The cloud computing has become a source and a booster of innovation with almost unlimited possibilities. It gives enterprises the ability to change faster and grow new revenue streams, but at the same time, it requires new skills to understand related cloud costs better and make informed business decisions. As companies move away from the traditional fixed-cost data center model to a variable cost consumption-based model, they must also transform their financial operations. The FinOps comes here with help as a new approach to cloud cost management.
Read on to find out:
- Why companies fail to manage cloud cost?
- The FinOps – new approach to cloud cost management
- 6 key principles of the FinOps cloud cost management model
- The FinOps journey
- Start building your cloud cost management strategy
Why companies fail to manage cloud cost?
“You need accountability” – this sentence stuck in John’s memory for a long time. When his company decided to move part of their IT services to the cloud, everything looked promising and straightforward. The process was simple enough to give it a try. Go through capacity planning, estimate cost, migrate and run. Finally, check the status quarterly. The surprise came a few months after the switch. Cloud spending varied from month to month with high, even double peaks, and overall average cloud usage grew noticeably. No one was able to identify the main source of the problem. It turned out that the sales team launched a new campaign requiring some more resources, but also the development team has worked on a new release of the core internal CRM system. Data analysts put their hands on new, super-fast tools to produce even better insights for management, and IT has moved most of their backup files to the cloud. There were several of payables without justification and too many people with the sufficient right to make a purchase decision. Suddenly John, as a CIO, stood in the company’s spotlight having to answer questions coming from the finance team and top management. This was the moment when he started to doubt the legitimacy of moving IT services to the cloud. John is not the first nor the only one who has found himself in a similar situation during his cloud migration journey. But what connects John and all of the other cases is an old approach to cost management that was replicated in the cloud environment.
Cloud means variable spend that can change on a per resource per-second basis. It is not forward-looking capacity planning of a large data center, capital expenses, and fixed costs. It is much more similar to a time & materials project. It is directly related to a business case describing revenue streams that will be eventually generated with its support. The case in which you take into account time, quality, and cost needed to earn 1$. And this is what the FinOps is all about. Bringing financial accountability to the variable spend model of the cloud.
The FinOps – new approach to cloud cost management
The cloud has changed the overall dynamic of procurement. Purchasing and provisioning happen in a matter of one click. Procurement and finance teams are cut out of the process. The power is now in the hands of developers, administrators, and engineers. This new cloud reality requires a new operating model to address the challenges it brought. What must be created in a company is a collaborative way of doing business that builds on IT, Finance, and Business teams interacting together to accomplish the organization’s goal. Those teams must start a cross-functional conversation about where, how much, and when to invest money. Sometimes the decision will be to lighten or stop the project entirely. The other times the decision may be to invest more. But now the outcome is mutually agreed to have in mind unit economics of cloud for business advantage.
This approach is much more extensive than widely discussed but significantly limited technical cost optimization. A process of changing the configuration or switching on/off resources to minimize expenses. It is still an important part of the FinOps, but it’s not the only one. With the FinOps, you look at a projected revenue and an investment needed to achieve that goal. You are not budgeting for the long term. Instead, you focus on value-based metrics that demonstrate business impact better than aggregated, total spend. Since the cloud is super flexible with almost endless resources available on-demand, you can constantly make conscious trade-off decisions between cost, quality, and speed. Eventually, after a preliminary test, you turn the services off and stop paying without incurring additional expenses.
6 key principles of the FinOps cloud cost management model
Successful incorporation of the FinOps practices into your company requires patience. Implementation is an incremental process. You learn through experiences gained while repeating its phases. More elements and tooling come each time you scale up. But no matter your urgency and importance, the first step you take before teams get their hands on the FinOps must establish an environment that cultivates and embraces the Six FinOps principles. It will guide, support, and shape all activities carried out later by people and instill a culture within your organization that promotes cost accountability and agility needed in the variable spend model of the cloud. Each principle has specific capabilities designed to yield exact results on your FinOps journey.
The FinOps principles:
1. Open-minded collaborationFoster cultural change. Build a FinOps team. One hero will not suffice to make a global change. Include multiple personas from your organization. It could be representatives from engineering, development, product owner teams along with functional leaders, portfolio directors, VPs, finance leaders, or even CIO, CFO, CSO. Their goal should be set to continuously monitor and improve efficiency while supporting innovation that impacts revenue and competitiveness of the company.
2. Business value driving cloud investmentStart thinking in terms of unit economics of the cloud. That means measuring cloud spend against selected business metrics. Treat cloud as a value creator, not cost per se. You will always spend more when cloud usage increases. Setting such context will help you to make the decision whether x$ spending bringing y$ revenue is reasonable for the organization. It will also enable measuring the impact of any changes made to your infrastructure based on cost/quality/speed criteria on those business metrics.
3. Transfer of ownership for the cloud usage
Push accountability for cloud spending into the hands of those who are using it. All the way down through divisions, business units, teams to individual engineers, developers, product and campaign owners, etc. Set their budgets and give them the power to make decisions about cloud usage and new purchases. Finally, begin to demand cloud cost discussion as a new business efficiency metric.
4. Detailed and widely accessible reporting
Enable real-time decision-making based on the most current amortized cost and utilization data. Provide visibility into direct cloud spend and shared costs at all levels of your company. Consistent cloud cost reporting along with trending and variance analysis will drive better cloud utilization. The fast feedback loop will improve spending patterns, impact better decision making and increase efficiency.
5. Centralized FinOps initiative
Centrally govern financial optimization with discounts, reservations, and usage commitments while driving best practices into your organization through standardization, education, and internal benchmarking. Introduce automation to reduce duplicate efforts and cut off unnecessary operational expenses. Focus on paying less while expecting from cloud budget owners using less. Moreover, start comparing your company to industry standards learning whether you can spend less, differently, or in a better way.
6. Gains from the variable cost model
Take advantage of the variable cost model. This is an opportunity for agile iterative planning and purchasing of capacity to fit real demand. Base your decisions on actual usage data and just-in-time predictions. You can always make adjustments on a daily basis while trying to make the most out of the resources you are currently using.
The FinOps journey
When you establish the environment that cultivates and embraces the FinOps principles, you are ready to start building your practice. The FinOps runs as a cyclical process executed in a Lifecycle loop of three phases: inform, optimize and operate. The process continuously examines cloud usage and seeks cost optimization opportunities. Each round builds incremental gains in your organization. Ultimately you will start looking at the cloud cost not as a simple cost of IT services but as a driver of value and innovation in your company. It will become a new tool in your portfolio of revenue generators rather than a cost center that must be reduced.