As the CXO, you have watched the monthly cloud bills steadily rise. You’ve tried everything to drive them down, but nothing seems to make a difference. You have lingering doubts on the cost effectiveness of your cloud usage, but all you have to measure are two metrics: the quantitative monthly bill, and the qualitative value you derive from the cloud.
Welcome to cloud moneyball.
For those of you who have not read the book or watched the movie, Moneyball is the story of Billy Bean, the Oakland A’s general manager who pioneered a new metrics-driven approach to baseball. The moneyball theory claims that the collective wisdom of baseball insiders for the last century has resulted in a focus on the wrong measures of success. The theory says we should be focusing on statics that create runs, such as on base (OBP) and slugging percentages (SLG) - not secondary metrics, such as batting average (BA), runs batted in (RBI) or stolen bases (SB).
Like baseball in the early 2000s, the cloud suffers from a dearth of the right metrics. We have over-focused on cost metrics, and ignored the real reason we are in the cloud: to drive business value. Below we’ll introduce three metrics CXOs can use to measure how effectively their organizations are using the cloud.
Infrastructure Cost of Goods Sold (ICOGS)
Infrastructure cost of goods sold is the percentage of your revenue expended on cloud infrastructure. This is an essential measurement since it will be a key variable in the margins for your product or service. It is sort of the on base percentage (OBP) of the cloud. The calculation is as follows:
ICOGS = current infrastructure costs / revenue
Acceptable ICOGS percentages will vary from business to business, but will typically range from 20% to 40%.
Infrastructure Utilization (IU)
Infrastructure utilization is a measure of how effectively you are utilizing the infrastructure you have provisioned. This is actually a family of calculations, varying by type of infrastructure (e.g. compute, storage, database). IU is the slugging percentage (SLG) of the cloud. The metric is simple:
IU = utilization of metric / maximum available quantity of a metric
For example, to measure the effectiveness of your utilization of block storage, you calculate your actual usage of the blocks you have provisioned. For example, if you have provisioned 100TB of block storage and are currently utilizing 60TB, your IU is 60%.
The goal of all cloud applications is to utilize as close to 100% of the underlying infrastructure while maintaining expected levels of availability and performance. Good IUs will typically be above 75%. If your IUs are below 60%, it's possible your application may be more cost-effective on physical infrastructure than the cloud.
Cloud Elasticity (CE)
The purpose of CE is to measure the elasticity of cloud costs as your business scales. CE is sort of the cloud equivalent of Value Over a Replacement Player (VORP). The calculation works like this:
CE = (ICOGS at projected 12 month maximum revenue - current ICOGS) / current ICOGs
For example, if my current ICOGs is 30%, and my ICOGs at my projected 12 month maximum revenue is 40%, my CE is 33%. If your infrastructure costs decline relative to revenue as you scale, your CE will be negative; if your costs increase relative to revenue, your CE is positive.
A typical CE will vary based on your business, but will range from -10% to -20%. A positive CE number is a likely sign you have something wrong in your usage of the cloud.
Last Thoughts
For those of us in Boston, moneyball has a special place in our heart, having played a role in breaking our 86 year curse. But as a CXO, cloud moneyball can have a special place in your heart - ensuring you are maximizing your return on investment in the cloud, and allowing you to manage to clear metric-driven goals. So ask your staff to start tracking these metrics, and take control of your monthly bill.
I’m interested in hearing about the metrics you use to manage your cloud. Drop me an email with your metrics and how you use them.
Related Posts: The Risk of Becoming a Cloud Dropout, Pennies in the Cloud