COST01-BP03 Establish cloud budgets and forecasts

Adjust existing organizational budgeting and forecasting processes to be compatible with the highly variable nature of cloud costs and usage. Processes must be dynamic, using trend-based or business driver-based algorithms or a combination of both.

Level of risk exposed if this best practice is not established: High

Implementation guidance

In traditional on-premises IT setups, customers often face the challenge of planning for fixed costs that change only occasionally, typically with the purchase of new IT hardware and services to meet peak demand. In contrast, AWS Cloud adopts a different approach, where customers pay for the resources they use as dictated by their actual IT and business needs. In the cloud environment, demand can fluctuate on a monthly, daily, or even hourly basis.

Using the cloud brings efficiency, speed, and agility, which results in a highly-variable cost and usage pattern. Costs can decrease or sometimes increase in response to greater workload efficiency or the deployment of new workloads and features. As workloads scale to serve an expanding customer base, cloud usage and costs correspondingly rise due to the increased accessibility of resources. This flexibility in cloud services extends to the costs and forecasts, which creates a degree of elasticity.

It's essential to align closely with these shifting business needs and demand drivers, and aim for the most accurate planning possible. Traditional organizational budget processes need to adapt to accommodate this variability.

Consider cost modelling while you forecast the cost for new workloads. Cost modelling creates a baseline understanding of expected cloud costs, which helps you perform total cost of ownership (TCO), return on investment (ROI), and other financial analysis, set targets and expectations with stakeholders, and identify opportunities for cost optimization.

Your organization should understand the cost definitions and accepted groupings. The level of detail at which you forecast can vary based on your organization's structure and internal workflows. Select a granularity that suits your specific requirements and organizational setup. It is important to understand at what level the forecast is performed:

Identify the business drivers that can impact your usage cost, and forecast for each of them separately to calculate expected usage in advance. Some of the drivers might be linked to IT and product teams within the organization. Other business drivers, such as marketing events, promotions, geographic expansions, mergers, and acquisitions, are known by your sales, marketing, and business leaders, and it's important to collaborate and account for all those demand drivers as well.

You can use AWS Cost Explorer for trend-based forecasting in a defined future time range based on your past spend. AWS Cost Explorer's forecasting engine segments your historical data based on charge types (for example, Reserved Instances) and uses a combination of machine learning and rule-based models to predict spend across all charge types individually.

Once you've established your forecast process and built models, you can use AWS Budgets to set custom budgets at a granular level by specifying the time period, recurrence, or amount (fixed or variable) and add filters such as service, AWS Region, and tags. The budget is usually prepared for a single year and remains fixed, which requires strict adherence from everyone involved. In contrast, forecasts are more flexible, which allows for readjustments throughout the year and provides dynamic projections over a period of one, two, or three years. Both budgets and forecasts play a crucial role when you establish financial expectations among various technology and business stakeholders. Accurate forecasts and implementation also provides accountability to stakeholders who are directly responsible for provisioning cost in the first place, and it can also raise their overall cost awareness.

To stay informed on the performance of your existing budgets, you can create and schedule AWS Budgets reports to email you and your stakeholders on a regular cadence. You can also create AWS Budgets alerts based on actual costs, which are reactive in nature, or on forecasted costs, which provides time to implement mitigations against potential cost overruns. You can be alerted when your cost or usage actually exceeds a certain level or if they are forecasted to exceed your budgeted amount.

Adjust existing budget and forecast processes to be more dynamic using trend-based algorithms (with historical costs as inputs) and driver-based algorithms (for example, new product launches, Regional expansion, or new environments for workloads), which are ideal for a dynamic and variable spending environment. Once you've determined your trend-based forecast using Cost Explorer or any other tools, use the AWS Pricing Calculator to estimate your AWS use case and future costs based on the expected usage (traffic, requests-per-second, or required Amazon EC2 instances).

Track the accuracy of that forecast, as budgets should be set based on these forecast calculations and estimations. Monitor the accuracy and effectiveness of the integrated cloud cost forecasts. Regularly review actual spend compared to your forecast, and adjust as needed to improve forecast precision. Track forecast variance, and perform root cause analysis on reported variance to act and adjust forecasts.

As mentioned in the COST01-BP02 Establish a partnership between finance and technology, it is important to foster a partnership and cadence between IT, finance, and other stakeholders to verify that they are all using the same tools or processes for consistency. In cases where budgets may need to change, increase cadence touch points to react to those changes more quickly.

Implementation steps

Resources

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