When evaluating the value of any business, one of the most important factors is the cost of goods sold (COGS). To put that another way, for every pound that a business makes, how much does it cost to deliver?
For a traditional business, there are many ways to minimise costs. A company could optimise its supply chain, find cheaper raw materials, or negotiate better rates with its suppliers.
But in the age of the cloud, a digital company’s costs might grow 10 times overnight as a result of a sudden increase in traffic volume, or a one-line configuration change. For every surprise event, a cloud company’s profit margin can be significantly eroded.
As a result, keeping on top of COGS is a key focus area for any digital company. Here are some tips for reducing your costs and improving your bottom line:
To cut costs, you first need to understand where inefficiencies are creeping in – after all, you can’t change what you can’t measure.
Start by agreeing how you are going to model your company’s costs, and whether that’s something you intend to break down across each of your products. Generally, it can be useful to go product-by-product, as this can give you a more granular view of your company’s cost drivers and help to identify the ‘low-hanging fruit’ that can be cut without impacting overall performance.
Getting a clear view of the inefficiencies in your cloud set-up will help you figure out what will really move the needle, rather than making vague guesses at performance improvements. Once set in motion, this will also enable you to see whether the changes you’re making are having the desired effect.
To help monitor the raw cloud infrastructure that powers each of your products and understand the cost of your cloud configuration in real time, there are plenty of monitoring tools you can use such as CloudHealth, AWS’s billing CSV, and Tableau.
Make a plan and rally your teams
Once you’ve identified the efficiencies you want to make, it will be key to put a plan in place to make sure the cost-cutting process is done efficiently. A plan helps unite your engineering team around shared goals and processes, with clear deadlines.
When laying out your plan, consider starting small and then building up. The best approach is to begin by tackling the lowest-hanging fruit you identified in the monitoring stage, and then steadily work towards more complex and time-consuming changes.
For each project, assign an ‘owner’ to drive it to completion – this can be done with a simple spreadsheet laying out who owns what, and when it’s due.
Once owners have been assigned, ask them to bring their team together once a week to ensure their cost-cutting effort is on track, and targets and deadlines are being met.
You will likely see the biggest cost savings by getting rid of unneeded processes, redundant effort and “dead” code. Every little counts, and having dedicated owners for each individual area – no matter how big or small – will combine into a huge collective effort that could save your company millions.
Other key areas to evaluate include your company’s CPU, disk and network costs, along with the cost of data transfer to and from the cloud. All of these can be brought under control with a little thought, and in some cases, new third-party solutions.
Build a repeatable monitoring process
Once you’ve invested in reducing costs, you want to make sure inefficiencies don’t start creeping back in. It wouldn’t do your company any good to have to repeat the whole cost-cutting process six months down the line.
To get ongoing visibility, it’s a good idea to automate a daily report into your key cost drivers. If you visualise this through a graph or table, you can easily see spikes and catch them early. With some monitoring services, you can even set up automatic alerts whenever a cost driver jumps over a certain threshold, so your team is able to dive straight in and fix the problem.
A worthwhile long-term investment
Though reducing your COGS is a serious undertaking, it’s well worth the effort.
For every redundant piece of code you remove, and every efficiency you build into your cloud infrastructure, you’ll be driving up your company’s profit margin.
And the better your gross margin, the better your company’s valuation – the ultimate reward for strong unit economics, and a great reflection on your business.
Interested in hearing industry leaders discuss subjects like this and sharing their experiences and use-cases? Attend the Cyber Security & Cloud Expo World Series with upcoming events in Silicon Valley, London and Amsterdam to learn more.