How to Create an Effective Tagging Strategy for Cost Management in AWS

In the world of AWS, it is important to be strategic with your tagging strategy. By defining specific tags for cost allocation, using those tags to organize your resources, you can easily track how much you are spending and on what, which is critical for cost management. Achieving this requires understanding both the tagging model used by AWS, and the best practices for tagging resources.

But before we share with you the most widely used cost optimizing tagging strategies, let’s look at tagging in more detail.

Tagging In AWS

Amazon Web Services (AWS) allows customers to assign metadata to their AWS resources in the form of tags. Each tag is a simple label consisting of a customer-defined key and an optional value that can make it easier to manage, search for, and filter resources. Although there are no inherent types of tags, they enable customers to categorize resources by purpose, owner, environment, or other criteria.

Tagging is needed for managing your AWS infrastructure. Therefore, you must define what tagging will do for you and build the strategy around that. When developing a tagging strategy, it is important to consider these aspects:

– Which tags are required for cost management?

– Will my resource be tagged by purpose, owner or other criteria??

– Do I need to tag my resources by environment (DEV/QA/PROD)?

– What is the key of each required tag?

– Do I need to assign any AWS-specific tags?

Tagging Strategy For Cost Management

If you know where you are leaking money, you can more easily go and fix the leaks. If you know how much you are spending and where you can easily put some cost optimization strategies in place, you can quickly make cost-saving decisions.

But for that, you need more information, and that’s where cost allocation tags are helpful. An effective tagging strategy for cost management can save your organization thousands of dollars annually.

To collect the details for cost analysis purposes, the following best practices can be used to define a winning cost allocation tagging strategy.

Tag Usage

It is important to know where to tag your resources, what tags are required for cost management, and which tags to enable. Tags can be used as dimensions in reports that help you track costs by bucket (e.g., departmental budgets). If you use tags for cost allocation, ensure they are easy to understand and accurately reflect the underlying business functions or processes. You should choose a key that can be associated with each allocated cost to allow for accurate tracking over time.

For example:

• A tag key of “Environment” could be used to distinguish charges between Production vs Development environments.
• A tag key of “Purpose” could be used as an expense category along with categories like Development Expense, etc.

As a starting point, define the following tags:

• Name
• Service
• Environment
• Owner
• Product
• Department

Smple Tags

Typically, customers use tags such as “Cost Center”, “Business Unit”, “Customer”, “Project” to associate AWS costs with traditional cost-allocation emissions. This allows customers to easily associate costs with technical or security dimensions such as specific applications, environments, or compliance programs.

Tag Everything

This is obvious, but it’s harder than most teams think. It can be easy to spin up instances, storage, databases, and other popular services and get to work. Left untagged, these services generate cost and utilization data that operations and finance teams must reconcile later.

Thorough tagging and a proven cloud cost management platform help make this task easier, but if parts of the infrastructure aren’t tagged, cost management and optimization per resource will not be possible.

Automating Tagging Process

Applying tags manually can be cumbersome… it’s time-intensive and can lead to human error, resulting in inaccurate reporting. Manual tagging could also omit some resources from being tagged, which will lead to a gap in information reported, eventually leading to decisions being made based on incomplete data.

This is where automating the tagging process comes into play. Automation helps reduce human error, lower the cost to tag resources that would otherwise be costly or time-consuming to tag, and gather more information about cloud usage for reporting purposes.

Using automation software, like Terraform, Puppet, or Chef to tag, for example, newly-created cloud resources, and other functions can come in handy.

Align Cost Allocation Tags with Financial Reporting Dimensions

To achieve optimal cost allocation, tags must map to the business dimensions used for financial reporting. Create a list of standard tags that are typically required by your organization for cost allocation. Ensure that these tags align with the established finance department cost-reporting hierarchy

For example, let’s assume that your financial reports are tagged as follows:

– Region (e.g., US West),

– Business Unit (e.g., Engineering),

– Location (e.g., San Francisco office) ,and

– Cost Center/Project Name (e.g., XYZ Project).

Using Tags To Cut Waste

As they say, a penny saved is a penny earned. Using tags to identify resources that are not giving the expected ROI can be critical to cost management.

For example, AWS organizations can use business or technical metrics to automatically tag an entire AWS account as cost-ineffective if usage falls below a threshold during a particular time of day, week, month, quarter, etc. This information is invaluable when it comes to making tough decisions about which clouds are underperforming and need attention.

Another example could be that if an account doesn’t have a good savings rate through discounts, or maybe it has a lot of rightsized-recommendations attached to it, the tagging system makes this easy to identify and can be used as a guide for making purchasing decisions.

Conclusion

Tagging tells a cost story. With the right tags, it is possible to better manage AWS costs. The key is not just adding them indiscriminately, but also making sure that they are mapped to financial dimensions for cost allocation.

Traditionally, most companies would manually tag each of their resources with a group of similar features such as ‘Environment’, ‘Department’, and many other such tags which can be used later on during analysis & reporting of costs by finance departments. This manual tagging process offered several challenges including lack of structure in the use of tags and thus leading to wasteful spending.

To overcome these issues and scale up tagging efforts across teams at an enterprise level, the right cost optimization and management strategies must be in place. The ‘tag everything’ approach will help, but it must be complemented with proven cloud cost management platforms (like Cloudability). The right automation tools like Terraform, Chef or Puppet can also play a crucial role in automating the tagging process to streamline resource tagging across teams and make it more accurate- bringing us closer to the much-needed solution that can optimize costs while ensuring compliance for finance departments at enterprise levels.

To talk about how you can improve your organization’s tagging strategy book a free call with us here.