What is Cloud Cost Allocation?

A 2023 survey found that 82% of businesses thought cloud spend was their biggest challenge.

Implementing the right cloud cost allocation strategy can fix this. 

‍

In this blog, we cover cloud cost allocation, its benefits and challenges, and associated best practices and strategies.

What is cloud cost allocation?

Cloud cost allocation refers to analysing and distributing cloud spend between departments, products and business units.

‍

It requires cloud users to actively compute, monitor, and report cloud resources. It also provides insights into cloud spend and usage.

‍

Furthermore, cloud cost allocation promotes positive business behaviour. Teams can develop a deeper sense of cost-awareness and accountability.

How does cloud cost allocation work?

Assigning the costs of cloud resources to various departments involves using tags. These tags are metadata with details such as the department or business unit number.

‍

Businesses add these to their cloud resources, which help them track usage and appropriately allocate costs.

‍

Each cloud provider has its own tagging system.

Cloud cost allocation tagging example: AWS

Amazon Web Services (AWS) is Amazon’s cloud service. It calls its tags cost allocation tags. They are used for all of AWS’s resources. They enable the creation of detailed cost usage reports, such as chargeback or showback reports.

‍

There are two types of cost allocation tags that assist in categorising and tracking AWS costs for businesses:

‍

• AWS generated tags are automatically created and accessible in the Billing Console. The 'createdBy' tags track the creator of a resource and do not contribute to the total quota.

‍

• User defined tags can be created, modified, and applied to AWS resources. They appear in the AWS console after enabling Cost Explorer, Budgets, and AWS Cost and Usage Reports.

‍

These tags contribute to the total quota and are not automatically applied to pre-existing resources.

‍

Cost Explorer doesn't fill spend data for tagged resources from before they were tagged. Adding tags early improves cost allocation visibility sooner for greater accuracy.

Challenges of cost allocation

1. A complex process

An effective cloud cost allocation strategy relies on the precision of organisation’s tagging policy and structure. 

‍

It can be time-consuming to establish a tagging policy and apply the tags, but it can also pay off. For maximum effectiveness, tags should be added to resources during creation. 

‍

Incorrectly placed tags lower the quality of cost allocation reports.

2. Unclear resource allocation to departments 

Clear ownership policies for tags must be allocated to the right departments. The process for doing this needs to be in place early on.

3. Resources spent on reports

Analysing long CSV files from cost allocation reports takes up resources. Summarising the rows of data is nearly impossible without a third-party reporting tool or hours of manual filtering.

Benefits of cloud cost allocation

1.Reporting insights

Reports provide visibility into cloud spending. They can, for example, show what top-spending departments are and indicate where cost adjustments need to be made. 

2. Cost transparency

Analysing each business unit, department, or project, brings clarity on cloud costs. It reveals the true expenses of running applications and services.

3. Reduced cloud costs

Understanding the spending for each department, project, resource, and business unit helps optimise budgets with cloud requirements. On top of this, it also reduces cloud waste more generally, which has a positive environmental impact.

4. Informed decisions

Cost allocation reports help companies refine their cloud investment strategies. 

‍

Organisations are empowered to make informed decisions about where to allocate resources now and in the future.

Cloud cost allocation best practices

Accountability and cost awareness

Building a shared understanding and responsibility for cloud costs is crucial. Team members should set cost objective targets and have them periodically reviewed.

Team collaboration

Achieving optimal tagging results begins with comprehensive cooperation and allocation amongst various departments with diverse requirements.

‍

For instance, the IT security team might use tags for audits. And the finance team might use them to identify cloud spend that can be linked to tax credits.

‍

This collaboration can be used to motivate and socialise different departments with one another. This helps build a shared sense of purpose and company culture.

Using multiple accounts

Cloud resources should be linked to key business metrics. To achieve this, it helps to first implement account segmentation. This can be done by creating separate accounts for products, environments, or teams.

‍

This enhances visibility into cloud costs and allows a pinpointing of contributions to total cloud spend by each environment, product, team, or feature.

Conclusion

Cloud cost allocation is a key component part of cloud strategy. It helps them understand their cloud spend and usage, which informs decisions about budget and future strategy.

‍

It can also be used to promote accountability and cooperation within organisations.

‍

They also help improve efficiency. Organisations can reallocate their resources to areas with higher demand to further reduce cloud costs.

‍

Challenges around implementing cloud cost allocation include establishing precise tagging policies and resource allocation ownership. However, the benefits, such as insights, cost transparency, reduced spending, and informed decisions, make it more than worthwhile.

‍

To succeed, organisations should foster a culture of cost awareness, encourage team collaboration, and consider using multiple accounts