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Nerdio Fundamentals: Azure Margin Optimization

Liz HoscheidDirector of Marketing
Windows Virtual Desktop
July 01, 2019Videos

Vadim Vladimirskiy:

For an MSP building a cloud practice in Azure, one of the most important considerations is to understand how to transact in Azure. This includes the various types of Azure resources and how they work, how each type of resource is built, how to architect in Azure IT environment and most importantly, how to make money. There are many levers available to reduce Azure costs drastically, relative to the list prices. We’re not talking here about five to 10 points, but high double-digit numbers in some cases. The following five levers will take you most of the way towards really making money offering and reselling Azure as a core part of your cloud practice. The first lever is to become a CSP. This can lead to an increase of 10 to 20% margin of the total Azure consumption.


This one is somewhat of a no-brainer. Not only will it be easier to transact Azure, it will also allow you to increase your margin by receiving a discount of Azure list prices via your CSP provider. There are two types of CSPs: direct CSP and a CSP reseller. Direct CSPs purchase Azure directly from Microsoft, but they’re required to maintain high consumption volume and need to overcome many qualification hurdles. CSP resellers purchase Azure through an indirect CSP provider. These providers are large distributors that help CSP resellers understand Azure, its pricing and billing, and other Azure-related nuances. Any MSP can become a CSP reseller without any volume commitments or hurdles. Reach out to your favorite IT distributor and ask them to become a CSP reseller.


The second lever is to use Azure reservations, otherwise known as reserved instances, or RIs for short. This can lead to an increase of 20 to 57% margin on Azure compute consumption. The cost of virtual machines in Azure is the single biggest component of a typical MSP’s IT environment. Therefore, focusing on reducing this large component is a great place to start. The savings are significant, but carry a bit of complexity and need for upfront planning to take advantage of them. RIs are reservations of a specific type of compute capacity in a specific geographic location for a predefined period of time. Depending on the VM family, duration of the reservation and region, these RIs can save you from 20% to 57% relative to the list pay-as-you-go Azure price. The trade-off is that you have to prepay for the reservation in advance. This is great news for MSPs because typical IT workloads they deploy in Azure on behalf of their customers are peristent, and customers are generally open to making one or three-year commitments. When you provision a virtual machine in Azure, two billing meters start running.


First is the base compute, and the second is the Windows Server license. The published pay-as-you-go rate includes both of these components, and every plain vanilla virtual machine you power on will bill you for both. RIs stop the base compute meter. Common question is what about cash flow? You may be concerned that having to come up with 36 or even 12 months’ worth of Azure VM fees is a burden on your company. There are financing companies specializing in working with MSPs who will finance the purchase of reservations. This way, you’ll get the benefit of the RI discount, but keep the cash flow outlay monthly. There’s obviously going to be a financing fee associated with this, but with savings of up to 57%, it’s still worthwhile. RIs do require some advanced planning, budgeting and structuring of your Azure account the right way, but can significantly increase the profitability of your Azure practice. On top of the inherent savings you get with reservations, you may also get anywhere from 2% to 5% discount as a CSP direct or CSP reseller. As you can see, discounts start to stack up and free up margin to be used in better ways. The third lever is Azure Hybrid Usage and CSP software subscriptions.


This can lead to an increase of 10 to 49% margin on Azure compute consumption. Microsoft has created a special entitlement called Azure Hybrid Usage that allows MSPs to pay for the Windows Server operating system via another licensing program, and not through Azure. Azure Hybrid Usage is a benefit unique to Azure. You can’t bring your own Windows Server license to AWS or GCP, for example. The cost of a VM in other public clouds will include the cost of the license, even if you already own Windows. Azure Hybrid Usage can be enabled on a per-VM basis in the Azure portal. Turning it on stops the Windows Server OS billing meter, and the cost of the VM becomes lower. How much lower? Well, that depends on the VM family, but it can be up to 1/2 the cost of the VM. Remember the two billing meters that start running whenever a VM is powered on. The first is the base compute and the second is the Windows Server OS. Reservations stop the base compute meter, and Azure Hybrid Usage stops the Windows OS meter. If you have both an RI for a VM and Azure Hybrid Usage turned on, the monthly cost of this VM is zero.


Now this doesn’t mean that it’s free since you paid for the reservations and the Windows license up front, but with the monthly cost being zero, the upfront cost of the reservation and the Windows license can be as little as 20% of the initial total cost of that VM when you spread it out over the course of 36 months. To be entitled to turn on Azure Hybrid Usage on a VM, you need to have the right kind of Windows Server license that has this benefit built in. The most relevant option for MSPs is purchasing the Windows Server license through the CSP program. This is known as CSP software subscriptions. You can also buy SQL Server and RDS licenses through this program. Combining RIs with Azure Hybrid Usage and CSP software subscriptions can reduce the cost of your VMs up to five times. It goes without saying that the margin impact to an MSP from such significant cost reductions cannot be overlooked.


As with RIs, some planning, budgeting and cash flow considerations must be evaluated. However, if building a scalable Azure practice is your goal, then it is all well worth it to check out Azure Hybrid Usage and software subscriptions. The fourth lever is auto-scaling to optimize cost of your Azure workloads. This can be an increase of up to 72% on your Azure compute and operating system storage margin. The value proposition of the public cloud is its utility-like consumption billing model. This is a great concept, but taking advantage of this aspect of Azure is not as easy as it sounds. To pay for only what you use, you need a mechanism to know what you need, when and a system that automatically resizes your Azure workloads to fit the demand at any given time.


This means that if a VM doesn’t need to be on, a system needs to be in place to know that and act on it by shutting down the VM at the appropriate time, and turning it back on when it’s needed again. Azure automation platforms, like Nerdio for Azure, can help. You can set business hours for each VM and tell the system what to do with the VM outside of those hours. For example, leave it alone, shut it down or maybe change it to something smaller. The system will then automatically execute these instructions, resizing the VM at the end of the business hours and again prior to the start of business hours the following day. This leads to significant savings that may even exceed the savings provided by RIs and Azure Hybrid Usage. The advantage of auto-scaling as compared to reserved instances in Azure Hybrid Usage lies in the fact that there are no commitments and upfront purchases to make. You use Azure as a pay as you go and keep auto-scaling, keeping everything efficient. The fifth lever is using burstable virtual machine instances. This can lead to an increase of up to 50% margin on Azure compute. B-series VMs, known as burstable VMs, are used for non-CPU-intensive workloads, such as domain controllers, file servers, and they cost about 50% of an equivalently sized D-series VM.


The reason they’re cheaper is because Azure imposes a quota on how much of the total CPU course can be used. This quota is usually a fraction of the total available CPU. Every second that a VM is using less than its quota, it is banking credits. These banked credits can be used to burst up to the total available CPUs when needed, while bursting the VM is consuming its banked credits. Once credits run out, the VM CPU utilization is throttled down to its 60% quota, or whatever that quota may be.


Why should an MSP use B-series VMs? Well, number one, they’re cheaper. For approximately the same price you would pay for a D-series VM, you can get a B-series with double the CPUs and double the RAM. However, they should only be used for workloads that are either not CPU intensive or are bursty, meaning that they only occasionally need all of the CPU, but most of the time the CPU is idle. For instance, an Active Directory domain controller is not utilizing its CPU very heavily on the regular basis. However, when Windows Updates run, the VM will use all its available CPU horsepower. B-series VMs are perfect for domain controllers since they bank credits while they’re idle and then consume them when needed to do an update or do some other CPU-intensive task.


As you can see, there are multiple levers that can help MSPs optimize their Azure consumption and make IT environments running in Azure be more affordable than any other alternative, not to mention the advantage of hyper scalability, high security, flexibility and Microsoft’s solid reputation. Understanding these levers will help MSPs start to model what their Azure offers could look like, how much margin they can achieve and how to build a successful and profitable cloud practice in Azure. Tools like Nerdio for Azure can help automate much of this complex manual work with its pricing and packaging automation, automated deployment engine, single pane of glass management portal and cost optimizing Auto-scale technology.

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