the cloud for their operations, these costs can add up quickly. The first step to managing cloudflation is to understand what’s causing it. Below, we’ll highlight some of the biggest factors contributing to Cloudflation, including:
Increased cloud adoption and usage
Forty-four percent of businesses adopt the latest cloud product as soon as it becomes available. However, as highlighted by Pluralsight, “There’s a big difference between adopting the cloud and using it to drive organizational success.” As businesses shift more operations to platforms like AWS and Google Cloud, providers face higher costs for scaling their infrastructure.
This includes greater expenses for servers, storage, and maintaining data centers amid rising energy prices. Additionally, the high demand for compute resources and processors further drives up costs, allowing providers to squeeze additional profits from their customer base. The increased adoption of cloud services by businesses drives up the demand for resources, leading to higher costs as providers invest in more infrastructure and pass those costs onto customers.
Inefficient usage optimization
Some companies may end up overprovisioning as they migrate to the cloud, which means they pay for more resources than they actually use. This often happens when the business doesn’t fully optimize their cloud resources or shut down unused services, leading to cloud waste.
Overprovisioning and failure to optimize cloud resources result in paying for unused capacity, contributing to unnecessary expenses and cloud waste.
Lack of cost visibility and control
Many companies struggle with cloud waste due to insufficient visibility into their cloud usage. Without proper cost monitoring and analytics, it’s tough to understand where your cloud budget is going. This lack of real-time insight often leads to uncontrolled cloud expenses, making it challenging for teams to manage and optimize their cloud spending effectively.
Lack of cloud financial accountability
Many organizations lack reliable financial accountability for their cloud spending, making it unclear who is responsible for what. Without showback and chargeback functionality to elaborate where the spend is allocated, it’s difficult to make meaningful changes.
Cloud financial accountability enables organizations to identify cost drivers, make informed decisions, and promote a culture of financial responsibility, ultimately leading to significant savings and better resource utilization. Without clear financial accountability and mechanisms like showback and chargeback, organizations struggle to allocate costs accurately, leading to continued inefficient cloud spending.
The impact of Cloudflation on businesses
Cloudflation significantly affects your business by reducing profitability, necessitating innovation and the adoption of a FinOps culture. Here’s how it can impact businesses:
Reduced profitability
When cloud expenses rise, profitability takes a hit. Higher cloud storage costs and other related expenses leave you with less margin — requiring you to allocate more resources to maintain the same level of service. However, that reduces the funds available for other investments.
As businesses face higher costs, they must decide whether to absorb these expenses or pass them on to customers. Either choice can negatively impact your bottom line. Opting to absorb costs will reduce profits directly, while increasing prices may result in lost customers or fewer sales.
Difficulty in cost predictability
Cloud pricing can be complex, involving various factors like compute, storage, data transfer, and API usage. This variability makes it challenging for businesses to predict and manage their expenses accurately. Cloud costs are directly related to usage; you only pay for what you use. As resources scale, predicting costs becomes naturally more difficult.
Recently, some cloud services have seen significant price hikes, such as various Google Cloud Storage SKUs increasing by approximately 25%. Small price hikes can mean huge increases in your cloud bill relative to usage. For startups and small businesses, this may not be significant. However, for larger organizations with hundreds of terabytes of cloud data, these price increases can be massive.
The need for innovation and FinOps culture
Rising cloud costs force businesses to optimize their cloud usage and reduce costs. Establishing a FinOps culture becomes essential, emphasizing cost-effectiveness and efficiency. This involves proactive monitoring and accurate financial management of cloud resources.
By adopting best practices for cloud cost management, businesses can ensure engineers focus on innovation while the FinOps team manages cost visibility and optimization. This shift is crucial to mitigate the financial impact of Cloudflation.
This is where autonomous FinOps tools like ProsperOps can come in handy — taking the manual element out of cloud cost management and freeing up time for your entire team.
Top Strategies for Managing Cloudflation
Managing Cloudflation requires a multi-faceted approach that includes principles from FinOps, effective tools, and innovative optimization techniques. Top strategies for managing cloudflation include:
Adopt FinOps principles and phases
FinOps principles are critical for managing cloud costs efficiently. They help maintain alignment between finance, operations, and engineering teams, ensuring cost control and financial visibility. The result is better operational efficiency, ROI, and accountability.
FinOps has 3 primary phases: inform, optimize, and operate.
- Inform: This phase focuses on gaining visibility into cloud costs and usage through data collection and analysis. It involves using cost monitoring tools and analytics to understand spending patterns and make informed decisions.
- Optimize: This phase is about enhancing cloud efficiency by rightsizing resources, managing workloads, and leveraging discount pricing models. It aims to minimize waste and ensure cost-effective use of cloud services.
- Operate: This phase involves the continuous management and governance of cloud resources. It ensures collaboration across teams, ongoing cost efficiency, and adherence to best practices for cloud operations.
Adapt cloud cost management tools
Cost management tools are essential for monitoring and optimizing cloud costs. They provide real-time insights and detailed analytics on your spending. Tools like AWS Cost Explorer, Azure Cost Management, and Google Cloud’s Cost Management help you track your usage and identify areas for improvement. On the other hand, there are third-party tools like ProsperOps automate rate optimization, and CloudZero offers Cloud Cost Intelligence.
By integrating these tools, you’ll improve your cost optimization and ensure governance policies are adhered to.
Use cost optimization techniques
Cost optimization techniques like right-sizing, using reserved instances, and leveraging discounted pricing options are excellent ways to reduce cloud costs.
- Right-sizing: Right-sizing your instance types means adjusting your cloud resources to match your actual workload requirements at the lowest cost possible, preventing overprovisioning while maintaining performance.
- Auto scaling: This is a cloud computing feature that helps businesses scale their cloud resources automatically based on demand or other predefined criteria. With auto scaling, you can ensure that you always have the right amount of resources available to support your applications’ demand — not more or less — for the best possible performance and cost.
- Cost avoidance: Leveraging long-term discount instruments (like Reserved Instances or committed use discounts) for your cloud services can offer your business lower costs for long standing commitments.
For more such cloud optimization strategies, you can read: 9 FinOps Tips for Optimizing Your Cost.
Automate cost management processes
Implementing automated processes for billing, reporting, and optimization can streamline cost management and improve efficiency. Automated workflows and scripts can enforce governance policies and control costs without constant manual supervision.
For example, ProsperOps automates rate optimization efforts and maximizes cloud ROI from long-term commitments without manual effort from your team. Zero friction means we create no trade-offs, or conflicts with your work. ProsperOps is implemented in only hours and operates silently behind the scenes optimizing the price of whatever cloud resources you consume.
Allocate costs appropriately
Proper cost allocation involves tagging resources and using Showbacks, Chargebacks, and cost allocation reports to assign spending to different departments or projects. Such transparency helps identify which areas are driving costs, enabling better budgeting and financial planning.
Using tags, you can categorize resources, making it easier to track who’s responsible for which costs. Cost allocation ensures each team is accountable for its spending, promoting more responsible usage of cloud services.
Understanding revenue and spend through detailed reports helps your finance teams manage budgets effectively and improves overall cloud cost management.
Reduce the Impact of Rising Cloudflation with ProsperOps
With many businesses relying so heavily on cloud services, Cloudflation continues to pose a challenge, affecting cost predictability and business profitability. While many aspects of Cloudflation are out of a business’s control, there are ways to manage it more effectively to keep expenses in check.
Using FinOps principles and leaning on automation to streamline efficiency and minimize human error are just a few ways to reduce the effects of Cloudflation — but another is using the right tools.
ProsperOps provides cloud savings-as-a-service, featuring a FinOps rate optimization platform that helps you manage your discount instruments — with zero manual oversight required from your team and no friction with your existing FinOps operations.
Our platform runs silently in the background to help maximize the hyperscaler’s native discount rates and place you in the 98th percentile of FinOps teams.
Keep your organization one step ahead of Cloudflation efficiently: Schedule a ProsperOps demo to see how our solutions can work for you.
