Editor's Note:This article is part of our 2021 industry trends series. For the full article, visit ourTrends Topic Page。

Many chief financial officers viewed cloud computing as a key tool for responding to the COVID-19 pandemic—it helped businesses cut fixed costs, shift to remote work, and adapt to a surge in online demand. However, as finance executives review their cloud spending, they may find they have "bought too much."

According toFlexera's estimates, up to 35% of a typical enterprise's cloud budget is wasted. Small and medium-sized businesses are especially prone to overspending. Randy Armknecht, Managing Director and Global Cloud Practice Leader at Protiviti, noted that many SMBs had been slow to migrate to the cloud before the pandemic, but rushed to do so after it broke out without closely monitoring costs.

"The situation then was, 'How do we serve our customers, and how do we keep operating without going out of business?'" he said. Now, these companies "have put 2021 on their agenda and are looking back, saying: 'We handled the emergency, now let's see if we can tighten spending.'"

Part of the reason spending has gotten out of control is that cloud adoption has reshaped companies' IT cost structures. In the past, technology spending was a capital expenditure on-premises, requiring multiple approvals and allocation by finance executives; today, it often becomes an operating expense generated by mid-level engineers and developers.

Employees can quickly launch new services or innovation projects in the cloud. While this ease of use can spark creativity and experimentation across the company, it can also "blow a hole" in the CFO's budget.

Cloud costs can escalate rapidly, said Scott Grossman, CFO of Ensono, a hybrid IT services provider. Before hiring Ensono to manage their public cloud services, some clients "went from spending $100,000 a month to $200,000 or $500,000," he said. "Waste is generated in large part because it's so easy."

Cloud computing may be one of the most impactful "new new things" in recent decades, but the business challenge it presents is as old as the CFO role itself—how to foster innovation at the grassroots of the company without relinquishing the central financial control that is vital to long-term survival.

"The further decision-making gets from the center, the more autonomy there is, and the more likely you are to lose control over spending," said Brendan Dolan, CFO of CloudCheckr, a cloud cost management and governance company. "You run the risk of runaway spending." (CloudCheckr claims it can help businesses cut cloud costs by 30%.)

Many companies view loose budget management as the top issue when using the cloud. Before the pandemic, 73% of businesses said cost savings was their top cloud initiative, ranking above migrating workloads from on-premises computers,Flexera data shows。

Without stronger budget discipline, waste could grow further as cloud spending surges. According toGartner's forecasts, global end-user spending on public cloud services will rise from $257.5 billion last year to $362.2 billion in 2022, an increase of 41%. Gartner also said that by 2024, cloud spending will account for 14.2% of total IT spending, up from 9.1% in 2020.

Companies waste cloud resources in various ways, including storing useless or outdated data, overestimating needed capacity, or paying for services that sit idle for long periods.

A Better Path

CFOs and consultants have distilled best practices and organizational structures that help finance executives ensure every dollar of cloud spending delivers value.

Put Customer Service, Business Strategy, and Revenue Growth at the Core of Cloud Budgets

Rather than pursuing broad, category-based cost cuts, finance executives should work with engineers and other stakeholders to tag each category of cloud spending according to how it serves customers and drives revenue.

"More of my clients have embraced tagging in the cloud," Armknecht said. "They can now see how each cloud system ties to a revenue stream. They can analyze and say: 'Look, every system involved in this revenue stream costs X, and our revenue is Y.'"

With this granular approach, CFOs can gain clear, real-time visibility into cloud spending and make quick, informed spending decisions, Dolan said.

"This is real-time data; you don't have to wait until the end of the month for a bill from Amazon, Microsoft, or Google to understand spending," he said. "You're optimizing continuously."

Finance executives with a detailed understanding of how cloud spending generates revenue will more quickly view a jump in cloud costs as a signal of opportunity from growing customer demand, rather than a sign of inefficiency or waste. They can budget with greater confidence and calibrate future cloud usage more accurately.

"The better the tagging, the more accurate the forecasting," Armknecht said.

Set Up a Cloud Center of Excellence

Corporate structures and complex billing methods can hinder a full understanding of spending. Cloud services are often billed separately by business unit. Additionally, many companies use multiple cloud providers, each with different pricing models and discounts.

By forming a core team of software developers, DevOps engineers, and other stakeholders, CFOs can identify potential savings, build cross-departmental consensus, and refine tools for real-time monitoring of spending and potential savings.

"Engineers want to build cool things, and if they lack regular communication with finance executives, they may not understand the impact of their spending," Grossman said.

In many cases, the center of excellence meets monthly, oversees cross-functional working groups that collaborate in real time, and reports to the executive committee at least quarterly, Armknecht said.

"A cloud center of excellence is a structure that works well across a wide range of companies," he said.

Before the pandemic, 69% of organizations relied on a central cloud team,Flexera data shows。

Grasp Cloud Concepts

Given the growing reliance on cloud computing, finance executives should understand the structure and language of the technology, as well as its advantages and risks.

"I don't think you have to match engineers and DevOps people exactly, but you do need to understand the terminology driving purchasing decisions," Dolan said. "Do your own research, training, and continuous learning."

Encourage Software Developers, DevOps Engineers, and Other Cloud Users to Find Waste

Rather than taking punitive cost-cutting measures, CFOs should encourage employees to identify potential savings. Finance executives can make progress by establishing incentives for frontline engineering and innovation staff to eliminate waste, several CFOs said.

Dolan said he challenges his DevOps lead: "How are you going to reduce my costs by 15%?"

Finance executives believe that, with the right approach, CFOs can view cloud computing as a tool for understanding and optimizing spending, rather than a threat to the budget.

"The cloud offers unprecedented granular visibility into technology spending," Armknecht said.

Note: This article has been updated to reflect Ensono's clarification regarding the timing of customer cost increases.