If you’re responsible for your organization’s cloud infrastructure, you’re also concerned with the cost of that infrastructure and how best to minimize operational expenditures (OPEX) and total cost of ownership (TCO). Although cloud services providers occasionally offer price reductions, it is better to develop a cloud infrastructure strategy that optimizes costs before they get out of control. Azure Reserved VM Instances can play an important role in your planning. To help you determine when it makes the most sense to use Azure Reserved VM Instances, this guide discusses optimal strategies and their most common use cases.

Azure VM Instances and Reserved VM Instances: What’s the Difference?

Azure VM Instances

Azure VM Instances provide on-demand Virtual Machine (VM) compute capacity on a pay-as-you-go (PAYG) basis that is billed by the second. PAYG is the standard pricing model for most cloud services. Azure VM Instances provide the flexibility to start or stop your VMs at any time knowing that you will only pay for the capacity that you’ve actually used. They are the best option if you have variable workloads that scale up or down and for use cases where your VMs do not have to run continuously.

Since you don’t have to purchase additional hardware, Azure VM Instances are a good option for application staging, development, and testing. They also work for hybrid cloud environments, where you’ve connected Azure VMs to your on-premises network to support variable workload spikes and spinning up or shutting down your VMs.

Azure Reserved VM Instances

With Azure Reserved VM Instances, you commit in advance to purchasing VM compute capacity over a fixed period of one or three years at a discounted price — the longer the period the greater the discount. Azure Reserved VM Instances discounted pricing is significantly lower than what you would pay for Azure VM Instances. The potential savings can reach 72% for a three year contract to as high as 80%, if you are an Azure Hybrid Benefit customer. Your exact savings will depend on several factors, including the type of instance, length of term, and the region in which the instance is resident.

Azure Reserved VM Instances Promise Significant Savings

In addition to cost savings, Azure Reserved VM Instances provide cost predictability, to better facilitate budgeting and forecasting. It should be noted that a reservation discount is offered on a “use-it-or-lose-it” basis, meaning you cannot carry forward unused reserved hours. If there are no resources that match your reservation for a particular hour, your reservation for that hour will be lost.

Azure Reserved VM Instances Summary

Availability:

  • Provides access priority to VMs that match your reservation attributes, but does not guarantee actual availability

Instance Size Flexibility:

  • Gives you the option to select instance size flexibility or capacity priority
  • Automatically applies your reservation discount to other VM sizes in the same group and region
  • Is on by default for shared reservations
  • Capacity is not prioritized for VM deployments
  • May save you time managing your reservations and while reducing costs

Azure Hybrid Benefit:

  • You can use your own on-premises Software Assurance-enabled Windows Server and SQL Server licenses to run your workloads on Azure.
  • Can potentially reduce your workload costs by up to 80%

Payment Options:

(The total amount that you pay remains the same )

  • A single upfront payment
  • Monthly payments, which lower your initial cash outflow

Cancellations:

If your workload or application needs change over time you can:

  • Exchange reserved instances across any region and any series at any time.
  • Cancel a reserved instance at any time and return your remaining reserved time. (There is a yearly limit on the number of months that can be returned, and an early termination fee of 12%. There is also a total refund limit of $50K for a rolling 12 month window.)

Evaluating Candidates for Azure Reserved VM Instances: Weighing Flexibility, Risk, and Lock-In

To evaluate whether your Azure deployments are good candidates for Azure Reserved VM Instances requires weighing the higher cost of Azure Instances and the flexibility of anytime cancellations, versus the lower cost of Azure Reserved VM Instances and the financial risk of use-it-or-lose-it terms that lock you in for 12 or 36 months, with a 12% early termination fee.

You’ll need to consider the number of applicable reservations, what VM series to use and in what region, as well as current usage and possible future usage. Also consider  that you are paying a monthly rate for your reservations and that stopping a VM will not affect that rate. You’ll have to evaluate possible savings and breakeven based on your monthly VM runtime. Finally, you’ll have to consider that reserved discounts (Azure Hybrid Benefit excluded) only apply to your compute costs. Reserved discounts do not apply to software, networking, or storage.

The best candidates for Azure Reserved VM Instances are those applications with predictable workloads and consistent consumption of resources. For example, production workloads running on your VMs 24x7x365 are excellent candidates, since they will continuously use reserved instances throughout the reservation. By contrast, non-production workloads that can be turned off when not required are not good candidates for reserved instances, since you can save more with PAYG.

Potential cost savings depend on the monthly runtime of your VMs. VMs running 24/7/365 can save you more than 60% on average per month, with a possible breakeven in a couple of months for a one year contract. Shorter runtimes will see lower savings and longer breakeven periods. Runtimes around 11/7/365 will not work since the reserved cost will likely be higher than PAYG.

The graphic below provides a visual summary of the flexibility, cost, and lock-in issues that you’ll have to weigh when deciding whether to implement Azure Reserved VM Instances. As you can see, there may be opportunities to implement a combination of both VM instances and reserved VM instances to optimize costs. One example of this approach is to use VM reserved instances to mitigate unexpected workload spikes that can exceed the workload capacity of your VM instances.

Manual vs. Automated Cost Optimization

It’s clear that Azure Reserved VM Instances can significantly reduce your infrastructure costs, but optimizing those costs can involve complexity, often a lot of complexity. The examples that we’ve outlined above are essentially all manual activities, and they can prove inexact and time consuming, especially if your cloud infrastructure is growing or already significant.

This is where automated optimization solutions come into play, or more specifically, this is where Cloud Cost Management software comes into play. Cloud Cost Management software operates within the context of Cloud Financial Operations or FinOps and is designed to automate the complex decisions involved in optimizing your cloud infrastructure costs.

An in-depth discussion of automated cost optimization is beyond the scope of this post, but it’s important to understand that Cloud Cost Management software is a powerful tool that not only simplifies the management of Azure Reserved VM Instances, it also reduces the risk that comes with their implementation.

However, if you are also an AWS customer, our Purchase Planner tool can help you eliminate the time-consuming process of analyzing and managing AWS costs by allowing you to craft reservation “purchase plans” that combine Reserved Instances & savings plans.

Conclusion

Azure Reserved VM Instances represent an opportunity for significant cost reductions, but it’s necessary to understand how and when to use them. Azure Reserved VM Instances make sense for your predictable production workloads, but they make less sense for variable, non-production workloads.

You’ll have to evaluate your potential savings based on your expected monthly VM runtime while also factoring the potential financial risk of being locked in for 12 or 36 months, with a 12% early termination fee.

If you need help evaluating your cost savings with Azure Reserved VM instances, reach out to our team to get a demo of the Reserved.ai cloud cost management solution. Save your business and finance teams hundreds of hours on cloud billing administration by automating the optimization of your Azure Reserved Instances while mitigating the financial risk associated with long-term contracts.

To learn more, sign up for a free trial or request a demo today.

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