Resource vs. Spend-Based Commitments: Which is Right for Your Business?

Yes, I know. I’m putting the cart before the horse by discussing the trade-offs between resource and spend-based commitments without first having laid the foundation: How can a company commit to long-term usage or spend without first developing a baseline understanding of their cloud usage and growth? Fair point. Commitments are a tool in the FinOps toolbox and not intended to be used independently but as part of a broader, company-wide strategy to extract the maximum value out of the cloud. Companies must first drive visibility through appropriate resource allocation, leverage that visibility to gain a better understanding of fluctuations in cloud usage, and develop a clear strategy for managing growth. Because I set out to write a short blog post and not a New York Times best-selling novel, let’s assume you’ve already done the heavy lifting.

Now that we got that out of the way, what are commitments anyway? Commitments are essentially agreements for future usage of specified resources or spend in return for discounted pricing. Depending on the CSP (Cloud Service Provider) you’re working with and the resource type, you’ll hear these agreements referred to as commitments, reservations, or even slots. Just know that these are all effectively the same thing, agreeing to future usage and/or spend for a specified resource over a specified period.

Why do CSPs offer discounts in return for commitments? Cloud service providers invest a lot of money to offer hosted services. Just like any business, these CSPs need to forecast future demand to ensure they have the appropriate infrastructure in place. Cloud commitments allow the CSP to ensure a planned level of future demand. In return for this predictability, CSPs offer additional discounts off list price. These discounts can range from ~30%-50%+ depending on range of factors including provider, resource type, duration (eg. 1 vs. 3 year), and resource or spend-based commitment type. The more predictability, the higher the discount, the greater the savings opportunity.

Resource vs. Spend-based commitments, what's the difference?

Resource-Based Commitments

Resource-based commitments entail identifying a specific amount of computing resources, such as virtual machines (VMs) or storage, over a defined period, machine type, and in a specific region. Resource-based commitments offer the greatest amount of predictability to the CSP and therefore typically garner the highest discount rates.

Advantages:

1. Cost Savings: By committing to a certain level of usage upfront, businesses can secure discounted rates, potentially leading to significant cost savings over time.
2. Predictability: Resource-based commitments offer predictability in pricing, making budgeting and financial planning more manageable.
3. Guaranteed Availability: Reserved resources ensure availability during peak demand periods, preventing resource shortages or performance degradation. This is particularly important when considering production vs. development resources.

Trade-Offs:

1. Inflexibility: Once committed, it might be challenging to adjust resource allocations to align with evolving business needs. Should engineering decide to use a new generation of compute resources or change regions, you may be stuck with unused resources that cannot be easily reallocated or refunded.
2. Upfront Investment: Businesses need to invest upfront capital to procure resource commitments, which may not be feasible for all organizations, especially startups or those with fluctuating workloads.
3. Risk of Overcommitment: Overestimating resource requirements can lead to underutilization and wasted expenditure.

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Spend-Based Commitments

Spend-based commitments, on the other hand, offer discounts based on the total amount spent on services within a specific timeframe. While spend-based commitments offer CSPs predictability of a general resource, ie. Compute, they are usually applied at the billing account level and do not specify a region or machine type. Because of this, the discounts available are usually slightly less than that of a resource-based commitment.

Advantages:

1. Flexibility: Spend-based commitments offer flexibility in resource utilization, allowing businesses to scale resources up or down based on demand without penalties, typically across regions or machine-type families.
2. No Upfront Costs: Unlike some resource-based commitments, spend-based models typically do not require upfront investments, making them more accessible to organizations with limited capital.
3. Pay-As-You-Go: Businesses pay only for the resources consumed, enabling cost optimization and efficient resource utilization.

Trade-Offs:

1. Less Predictability: Unlike resource-based commitments, spend-based models may result in fluctuating costs, making it challenging to predict expenses accurately. Resource-based models are billed consistently regardless of the actual usage.
2. No Guarantee of Availability: Without reserved resources, there's a risk of resource contention during peak periods, potentially affecting performance and reliability.
3. Potential Overspending: Without careful monitoring and management, businesses may inadvertently exceed their budget limits, leading to unexpected costs.

I’ve got the basics, but which approach is right for me? Each approach presents distinct advantages and trade-offs. The decision between resource-based and spend-based commitments ultimately depends on the specific service requirements, budget constraints, and growth projections of each organization. While resource-based commitments offer predictability and potentially deeper cost savings, they may lack the flexibility needed to adapt to changes in the business. On the other hand, spend-based commitments trade additional flexibility for slightly lower discounts and fewer assurances when it comes to resource availability. ?

Truthfully, there is no right answer when it comes to the question Resource vs. Spend-based: Which is right for me? Both resource and spend-based commitments are simply tools in an organization’s FinOps toolbox. A worthwhile strategy might be to employ a mix of resource and spend-based commitments for stable workloads while supplementing with on-demand or spot options for more variable or one-time, development related usage. Of course, these are very individualized decisions and will vary greatly from business to business depending on their underlying cloud growth, usage patterns, and strategic goals. The first step for a cloud-based organization is to develop a deep understanding of their business, underlying cloud usage, and their strategic goals – only then will they be able to fully maximize their savings opportunity and maintain the appropriate flexibility to operate in an ever-changing cloud world.