(This guest post written and contributed by Jeff Kaplan, Managing Director of THINKstrategies)

Sometimes trying to save money can become costly and complicated.

A case in point is the growing popularity of Amazon Web Services’ (AWS) EC2 Reserved Instances (RIs) which enable users to obtain spare cloud capacity in anticipation of future use.

While having these extra resources available for a ‘rainy day’ may make operational sense, holding underutilizing spare instances can become needlessly expensive if they aren’t properly managed.

AWS offers three types of EC2 Instance purchasing models:

1. On-Demand Instances which allow users to pay a fixed rate by the hour with no commitment;
2. Reserved Instances allow users to pay a low, one-time fee and gain a significant discount on the hourly charge for that instance; and
3. Spot Instances that enable users to bid for instance capacity for applications which have flexible start and end times.

Although Reserved Instances have been around for a long time, recently AWS began more actively promoting its offerings, especially to its larger customers. AWS offers three types of Reserved Instances for many years – Heavy Utilization, Medium Utilization, and Light Utilization. The user selects the right option based on their expected utilization level, and pays a one-time fee to guarantee capacity for each instance over a 1 or 3 year period.

RIs are a practical way for larger cloud users operating traditional / closed clouds to easily onboard AWS, take advantage of class a serviced infrastructure, and enjoy substantial cost savings.

Although it may appear to be a no-brainer to take advantage of Reserved Instances, when to use these resources and the level of these services to obtain takes some skill and experience. The real challenge is determining when to utilize Reserved Instances and what type to employ based on your projected usage needs over the next 1-3 years.  In the past, this decision has been very difficult to make without dedicating valuable staff time to calculate potential usage requirements and the various cost benefits of the differing Reserved Instance options.

Newvem’s unique approach to Reserved Instances is an effective way for enterprises to better utilize the cloud with smart independent mechanisms built on AWS best practices.

For instance, Newvem, recently launched their new Reserved Instances Decision Tool helps AWS customers determine which On-Demand Instances should be moved to Reserved Instances. The tool leverages Newvem’s KnowYourCloud Analytics which captures users’ past Cloud consumption patterns to determine their baseline requirements in the next one to three years; the types of instances they will need to meet their business requirements; and best geographic locations of their instances. The users’ historic and current Cloud usage patterns (including frequency, resource, regularity and costs) are then used to identify which On-Demand Instances can be safely moved to Reserved Instances, and alert users when their one- or three-year contracts are going to expire.

The user-specific data and recommendations are also based on Newvem’s ongoing tracking of more than 15,000 AWS servers which enables Newvem to identify the best opportunities for AWS customers to lower their costs while ensuring the availability of their necessary Cloud capacity via Reserved Instances. In fact, Newvem estimates that its KnowYourCloud Analytics has uncovered over $8 million in cost savings for more than 500 customers.

Generating these kinds of savings is critical to preserve the primary value proposition of Cloud services – reducing the cost of compute power. But, it is also an important part of delivering on the secondary promise of the Cloud – gaining agility. Ironically, there is a significant tradeoff which users have to consider between cost vs. flexibility.  By acquiring a Reserved Instance to gain cost-savings, the user is also locking into a 1-3 year contract.  However, the lost flexibility can often be outweighed by the assured capacity utilization and guaranteed availability for the end user.

As the Cloud services market becomes more stratified and sophisticated, being able to more clearly and confidently identify where, when and how to utilize the various Cloud services becomes more challenging. Even services which appear to be obvious cost-savings alternatives, like Reserved Instances, can be improperly employed and counterproductive.

Fortunately, a new set of tools – like Newvem’s Reserved Instances Decision Tool – are making it easier for Cloud users to make the right decisions, monitor their performance and measure the monetary value of their Cloud services.

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About the Author

This is a post written and contributed by Jeff Kaplan.

Jeff Kaplan is the Managing Director of THINKstrategies, the only strategic consulting firm focused entirely on the business implications of the transition of the technology industry from a product-centric to services-driven solution model, including Software-as-a-Service (SaaS), Cloud Computing and Managed Services.

THINKstrategies helps IT/business decision-makers with their sourcing strategies; solution providers with their marketing strategies; and venture firms with their investment strategies. Kaplan is also the Founder of the Cloud Computing Showplace, the largest, vendor-independent, online directory and best practice resource center regarding SaaS, Platforms-as-a-Service (PaaS), and Infrastructure-as-a-Service (IaaS), including Managed Services. Jeff can be reached at jkaplan@thinkstrategies.com

Keywords: reserved instances, ec2 reserved instances, enterprise cloud, aws, aws ec2, aws cost