How a zero-based approach can improve your cloud budget

How businesses think about cloud costs

The benefits of cloud migration are established. A cloud deployment is easy to set up without upfront hardware or software costs. Cloud's features can also improve efficiency. Overall, moving to the cloud should present a cost-effective option for organizations that require compute services they don't want to pay to own or maintain.

Providers bill on a pay-as-you-go basis. Businesses only pay for the services that they request. These services include SaaS, PaaS and IaaS models. Each service provides users with different levels of customization and control over the cloud and its resources.

However, the customization and scalability of cloud can also be a financial detriment. Without oversight, individuals can make any changes or access any resources and services they see fit. Additionally, as businesses purchase more services or licenses, the billing associated with these added expenses becomes much harder to track.

Cloud costs are also constantly changing, even from month to month as service consumption goes up and down. Often, businesses optimize their cloud costs from measures like capacity planning, cost tracking, cloud access restrictions and data transfer limiting.

But what happens when the cloud team has cut all the fat yet management expects further budget cuts? The zero-based approach addresses this problem, offering an alternative perspective on budgeting.

What is zero-based budgeting?

Zero-based budgeting is a technique that interrogates and explains the costs associated with a department or business. In this exercise, budgets begin at a base of zero. As teams add expenses to the budget, they must deliberate on each one and justify it as necessary or valuable. Those responsible for the budget must be ready to explain their reasoning in the final estimate.

CFOs appreciate when budgets are presented as "a story based on numbers," Ratcliffe said. Cloud teams that can be honest about their spend and provide a narrative on its efficacy can have more constructive conversations with their CFO about money.

IT have gotten themselves into the hole of 'we're just a cost center.' Why should IT not be seen as a value?

Ratcliffe also pushed back on the assumption that IT should be seen as just a cost center.

"IT have gotten themselves into the hole of 'we're just a cost center.' Why should IT not be seen as a value?" he said. IT departments need to adopt an entrepreneurial attitude. Teams should focus on the value they bring to their organization and say, "If we do x, we can deliver y value."

Challenging the line items in a budget can be time-consuming. But this strategy can offer invaluable insights into a business's cash flow.

"It would be exactly like if I said to you to go through your credit card and bank statements and work out if everything you're spending is adding value to your life," Ratcliffe said. "If it's not adding value, get rid of it."

4 steps to create a zero-based budget

Cloud teams interested in implementing a zero-based approach in their organization can follow Ratcliffe's steps:

1. Throw away the old budget. Begin by breaking the habit of using the prior year's budget as a baseline for the new budget. It is time for a fresh start.
2. Create a new baseline. Whether a team hires an outside consultant or directs resources toward cost monitoring, they must find where to make changes. Ask: What do we have? What is it doing? What does it cost?
3. Establish that baseline within the new budget. This is the time for cloud teams to determine their needs. Look for expenses like hidden costs and fees, runaway resources and MSP fees. Ratcliffe recommended first looking at what cloud teams are spending on software and SaaS services, which he said are the most common places for overspending. Do not wait until the end of the budget cycle. This needs to be a rapid exercise since cloud costs are always changing.
4. Understand why costs exist within the budget. Ratcliffe recommended creating a checklist that displays the efficacy of your cloud team's line items. Separate the checklist into two categories: necessities and value add-ons. Necessities are any standard costs associated with daily operations. Value add-ons are any costs that enhance or improve the business.

A checklist presents an opportunity to create a business standard by which stakeholders can determine meaningful cloud costs. Is the cloud team purchasing tools and services that can add value to their business and provide a competitive edge, such as automated monitoring tools or AI technology? How does the team determine what is a value add-on?

In reality, exploring every single expense and cost in your organization and figuring out the propriety and meaning in every one can be a challenge.

Once a cloud team has created a new budget and fully understood the costs associated with it, they can present the budget and tell the story of their department's needs. Moving into future budget cycles, this process should become mainstreamed as adding expenses becomes a more deliberate process.

Pros of zero-based budgeting

All IT teams want their business to find value in the cloud services they pay for. Advantages of zero-based budgeting, according to B2B financial consultant firm Paro, include the following:

• Holistic view of expenditures. Cloud teams reviewing their expenditures can see how those costs relate to other teams and departments. This provides further oversight into how the overall business functions.
• Less reliance on historical precedence. Collecting expense data from previous years loses importance in zero-based budgeting. The goal is not to meet last year's budget, nor is it to simply increase or decrease the budget. Instead, teams explain why the expenses exist within the budget and how they provide value.
• Interdepartmental communication. Departments in the same organization may have overlapping expenses. Interdepartmental collaboration can help build the budget, while also improving professional relationships.
• Visibility into cash flow. Since individual expenses are combed through and interrogated, cloud teams can gain more insight into their cash flow.
• Budget alignment. A zero-based approach requires justification for each individual expense. This exercise can help align a business's budget with its strategic goals. By making intentional decisions about expenses, teams can determine how their costs contribute to greater value.

Cons of zero-based budgeting

A zero-based approach to budgeting isn't the right fit for every organization. Paro also noted the following challenges associated with zero-based budgeting:

• Less historical focus. Traditional budgeting compares the last budget cycle's expenses with the new or current expenses. A zero-based approach asks teams to justify their expenses rather than dictating necessary expenses.
• Added effort. Zero-based budgeting can be labor-intensive since there's no reliance on last year's data to start a new budget. Examine expenses one by one, and make sound judgments about what to keep or add. Remain objective and accountable for budgetary value add-ons.
• Time restraints. Anyone experienced in traditional budgeting knows the process can be time-consuming. Expanding this process to include deliberation of expenses can add a time crunch to an already tight project.
• Employee skill gaps. Though cloud teams might coordinate with a finance team, that doesn't mean everyone is a cloud finance expert. Any employees outside of finance might not have useful financial analysis skills.
• Short-term vs. long-term goals. While working within a budget cycle, it's tempting to focus on short-term goals that see immediate ROI. Also, budget to fund long-term projects that align with strategic goals.

Is a zero-based approach feasible?

While zero-based budgeting can provide organizations with a greater sense of ownership over their budgets, it might not be a fit for every business.

"It's a fantastic place to start in theory," said Hyoun Park, CEO and principal analyst at Amalgam Insights. "In reality, exploring every single expense and cost in your organization and figuring out the propriety and meaning in every one can be a challenge."

Park estimated 25% to 50% of companies overall have adopted zero-based budgeting. Additionally, organizations experiencing growth of 50% or more per year likely don't prioritize zero-based budgeting, he said. Fast-growing companies or organizations that don't have a consistent revenue stream, such as nonprofits or those in public sectors, can also struggle to use the strategy.

Ratcliffe said the zero-based budgeting process needs to be done in small pieces, so it might not suit a multinational organization.

Everett Bishop is assistant site editor for Cloud Computing at TechTarget. He graduated from the University of New Haven in 2019.