For SaaS companies, the cloud plays a significant role in product creation and delivery. As one of the top drivers of COGS, cloud costs have a major impact on key financial metrics and can dramatically impact revenue and valuation.
However, that creates a scenario ripe for conflict: Engineers make important decisions about features and functionality without clear insight into how those decisions will impact spending—and finance continuously gets surprised by seemingly exorbitant cloud bills.
Setting a cloud budget is the obvious solution, but oftentimes budgeting is perceived as restrictive, or a drag on production. It’s true that SaaS budgeting for cloud spend in its current form is rarely useful. But it doesn’t have to be that way.
If you’ve been struggling to keep your cloud spend under control, it might be time to take a hard look at your company’s budgeting practices and redesign the process from the ground up.
We believe that, when done right, budgets can and should be used to track progress, enable proactivity, and hold people accountable, ultimately helping teams go faster while they control cost.
How To Make SaaS Budgeting For Cloud Spend More Useful
Before we dive into the solutions, let’s shine some light on why traditional budgeting falls short for most SaaS companies.
A traditional SaaS budget doesn’t inspire any suggestions for future improvement
Most companies have a dynamic where the finance department will set a budget for the year, expecting the engineering team to adhere to that number. At the end of the month, when engineering has blown past the set number and may or may not be able to explain why, both teams are distressed and no one knows how to fix the issue for next year.
In this way, traditional budgeting is very retroactive. The company finds out how much it has spent only after the money is already gone. Worse yet, it’s challenging to work toward future improvements, because it’s unclear what exactly is driving the costs.
This situation leaves most finance departments to throw up their hands and say, “Fine, just try harder to stay under budget this year.” Engineers, faced with the impossible task of cutting costs without any context of which costs should be cut, are often doomed to fail before they even begin.
It’s almost never helpful to set a single budget number and attempt to stay under it.
Without any insight into which items contribute the most toward cost versus revenue, finance and engineering leaders often pick an arbitrary number out of thin air that seems, at the time, to make sense. Attempting to enforce that arbitrary number is a well-meaning but heavy-handed approach that causes more problems than solutions.
There is a better way to keep track of your spend
The key lies with unit cost economics. Instead of trying year after year to accurately predict total costs ahead of time, it’s much more helpful to break those costs down into manageable pieces. Rather than saying you’re going to spend $X on cloud costs as a whole, start by allocating spend to different products and features.
For example:
- How much is reasonable to spend on research?
- What is the cost per customer for a newly released feature?
- How much should the team be spending on a particular product launch?
- What about supplemental services and individual transactions, such as customer support and messaging?
Once you have these ballpark figures, it’s easier to partner with engineering to come up with an estimate to see how much these separate items are likely to cost.
The trick is to ensure that every engineer on the team has access to these metrics and can see how their development decisions impact each dimension. When engineers have real-time visibility into the relevant costs associated with their choices, the game changes.
If a problem arises — such as a trend indicating they’re spending too much toward a particular goal — this insight can encourage productive conversations.
Engineering can sit down with finance and discuss whether the expected results of continuing on that course are beneficial enough to warrant going over budget, or if there should be a change in strategy.
Breaking the total budget down into itemized buckets and proactively monitoring those dimensions provides a continuous feedback loop that keeps both departments aligned and on track toward a common goal.
Additionally, tracking these metrics as your business is growing helps you understand how that growth affects your costs over time.
That worst-case scenario of blowing the total budget number out of the water and finding out retroactively that you’ve spent too much becomes a thing of the past.
A cloud budget doesn’t have to be a roadblock to success
Instead, we believe that in rethinking your budgeting strategy, you’re paving the way toward greater success. After all, a well-designed budget can provide a way to track progress, keep all departments on the same page, and smooth out communication breakdowns between finance and engineering.
Drives Cost Awareness — And Keep Engineering And Finance On Track
At CloudZero, we help companies break through the barriers of traditional budgets and gain true intelligence into how much money is being spent, where, and why that spend is necessary or not.
Only after you take a deeper look into the context and circumstances behind your company’s spending habits can you start to recognize the big picture and understand how to take meaningful action.
That’s why we created CloudZero Budgets to provide your engineering team with real-time updates on how they’re tracking against each item on the budget. Your team will be able to tell right away if spend is climbing too high in a particular category. This proactive tracking of meaningful metrics provides insight that encourages productive conversations about how to improve, helps your team make more efficient decisions, and ultimately leads to better outcomes for your business.
CloudZero Budgets builds on top of Dimensions, CloudZero’s proprietary code-driven cost allocation method. With Dimensions, customers can organize spend according to business-specific metrics, then set a budget for any custom grouping. This gives teams unlimited budgetary flexibility.
to discover how CloudZero can help your engineering and finance teams create a shared language around cost — and set a realistic budget that engineering can actually stick to.
The Cloud Cost Playbook
The step-by-step guide to cost maturity
