The January Problem
How do we deal with cloud vendor credits?
So, I’m solving “the January problem” today at my current employer, except that here it’s a February-March problem. To refresh our memory, this happens when you have a long term commitment with a cloud vendor that contains a provision for some kind of promotional credits to be applied to your bill. I’m not a fan of these credits but I understand why they exist and also that nobody cares what FinOps thinks about the arrangement. I’ve experienced this with two vendors so far - AWS and GCP - and they tend to make it rain on your bill to varying extents that can appear to zero out the cost of your bill on a cash basis. It looks basically like this:
This was not a hot button issue for me until lately when - yes, it can happen to you too! - some members of the engineering staff started asking me why some numbers they were looking at weren’t there for the last several days. I blamed Google but then a few days later remembered that it was that magical time of year.
I hacked around the missing data to get the reporting back up for a minute while I circled back to the real solution to this problem, which is to amortize those credits back into the bill. Here’s the general idea.
Rough methodology
It’s not really that tricky, but if you’ve never been an infrastructure person telling the Finance team how this is going to go, it can feel a little awkward at first. Here’s the methodology I recommend, at least as a conversation starter.
These credits are probably delivered to you on some kind of annual cycle (check your contract). This means that a 12 month amortization window is a reasonable choice. So here’s what might you do -
Sum up all of the promotional credits that you received at a monthly granularity going back as far as you’re able. Calculate a 12 month moving average of this number OR just divide this number by 12.
Sum up all of your costs excluding those credits at the same monthly granularity.
Divide the 12 month moving average by the monthly cost number to arrive at the “credit discount percentage”.
Discount your costs by that number monthly, et voila
Some visual examples, to make this a little more tangible.
Let’s say you have $600k in annual credits, and an average annual spend of $12M. That would zero out roughly 2 weeks of cloud costs, and otherwise inflate the remaining costs by approximately 5% over what they should actually be.
After amortizing that credit forward, and applying a discount percentage to your list cost you get a truer, smoother representation of the actual cost of your resources. Put another way - the yellow bars are the very spiky credits, where as the purple area is the 12 month average - 12m MA. In effect, the 12m MA is what you subtract from your monthly costs, and you put the transient credit data to the side. This resulting metric is what I call the “effective cost” around here.
In closing
The January problem, regardless of when it visits your org, is really just a data quality problem in a finance costume. The credits and their savings are real, but the mismatch between when and how they land, and when you consume resources over the source of a year can wreck your reporting (once people actually start looking at it).
Amortization is not one they typically teach in technical curricula, but it’s a fact of life in Finance. Once you've had that conversation with Finance and gotten alignment on the methodology, you'll never have an engineering lead asking you why the numbers disappeared again.