Cost allocation creates accountability for your cloud spend. It encourages more intelligent and informed decision-making. However, your ability to effectively allocate costs is directly related to the quality of your tag hygiene. Tagging enables you to reduce cloud spend by executing strategies such as rightsizing resources, shutting down idle instances, and identifying orphaned volumes. But robust tagging also allows you to leverage your tag environment to realize more sophisticated cost benefits. Cost allocations in the form of show backs and chargebacks open a whole new spectrum of visibility, reporting, forecasting, budgeting, and savings.
Cost Allocation Rightly Understood
Cost allocation is the process of tagging your cloud resources in such a way that their cost can be assigned to the responsible unit, whether it be a person, cost center, department, product, team or otherwise. In doing so you can quickly determine how the cost was incurred and by whom. An up-to-date tagging strategy provides this data in real-time. The FinOps model seeks to push spend accountability to the edges of the organization that are responsible for creating the expense. Cost allocation is a significant tool for managing cloud costs.
Show backs are a model of cost allocation that serve to inform the organization’s cloud consumers what their activity or product is costing. It creates accountability by bringing individual or team performance into the light. This visibility encourages compliance with spend policies. A desire to perform better is fostered among the various teams as few want to be the weak link. On occasion show back is colloquially referred to as “shame back.” It is common for an organization to begin with a show back model and transition to a chargeback model.
A chargeback model of cost allocation literally charges the budget of the team responsible for the resource expense. Again, thorough, and accurate tagging is necessary to arrive at the correct costs. Chargebacks foster the financial accountability that is promoted by FinOps. Direct financial responsibility has enormous impact on a team’s behavior toward cost efficiencies. With comprehensive tagging an organization can achieve financial awareness and accountability without sacrificing the innovation and agility cloud computing confers. The ability to accurately forecast future expenses and create budgets based on this newfound awareness is a strong byproduct of chargebacks.
Not All Costs Are the Same
Several types of costs are incurred in the cloud and their differences must be considered to thoroughly and accurately allocate all of them. Many of the costs present unique tagging challenges that must be addressed in your tag strategy.
Direct costs. The most common method of cost allocation is to simply charge the cost of the resource to the business unit that is responsible for it. For example, a development team that spins up an EC2 instance for a particular project is charged the entire cost of the resource. Consistently tagging every cloud resource is the key to capturing every cost and allocating them appropriately.
Indirect costs. The next level of challenge is to allocate costs not directly associated with a business unit or cost center. One could characterize these as the cost of doing business in the cloud. These costs might include costs deemed untaggable. Egress or transfer fees, support plan costs, and subscription pricing, are charges levied in the cloud that do not easily lend themselves to standard tagging practices. In addition, commitment-based discounts and other reductions in cost also need to be allocated to obtain an accurate picture of the true cost of a product, service, team, or department. The ability to assign virtual tags to these expenses and discounts is a high-level tagging option that exceeds the capabilities of nearly every tagging solution currently available in the market.
Shared costs. Comprehensive cost allocation is further challenged by the creation of cloud resources that are shared by one or more business units. Multiple business units will share the same S3 storage bucket or the same Kubernetes clusters. The ability to split and then allocate the cost of these resources in the correct proportions hinges on the sophistication of the company’s tagging capabilities. At this level, a robust tagging practice is essential.
Adjustable costs. From an accounting perspective, even after correctly allocating cloud costs to the appropriate business unit, the ability to adjust these costs to mirror generally accepted accounting principles is important. The business or finance departments may desire adjustments to an allocation to align with their tax and accounting needs, such as amortizing an expense. Tagging resources for business adjustments at the time of deployment facilitates this high level of allocation.
By properly tagging the different types of resources and then correctly allocating their charges across the appropriate cost centers, a business has accurate real time data for management of its cloud costs.
Tagging makes the Difference
Properly tagging your cloud resources is imperative when it comes to realizing the benefits that mature cost allocations confer. These benefits are far reaching in scope and significantly advance savings opportunities.
You have a complete picture of where cloud spend is coming from and who should pay for it.
Because you are more accurately informed of the true cost of a product or service you can charge customers the right price.
Comprehensive tagging opens the door to real time granular reporting with respect to cost allocation issues, providing the opportunity for accurate forecasting and budgeting.
The accurate real time data positively impacts your business strategy and objectives as you obtain a clearer picture of what works and what doesn’t.
Chargeback and show back models bring more people into the process of actively pursuing cost savings measures, embracing a collaborative approach to reducing cloud spend.
Cost allocation is a major component of FinOps and cloud cost management strategies. It requires mature tagging practices that are difficult to achieve without the right solutions. Tag Manager is a powerful SaaS solution offered by CloudSaver that enables organizations to optimize their tag environment. Its comprehensive features refine your tagging practices to create excellent tag hygiene capable of performing the sophisticated tagging practices necessary for robust cost allocation.
Learn more about Tag Manager and how it can benefit your organization.