Understanding Reserved Instances: Maximizing Utilization and Coverage

Cloud computing offers unparalleled flexibility, but optimizing costs can be a complex endeavour. One powerful tool in the arsenal of cloud cost management is Reserved Instances (RIs). This commitment to specific computing resources for a defined duration provides a significant opportunity to lower costs.

In the dynamic realm of cloud computing, optimizing costs is paramount. Reserved Instances (RIs) stand out as a powerful cost-saving tool, offering substantial discounts for committed usage. However, to truly harness their potential, organizations must delve into the intricacies of RI utilization and coverage.

In this guide, we'll explore the why, how, and guidance for maximizing the coverage and utilization of Reserved Instances.

What Are Azure Reserved Instances?

Reserved Instances represent a commitment to the cloud provider such as Microsoft Azure, AWS, GCP etc, to use specific computing resources for a specified duration, either one or three years. This commitment is reflected in the invoice, providing a substantial discount compared to pay-as-you-go rates.

Why Choose Reserved Instances?

1. Cost Efficiency: RIs are an effective method to lower costs, offering up to a 72% discount compared to pay-as-you-go pricing.

2. Ideal for Production Workloads: They are particularly suitable for stable, production workloads with predictable resource usage patterns.

3. Cost Recovery: While cost recovery periods can vary, generally, for one-year RIs, it takes around 7-10 months, and for three-year RIs, it takes around 10-20 months.

How to Optimize Reserved Instances?

Before committing to RIs, it's crucial to follow certain steps:

1. Rightsizing: Complete essential rightsizing steps to ensure the chosen instance sizes align with your workload needs.

2. Identify Stable Workloads: Apply RIs to workloads that maintain continuous operation or demonstrate higher utilization rates, preferably exceeding 60%.

3. Forecast Usage: Predict future instance usage and identify trends to match your RI commitment for cost-neutral or better outcomes.

Understanding RI Utilization and Coverage

Maximizing RI utilization ensures that the committed instances are actively contributing to cost savings. It's not merely about the commitment but making the most out of that commitment. Achieving a balance between utilization and coverage becomes pivotal - ensuring that the right instances are covered by RIs while efficiently utilizing the reserved capacity.

RI Utilization Vs Coverage

Aspect	RI Utilization	RI Coverage
Focus	Measures how effectively purchased RIs are utilized.	Indicates the extent to which running instances are covered by purchased RIs.
Measurement	Calculated as the ratio of used hours to available hours for purchased RIs.	Calculated by comparing the number of running instances to the number of purchased RIs.
Optimization Focus	Aims to maximize the efficiency of purchased RIs by ensuring they are used as much as possible.	Aims to align the number of running instances with purchased RIs to maximize cost savings.
Impact on Cost Savings	Higher utilization leads to more significant cost savings by maximizing the value of RIs.	Higher coverage ensures a larger portion of infrastructure is covered by RIs, resulting in increased cost savings.
Optimization Strategy	Optimize usage patterns and match workloads to the purchased RIs to increase utilization rates.	Adjust the number and type of purchased RIs to better match the running instance requirements and increase coverage.

This table provides a concise comparison between RI utilization and coverage, highlighting their focus, measurement, optimization goals, impact on cost savings, and recommended optimization strategies.

Reasons for Low RI Utilization

• Mismatched Instances: Underutilization may occur when Reserved Instances (RIs) do not align with the attributes of running instances.

• Changing Workloads: Instances may cease to align with purchased RIs due to evolving workload patterns over time.

• Fluctuating Demand: Irregular instance utilization may result from unpredictable changes in demand.

• Overprovisioning or Underutilization: Instances being oversized or underutilized can lead to reserved capacity being used less than expected.

• Complexity in Management: Inefficient utilization may arise when managing RIs across multiple accounts, services, or regions becomes challenging.

• Limited Flexibility: Underutilization can occur due to the inability to modify or adapt RIs to match evolving workload needs.

• Lack of Monitoring: Inadequate monitoring tools or processes may contribute to a lack of visibility into utilization rates, impeding optimization opportunities.

• Mismatched Business Strategies: Changes in business strategies can impact workload patterns, potentially resulting in underutilization of reserved instances.

Guidance for effective use of Reserved Instances

• Employ a data-driven approach by analyzing historical usage data, ideally spanning the past two months, to discern usage patterns and efficiency trends.

• Optimize resource allocation and minimize waste by establishing Reserved Instance (RI) commitments based on instances that are optimally utilized.

• Implement a centralized procurement strategy by consolidating purchases under a central billing account to maximize benefits organization-wide.

• Be aware of potential risks by recognizing that changes in architectural decisions or business requirements may pose risks to long-term RI commitments, such as transitions to serverless architectures or considerations of different cloud service providers.

• Assign responsibility for RI procurement and management to the FinOps/Cost Optimization team.

• Regularly assess and make adjustments by continuously identifying underutilized RIs, modifying reservations to maintain utilization, monitoring on-demand usage, and proactively managing expiring reservations.

Conclusion

Optimizing Reserved Instances requires a strategic approach that considers the dynamic nature of cloud workloads. By focusing on data-driven decisions, efficient resource allocation, and continuous evaluation, organizations can ensure they get the most value from their RI commitments. Balancing utilization and coverage, while addressing common challenges, will pave the way for enhanced cost efficiency in the ever-evolving cloud landscape.