How FinOps Can Facilitate Cloud Cost Optimisation

Organisations will always look for ways to optimise their costs and save money. Every CFO wants their company to spend in a smart and controllable way, but it’s not that easy when it comes to cloud services where a large amount of the spending is directly in the hands of the IT team. It’s a massive change, especially for organisations that heavily rely on the traditional procurement processes controlled and governed by the finance department.

Cloud introduced multiple changes. Some of the most significant ones from the CFO perspective are how spending is reported and managed, as well as switching from large initial investments (CapEx) to subscription-based continuous spending (OpEx). They affect the procurement process, which in most cases, has traditionally been static and controllable, changing it to a very dynamic approach where every engineer can spend company money. If your organisation adopts the cloud successfully, you’ll maintain firm control of your expenses, and this change will be seen as convenient.

However, you have to remember that this makes estimating your yearly budget much more challenging — 57% of IT leaders have exceeded their cloud budget, and 20% have done so by more than 20%. And, if the cloud transformation isn’t performed carefully, it may reduce accountability and make it more difficult to understand your expenses.

That being said, these challenges can definitely be resolved. As the popularity of the cloud continues to grow and this technology continues to play a dominant role across many industries, everyone needs to adapt. Finding a way to control and optimise cloud expenses and improve business effectiveness quickly became a top priority for many organisations — and that’s exactly what lies at the heart of FinOps.

What is FinOps?

FinOps is the practice of bringing together finance, technology, and business to leverage the unique capabilities of the cloud to create business advantage, support innovation, and improve delivery speed. It’s a solution that helps combine the inherent agility of the cloud with financial governance.

First and foremost, it’s a cultural change that requires the mentioned areas of the organisation to cooperate and work towards a common goal — increasing the business value of the cloud in the organisation. A FinOps practice builds bridges between these departments and provides a set of processes for each of them.

The entire concept is aligned with the shift-left paradigm. Engineers have to take responsibility for their expenses, work towards cloud usage optimisation, and think about innovation and improving the delivery speed. People from the procurement team have to build relationships with cloud providers and think strategically. As for the finance department, they need to become a partner in the discussion focused on optimising the unit economics — revenues and costs in relation to an individual unit.

Leveraging the Benefits of the Cloud

The cloud introduced plenty of benefits, but not all of them are easy to fully leverage. Whenever you see a list of the cloud’s advantages, flexibility always occupies one of the top positions. At the same time, this technology has the potential for incredible levels of transparency and cost visibility. Utilising these two elements to their full extent can be tricky. Tons of configuration possibilities and extremely detailed bills from several providers in different models can simply be overwhelming (especially for procurement and finance departments that lack in-depth technical knowledge). FinOps aims to leverage the cloud’s unique qualities by managing them in a way that will enable the business to take full advantage of them.

Flexibility

The ability to scale cloud services up and down or select different services providing similar features is a massive boon for any business. Additionally, cloud providers are offering automatic real-time adjustment of capacity to match your exact needs. However, while this model is perfect for specific use cases, it might not be the most efficient option in the long run. If you see that your organisation has a certain constant level of cloud usage, it’s best to cover it with less flexible, but cheaper options, such as reserved instances. This approach can reduce the cost of service by as much as 60%.

Real-time capacity adjustment is best for the portion of demand that fluctuates, especially in an unpredicted way. This combination of constancy and flexiblity is the optimal spending model for most organisations that utilise the cloud.

Transparency

The cloud provides great visibility into multiple dimensions, including the expenses and income it generates. When managed properly, billing can be easy to understand and accurately represent your consumption. From the finance department’s point of view, this is no different from a utility bill. Depending on your business requirements, you could track your usage down not only to hours or minutes, but even to individual actions. At the same time, you can look at your cloud consumption by analysing every department, machine, or user. This also enables you to group and report your spending with the use of different criteria.

This information can be used to plan your business initiatives and budget accordingly and look for specific actions as well as support your company’s development and reduce expenses. With such an increase in accountability, you can vastly improve financial and operational control of your organisation without losing agility.

Inform, Optimise, Operate

The idea of FinOps is perfectly encapsulated in the never-ending cycle that consists of 3 cyclical phases: Inform, Optimise, and Operate. Each of these stages plays an important role in the process and aims to achieve specific goals.

Inform — provide the transparency and visibility needed in the finance department. Accurate and relevant information is a massive help for budgeting, forecasting expenses, and allocating resources. This phase can be heavily supported by a variety of tools available on the market and already provided by cloud vendors.

Optimise — use the gathered information to improve your cloud setup depending on your workload. This can mean moving your constant consumption to reserved instances, introducing automation where possible, improving forecasting and reporting, etc.

Operate — make sure that your teams follow the idea of continuous improvement. Learn how to best leverage the cloud and what type of data is relevant to specific departments and users. Focus on business value and promoting the right culture — create an alignment between delivery and finance.

What You Should Consider Before Implementing FinOps

The core concept of FinOps revolves around the cloud and its impact on your organisation. Whenever you think about initiating another cloud project, you should consider taking the FinOps approach to onboarding — regardless of whether you’re just planning the migration to the cloud, or you’re already there.

First, you should think in detail about your business goals and tailor reports and KPIs that will represent them most accurately. Decide what you want to measure and report, identify cost centres as well as the crucial products, applications, business units, etc. It’s important to understand what you want to track, in order to head in the right direction from the start.

Decide if you’re interested only in identifying high-level trends in your expenses, or very detailed charging. Choose whether you want to implement chargeback or showback. Chargeback comes with internal cloud bill re-invoicing and financial responsibility in each department, while with showback, costs are only presented to build awareness and improve forecasting. These decisions may have massive implications on how you should approach implementing FinOps and what tools to use.

Lastly, identify where your bulk spending is coming from, trace which services generate the most expenses, and take an in-depth look at them to find out if there’s potential for optimisations. You should also identify the areas that generate the most profits. Having this level of awareness will be a good starting point for the implementation of FinOps.

FinOps Maturity Stages and Example KPIs

One of the major advantages of FinOps is that it gives you the ability to set your own unique KPIs that fully demonstrate your business success. While we definitely encourage you to do that, it might be a good idea to start with a few general metrics that can show you how advanced you are in the process of implementing FinOps. Based on our experience, it’s best to look at the percentage of cloud resources that are actually allocated, the commitment-based discount you’re able to get from your cloud provider, and the accuracy of your estimated expenses.

With these metrics in mind, you can roughly divide organisations’ FinOps maturity level into three stages — i.e. ‘Crawl’, ‘Walk’, and ‘Run’. Remember that the provided level of KPIs is a general estimate, the actual values will be closely connected with your company profile, and you might need to make some adjustments.

Crawl Stage

Companies at this stage of their journey have minimal reporting and the tools they use are underwhelming. They only follow basic KPIs and don’t use any success metrics tailored to their business. In these organisations, the plans for future improvements only focus on issues that can be solved easily and relatively quickly. There’s not much strategic direction in their cloud-specific efforts.

In terms of KPIs, companies at this stage are usually looking to achieve:

• Over 50% resource allocation
• Commitment-based discount target coverage of approx. 60% of their resources
• Forecast accuracy with about 20% variance

Walk Stage

Companies that have already addressed their most pressing, yet manageable, problems with their cloud setup are in the Walk stage. They have also already identified the most difficult edge cases that need to be addressed, estimated the effort required to solve them, and consciously decided not to deal with them until a later point in time. Automation and well-planned processes are already put in place. Finally, they created unique KPIs — ones that clearly demonstrate their business success.

Such companies’ cloud consumption is usually characterised by:

• 80% cloud resource allocation
• 70% commitment-based discount target coverage
• 15% variance in their cost estimates

Run Stage

Companies that reached this point already have all the necessary processes in place. This doesn’t mean, however, that they’ve already reached the end of their FinOps journey. There still may be room for introducing optimisations in new areas or simply re-evaluating certain solutions as the cloud market evolves. That being said, these organisations aim to achieve ambitious goals, set with relevant, unique KPIs. They have already addressed difficult edge cases and implemented automation wherever it was applicable.

Such companies can typically say that they’ve reached the following KPIs:

• Over 90% cloud resources allocation
• Commitment-based discount covering approximately 80% of the resources
• Difference between the predicted and actual expenses no greater than 12%

If your organisation fits this description and passes the KPI check, you can rest assured that you’re amongst the best. Just stay on track and keep looking for new opportunities.

Conclusion

FinOps is an excellent solution for any business planning to move its operations to the cloud. The IT department’s willingness to use this new technology can often help improve efficiency in all areas of the company. However, the finance department needs to follow suit in spite of the inherent difficulties such as subscription- or usage-based costs management. At the beginning, this approach can be challenging for organisations built with fixed budgets and controlled capital investments. The best way to adopt FinOps is to break down silos and create an alignment between IT, procurement, and finance.

For companies that are already in the cloud, the FinOps practice can improve the performance of the entire organisation. It will allow you to gain better visibility of your cloud ecosystem — from both the technical and business perspectives. It will also enable you to define an optimisation plan, increase predictability, unlock your innovation process, and accelerate value generation.

You should remember that FinOps is a cultural change for the entire organisation regardless of your cloud adoption level. It brings everyone to the table — allowing technical teams to participate in financial decisions and the finance department to leverage their insights to the company’s advantage. When these two departments work together, the organisation can make more informed decisions at a faster pace.