Author(s): Venkata Sasidhar (Sasi) Kanumuri
Organizations may greatly benefit from utilizing shared services in cloud-based settings, including increased operational effectiveness and cost savings. Nevertheless, efficiently allocating the costs related to these shared services can take time and effort. This article strives to navigate the complex world of cloud resource management alongside asserting the significance of understanding the notion of Shared Services Cost Allocation, or SSCA. It examines the many benefits of implementing a clear SSCA model, highlighting how it may promote better cost transparency, increase team accountability, and enable data-driven decision-making throughout the company. This article also explores other approaches to cost allocation, including equal split, proportionate allocation based on utilization, and proportional allocation based on other factors, outlining the benefits and drawbacks of each in different situations. It also highlights how crucial cooperation is between various stakeholders, such as finance, IT, and individual teams, in creating and sustaining an effective and long-lasting SSCA model. The paper highlights the critical role that efficient SSCA plays in optimizing cloud service ROI and advancing businesses toward their strategic objectives.
Although the cloud has many business advantages, efficiently managing costs can take time and effort. This is particularly valid for shared services and resources several departments or teams use. Effective cloud resource management requires fair and transparent allocation of the cost of these shared services. Within cloud computing, shared services are resources several teams or departments use in a company. These services, like databases, SaaS applications, and Kubernetes clusters, offer essential features that facilitate a range of cloud-based operations. Although shared services are very advantageous in cost-effectiveness and convenience, their cost allocation presents unique challenges.
Shared services cost allocation (SSCA) refers to fairly and explicitly splitting up costs related to shared services among the various departments and teams that use them. It is a key component of any FinOps practice, enabling cost transparency, accountability, and equitable cost allocation. The following lists the benefits of SSCA for efficient cloud cost management, allowing organizations to:
Therefore, implementing a well-defined SSCA model is essential for maximizing the value of cloud services and ensuring efficient resource management within an organization.
Several teams or departments within shared services consume and share many cloud-based resources. Here are a few typical instances:
It is important to understand that not all shared service costs can be directly attributed to specific teams through tagging.
Tagging involves assigning labels or identifiers to cloud resources to track ownership and usage. This allows for granular cost allocation based on specific teams or projects utilizing the resource. However, shared service costs, such as support fees, taxes, or committed use discounts, are not directly associated with individual resources and cannot be easily tagged. These require alternative allocation strategies, such as proportional allocation based on overall cloud spending or other relevant metrics.
Distinguishing between taggable and non-taggable shared service costs is crucial for establishing a comprehensive and accurate SSCA model.
Developing an effective shared services cost allocation (SSCA) model requires careful consideration of various factors. Here are some key steps involved:
This first step requires you to thoroughly grasp how much your company spends on cloud services. This involves thoroughly analyzing your cloud bill to identify the primary cost drivers associated with shared services. Common cost drivers include:
By analyzing your cloud bill, you can gain valuable insights into the overall breakdown of your cloud expenses and identify the specific shared services that contribute significantly to the cost.
After determining your shared cloud expenses, you must select the best cost allocation strategy. Numerous approaches are available, each with unique benefits and drawbacks:
The choice of cost allocation methodology depends on your specific needs and the nature of your shared services. For instance, proportional allocation based on usage is ideal for services like databases where specific teams can be identified through tagging. However, proportional allocation based on overall cloud spending may be more appropriate for shared costs like support fees.
It is crucial to emphasize the importance of a proper tagging strategy for accurate proportional allocation. Implementing a well-defined and standardized tagging system ensures consistent and reliable cost allocation based on actual resource usage.
Clear communication with all stakeholders is vital throughout the SSCA process. This includes:
An effective SSCA model is not static. Resource consumption patterns may alter, and new services may be offered as your organization's needs change. Monitoring and modifying your SSCA model regularly is critical to ensure it stays accurate and reflects the realities of modern business. This may involve:
By continuously monitoring and modifying your SSCA model, you can ensure it accurately reflects your evolving cloud environment and provides valuable insights for informed decision-making.
Shared service costs can be broadly categorized into taggable and non-taggable. While tagging enables us to directly attribute costs to specific teams or projects for certain resources, other shared costs present unique allocation challenges. Here, we explore strategies for handling these distinct scenarios:
The Cloud Service Provider (CSP) typically applies these costs at the account level, meaning they are not inherently tied to specific resources or teams. Allocating these costs fairly requires alternative strategies due to their non-resource-specific nature.
Even Split Allocation: The even split method is a straightforward way to allocate shared service costs. It involves dividing the total cost equally among all departments or teams, regardless of their usage.
Proportional Split Method: This approach distributes shared costs based on each team's overall cloud spending percentage. The underlying assumption is that teams utilizing more cloud resources proportionally contribute more to these shared expenses.
Here's the formula for a proportional split: Cost Allocation per Team = Shared Cost * (Team's Cloud Spend / Total Cloud Spend)
Shared Support Fee: $1,000 Team A's Cloud Spend: $5,000 Team B's Cloud Spend: $3,000
CostAllocation forTeamA: $1,000 * (5,000 / 8,000) = $625
CostAllocation forTeam B: $1,000 * (3,000 / 8,000) = $375
Chargeback models for Relational Database Services (RDS) and Kubernetes (K8s) can be intricate due to each team's varying workloads. These services often serve multiple teams, making it crucial to identify relevant metrics to attribute their costs accurately.
Since different workloads prioritize different resource types, more than a single metric might be required for fair cost allocation. Therefore, a weighted combination of relevant metrics is often employed to distribute resource costs proportionally. This involves assigning weights to each metric based on its relative importance in reflecting a team's resource usage.
Here's a simplified example formula for combining metrics: Cost Allocation per Team = Shared Cost * ((Metric1_Weight * Metric1_Value) + (Metric2_Weight * Metric2_Value) + ...) Example:
Shared K8s Cost: $15,000
Average CPU utilization: 50% Average Memory utilization: 30% Team B:
Average CPU utilization: 30% Average Memory utilization: 70%
Assuming equal weights (0.5) for both CPU and memory utilization:
Cost Allocation for Team A: $15,000 * ((0.5 * 0.5) + (0.5 * 0.3)) = $6,750
Cost Allocation for Team B: $15,000 * ((0.5 * 0.3) + (0.5 * 0.7)) = $8,250
It is crucial to remember that these are merely simplified examples and that the weights assigned to the various metrics may change based on the particulars of each task and the business's expectations. Consulting with cloud cost management tools and cloud service provider documentation can provide further guidance on cost allocation calculations specific to your platform and services.
BenefitsofEffectiveSharedServicesCost Allocation (SSCA) Implementing a well-defined SSCA model offers many benefits for organizations leveraging cloud services. Here, we explore some of the key advantages:
A well-defined SSCA model provides a window into the often- opaque world of cloud billing, providing individual departments with a clear understanding of their cost drivers. By identifying their proportionate share of shared service costs, departments gain valuable insights into how their activities contribute to overall cloud expenses. This transparency fosters:
Effective SSCA fosters a sense of accountability within organizations. By holding departments responsible for their share of shared service costs, the model incentivizes:
This shift in mindset can significantly impact overall cloud spending and optimize resource allocation across the organization.
Strong SSCA models provide leaders with the facts and insights needed to make well-informed decisions about:
Building and maintaining an effective SSCA model often necessitates collaboration between various stakeholders within an organization, including:
This collaborative approach fosters transparency, trust, and a shared understanding of cost ownership, ultimately leading to better cooperation and alignment between departments in managing cloud resources effectively.
Effective SSCA directly contributes to a higher return on investment (ROI) for cloud services by promoting:
Figure 1: Benefits of Effective Shared Services Cost Allocation
While cloud-based enterprises can benefit greatly from shared services, allocating their costs can be difficult. A clear Shared Services Cost Allocation (SSCA) model should be implemented to help you navigate this complex environment. Through promoting openness, responsibility, and well-informed choices, efficient SSCA enables institutions to:
Ultimately, a robust SSCA model unlocks the true potential of shared services, maximizing the value of cloud adoption and propelling your organization toward its strategic goals. Clear communication, collaboration, and continuous adaptation are crucial to maintaining an effective SSCA model that evolves alongside your organization's needs [1-5].
