Understanding Cloud Costs in Technical Due Diligence

Why Cloud Costs matter in Tech Due Diligence

Cloud expenses refer to the costs associated with using cloud-based services, including compute power, storage, networking, and additional features like managed databases or serverless functions. These costs often vary based on usage, scalability needs, and pricing models offered by providers. Cloud expenses play an important role in assessing a company’s scalability, operational efficiency, and overall profitability.

For example, high and unpredictable cloud costs may signal architectural inefficiencies that could hinder growth. As cloud services often constitute a significant operational expense, their mismanagement can erode profit margins and make a business less appealing to investors. Additionally, a company's ability to monitor and optimize these expenses is a strong indicator of technical maturity and operational discipline, which are key factors during an investment evaluation.

Beyond these direct financial implications, cloud costs also reflect an organization's ability to adapt to market demands. As companies scale, their cloud infrastructure must evolve to accommodate increased workloads without incurring disproportionate cost spikes. A well-managed cloud environment not only supports business agility but also fosters confidence in potential investors who are assessing the viability of long-term growth strategies.

Common challenges in managing cloud costs

Many organizations struggle with cloud cost visibility, often failing to monitor resource usage at a granular level. For instance, a company might run multiple virtual machines (VMs) during non-peak hours or retain storage that remains idle for months. Without proper tools to track these inefficiencies, such usage can lead to significant waste and unexpected charges at the end of the billing cycle.

Overprovisioning is another common issue, where companies allocate more resources than needed—such as running oversized VMs or maintaining unused storage—resulting in unnecessary expenses. Inefficient architectural choices, like unoptimized data transfers or reliance on legacy systems, further exacerbate these challenges. Additionally, vendor lock-in can limit a company’s ability to negotiate pricing or explore cost-saving alternatives.

A deeper issue often lies in the absence of accountability across teams. Without clear ownership of cloud resources, it becomes difficult to track who is responsible for excess spending. Furthermore, unpredictable costs associated with sudden spikes in demand can create budgeting challenges, especially for smaller companies with limited financial flexibility. These factors collectively underline the importance of proactive cloud cost management.

Managing Cloud Costs Effectively

Effective cloud cost management requires a proactive and collaborative approach. Implementing cost monitoring tools, such as AWS Cost Explorer or Azure Cost Management, provides businesses with critical insights into their resource consumption and spending patterns. This data can help identify inefficiencies and drive cost-saving measures.

Fostering a culture of financial operations (FinOps) is another key strategy for optimizing cloud costs. FinOps emphasizes collaboration between finance, development, and operations teams, ensuring that cost efficiency is prioritized throughout the software development lifecycle. By leveraging FinOps principles, companies can right-size resources based on actual demand, implement autoscaling to dynamically adjust resource allocation, and gain better visibility into cost drivers.

For example, FinOps encourages teams to adopt practices like tagging cloud resources, enabling granular tracking of usage across departments. This approach not only improves accountability but also facilitates more accurate budgeting and forecasting. Additionally, adopting Kubernetes for container orchestration can optimize resource utilization by allowing applications to scale efficiently based on real-time demand.

Reserving instances or adopting savings plans can also yield significant cost reductions, especially for predictable workloads. Reserving instances refers to committing to use specific cloud resources, such as VMs, for a fixed period—typically one to three years—in exchange for significantly reduced pricing compared to on-demand rates. This approach is particularly effective for predictable workloads, where businesses can plan their resource usage in advance. Research from Flexera’s 2023 State of the Cloud Report indicates that businesses can save up to 72% on cloud expenses by using reserved instances. Similarly, regular IT audits to identify unused or underutilized resources—such as idle instances or unattached storage volumes—can eliminate unnecessary expenses.

For some organizations, a multi-cloud strategy may offer cost advantages and reduce dependency on a single vendor. However, this approach should be weighed carefully against the added complexity it introduces. Companies must also establish governance policies, such as setting budgets and enforcing spending limits, to ensure that cloud usage aligns with organizational objectives.

Cloud costs in the context of Due Diligence

When conducting tech due diligence, understanding how a company manages its cloud costs is essential. Key questions to consider include:

• How are cloud expenses tracked and managed?
• What tools or processes are in place to optimize costs?
• Are there architectural inefficiencies driving up expenses?
• How does the company’s current cloud strategy align with its growth projections?
• Are there any long-term commitments or vendor dependencies that could limit flexibility?

These questions often reveal broader insights into a company’s operational capabilities. For instance, one company operating an e-commerce platform discovered escalating costs due to a reliance on outdated VMs that were continuously running—even during periods of low customer activity. By migrating to a modern architecture leveraging auto-scaling and serverless computing, they not only reduced their cloud expenses by 40% but also improved system performance during peak shopping seasons.

Similarly, reviewing the use of third-party cloud cost management tools can provide valuable indicators of a company’s maturity in handling expenses, highlighting whether teams are equipped with the right tools to track and optimize usage effectively. The adoption of serverless architectures, such as AWS Lambda or Google Cloud Functions, has become a compelling strategy for optimizing cloud costs. These frameworks allow businesses to pay only for actual usage rather than pre-allocated resources, eliminating the expense of idle capacity. Companies leveraging serverless technologies often achieve higher levels of cost efficiency and technical sophistication by dynamically scaling resources to meet demand in real-time, reducing both overhead and operational complexity.

The role of FinOps in long-term strategy

As cloud spending continues to grow—with projections exceeding $1 trillion by 2030 (Source: Gartner)—the adoption of FinOps principles is no longer optional. Organizations that fail to prioritize cloud cost management risk falling behind competitors who optimize their spending to support innovation and growth. FinOps serves as the foundation for a sustainable cloud strategy, enabling businesses to balance cost control with performance and scalability.

FinOps also supports informed decision-making at the executive level. By providing clear and actionable insights into cloud expenditures, it allows leadership teams to allocate resources more effectively and identify opportunities for reinvestment to create value. For example, companies that achieve significant savings through FinOps practices can redirect those funds toward research and development, marketing, or other growth initiatives.

Conclusion

Cloud cost management is a vital aspect of technical due diligence, reflecting both the operational maturity and financial health of a business.

"A company that demonstrates mastery of cloud cost management—through FinOps or other strategies—shows that it is prepared to scale efficiently and responsibly" says Jonathan Berdah, Tech Due Diligence Expert at Vaultinum.

Addressing inefficiencies and fostering a cost-aware culture rooted in FinOps principles can improve profitability, enhance operational efficiency, and make a company more appealing to investors. This approach helps businesses meet the demands of modern markets while building a foundation for long-term success.

By embracing a proactive approach to cloud cost management, businesses can position themselves as agile and efficient players in their industries. This not only enhances their attractiveness to investors but also lays the groundwork for sustained growth in an increasingly cloud-driven economy.