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The questions your Finance team will always ask about RIs— and what they REALLY need to know

By Toban Zolman on February 13, 2014
PLEASE NOTE: As of December 2nd 2014, there has been a major change to the Reserved Instance model. As a result, some of the information in this blog post may be incomplete. We invite you to read our Reserved Instances 101 for up-to-date information.

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If you’ve ever tried justifying an RI purchase to your Finance team, you know that you need to do some translating. While it’s obvious to folks in IT how Reserved Instances would save money, their merits aren’t so apparent to the uninitiated— especially when they’re staring at a spreadsheet. You’ll need Finance’s approval on this, just like you would have with other hardware purchases in the past. In order to save money on AWS, you’ll need to be able to answer their questions.

Question I: “What will this cost us?”

When it comes to cloud costs, everyone has the same goal: saving money wherever possible, without cutting corners. Therefore it’s understandable that when Finance sees the upfront cost of a Reserved Instance, they’ll be wary; “You want to spend more money on the Cloud?”

Explain to your Finance team that Reserved Instances work by charging an upfront cost in addition to an hourly rate— a rate that is much lower than that of On-Demand instances. By combining the initial cost of the Reservations with the estimated cost of its hourly usage, you can compare that cost to the On-Demand cost— and, if you’ve chosen the right RIs, find that your cloud bill will ultimately end up leaner than it would be otherwise.

As such, the question of how much an RI purchase will cost ultimately comes down to several factors.

“How much money am I spending off the bat?”

Unlike On-Demand instances, Reserved Instances have an upfront cost. This means that you will be spending more money initially than you would with On-Demand instances.

That said, the hourly rate for a Reserved Instance is considerably lower to that of an On-Demand instance. Generating savings with Reserved Instances comes down to prolonged usage of the reservation, in order to take advantage of that lowered hourly rate.

“What will cash flow look like over the next X months?”

In order to break even and see a return on a Reserved Instance investment, you need simply use the reservation a certain percentage of time or more over the duration of the Reservation. Using reservations correctly can save you between 30%-60% compared to On-Demand, depending on the RI type— which can change the entire economics of your infrastructure.

It’s important to note that a three-year RI may have a break even point only a month after a one-year RI; even if you’re not sure that you’ll use it for the full three years, you can enjoy a much greater hourly discount using a three-year RI than a one-year. As you can see in the table below for a m2.4xlarge us-east running Linux, the savings from a one-year RI surpass those of a three-year RI long before the three-year mark:

Screen shot 2014-02-12 at 1.26.05 PM

Once you’ve broken even on your reservation purchase, the rest is simple: the more that the instance is used, the greater your ROI.

“If we don’t do this, then what’s the difference?”

You can predict the precise savings that Reserved Instances will generate by comparing the cost of the Reserved Instances— both the fixed upfront cost, and the hourly rate according to usage— to what the hourly On-Demand rates would cost. If you’ve picked the right Reserved Instances, you should find that the overall Reserved Instance cost over its duration (one or three years) is substantially lower than that of On-Demand.

Question 2: “How do we know these are the right purchases to make?”

Answering this question is incredibly easy with Cloudability’s Reserved Instance Planner. The planner calculates which RIs would best suit your infrastructure for maximum savings based on historical usage, then generates each of these data points instantly, all on the same page.

The Planner’s reservation recommendations are calculated with precision according to your hourly historical usage. Not only does it predict which Instances are the best candidates for each Reservation type, but it accounts for your hourly usage patterns, ensuring that levels of usage will persist for Instances which qualify for Reservations.

Of course, there is always a human component. Before making a big purchase, it’s wise to talk to folks at your company to see why they’re using different instances; for something like a short-lived project, an RI is likely not a wise idea. However, an instance being used to drive the app itself is a much more viable RI candidate.

Demonstrate ROI

With these precisely calculated numbers in front of you, articulating the merits of Reserved Instances to your CFO will be a simple task.

Whether your Finance folks are already believers in Reserved Instances or you’re in need of some data to get them on board, log in or start a free trial of Cloudability Pro now to see where RIs can help you save on your cloud costs.

Being in the know feels great