How to Value Compute Savings Plans Contracts

Written by

Aditya Datta

If you’re not yet familiar with Cloud Savings Instruments, take just five minutes to read our blog on standard Reserved Instances (RI) here:
https://www.cloudwiry.com/value-standard-reserved-instance-contracts-new

AWS disrupted the market earlier this week with a powerful new Cloud Savings Contract referred to as Savings Plans. AWS’ portfolio of cloud savings instruments has become sophisticated with the growing list of Standard RIs, Convertible RIs, Marketplace RIs, and now Savings Plans.

For savings of up to 72% off on-demand pricing, you can purchase Savings Plans for one or three-year terms. There are also multiple payment options including all upfront, partial upfront, or no upfront.

This sounds wonderful, but how can you tell if Savings Plans are right for your organization? As we have always done for our customers, Cloudwiry can evaluate the purchase of Savings Plans via net present-value calculations. We evaluate your cash outflows (payments for the Savings Plans) along with cash inflows (savings versus on-demand pricing) for the entire period of your contract. Once we’ve evaluated your unique situation, we can discover discounts and determine if the net present value (NPV) of the purchase is positive or negative.

For example, let’s imagine you are spending $10 per hour on AWS EC2 with an annual corporate discount rate of 6%, a machine utilization rate of 80%, and a contract that starts on January 1. If we look at the four ways to have this machine available to us, we find that:

On-Demand No Upfront Partial Upfront All Upfront
January $5,952 $3,809.28 $23,190 $42,048
February $5,376 $3,440.64 $1,640 $0.00
March $5,952 $3,809.28 $1,815 $0.00
April $5,760 $3,686.40 $1,757 $0.00
May $5,952 $3,809.28 $1,815 $0.00
June $5,760 $3,686.40 $1,757 $0.00
July $5,952 $3,809.28 $1,815 $0.00
August $5,952 $3,809.28 $1,815 $0.00
September $5,760 $3,686.40 $1,757 $0.00
October $5,952 $3,809.28 $1,815 $0.00
November $5,760 $3,686.40 $1,757 $0.00
December $5,952 $3,809.28 $1,815 $0.00
NPV $70,080 $44,851.20 $42,749 $42,048

Notice that the “Partial Upfront” and the “All Upfront” have the best and lowest NPV. These values might change dramatically if you do not spend the full minimum amount you have committed per hour.

What if your business needs change during the middle of the year and you are using less Amazon EC2? Every unused hour reduces your savings. While Savings Plans do have some technical flexibility, they are financially rigid and there is no ablity to trade or re-finance for a lower montly run rate. Since there is no Marketplace for these plans, your only option is to write off missed savings as losses in case your needs decrease in the next 3 years (move to serverless / rightsizing / business forecast).

Fortunately, Cloudwiry is here to help. We will work with you to identify your best options with Savings Plans. Additionally, we can help you hedge your risks by deploying another very powerful savings instrument that can get you similar discounts with simplicity and hedge your risk of future uncertainty – Convertible Reserved Instances.

I look forward to working side-by-side with you to navigate this confusing new arena. Connect with me at hello@cloudwiry.com to learn how our Savings Maximizer can advise, purchase, and manage your portfolio of cloud savings instruments.

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