The adoption of public cloud has changed the financial management operating model for businesses. I’ve seen many organizations struggle to adapt to these changes. Here’s why:
Traditionally, procurement teams controlled any material IT spend, because they approved all large equipment purchases. This kept engineers in check and ensured expenditures were closely aligned with corporate strategy. Procurement’s “gate-keeper” role also helped instill financial discipline.
That was until organizations started to adopt greater cloud usage, which changed the dynamics.
The variable-spend model (pay-as-you-go) allowed engineers to bypass the procurement approval process. Initially, these expenses were small, but as we all know, cloud usage and costs quickly balloon. Suddenly, Finance was left to allocate, explain and control these Infrastructure-as-a-Service (IaaS) costs — costs, billing methods, and billing cycles that are very different from the other assets and resources that Finance tracks and reports on.
How do organizations implement an effective cloud financial management operating model? The key to restoring sanity to the chaotic world of Cloud Expense Management (CEM) is adopting a FinOps practice.
The Role of Finance is Changing
As a finance professional, you understand that cost transparency, visibility, budgeting and predictability are critical for the business to function. Your tech counterparts understand this, too, broadly speaking. But it’s not their primary focus: IT infrastructure teams are focused primarily on scalability, support, performance, innovation, agility and speed to market.
How do you educate your tech counterparts on the financial requirements of the business? How can you bring “financial accountability to the variable-spend model of public cloud computing?” This requires collaboration, which is exactly what a FinOps practice is designed to deliver.
So how do you get started?
Here are three considerations to incorporating a FinOps practice following public cloud adoption:
Create a Culture of Collaboration and Accountability
The first step is to foster a culture of collaboration. You can start by assembling a cross-functional team consisting of your Tech executive counterparts, Engineering and Operations, Procurement, and, of course, Finance. Your role in this team is to educate your colleagues on the financial requirements of the business while educating yourself on the basics of IaaS.
Define Broadening Responsibilities
Next, each team will have to adjust their processes to align with the realities of public cloud.
Engineers and IT Ops
Engineers and IT Ops teams don’t typically think about operating costs. Previously, capacity planning happened in advance, forcing engineers to contend with hardware constraints.
Cloud computing changed that paradigm, allowing engineers to add more servers, storage, or computing power as needed. This allows these teams to be more agile and meet infrastructure needs more effectively. However, this also affects the operating budget.
Engineering and IT Ops teams have to learn to consider the costs of their infrastructure choices (e.g., adding capacity) and their impact on the business. You can help them by presenting expense management as simply another metric they need to measure, and showing them they can monitor and control these costs simply by shifting cloud resources proactively.
Procurement teams normally tightly control spending and rate negotiations via the purchase order process. These important tasks are compromised once employees can bypass corporate processes and acquire cloud resources without the involvement of Procurement.
This shift doesn’t render Procurement obsolete. Rather, it offers an opportunity to broaden the role of the department. Instituting a FinOps practice allows procurement to focus on strategic sourcing. With added visibility to all public cloud costs, they can consolidate all cloud spending into an enterprise agreement with cloud service providers. This enables the organization to get the best rates for services consumed, all while reducing the instances of shadow IT.
The challenges and concerns of Tech Executives are similar to those of Finance. CIOs and CTOs no longer plan large infrastructure purchase decisions; they now depend on their teams to operate within their budget. They are less consumed with having enough capacity to meet business needs, and more focused on ensuring spend is in line with business outcomes. Your Tech counterparts want more real-time control of IT expenses and the ability to steer spend.
Lastly, Finance teams traditionally focused on retroactive monthly or quarterly reporting based on set budgets. In the world of cloud computing, retroactive reporting is ineffective. Finance teams need to partner with tech and engineering teams to forecast spend based on the actions of engineers. This requires a shift from Capex reporting to Opex forecasting. It also requires education on the basics of IaaS, so Finance teams understand precisely what items are driving spend.
Use Real-Time Reporting to Pull it All Together
Once you’ve assembled the FinOps team, and each group understands the necessary changes in their responsibilities, how do you ensure each team member is marching in the same direction? Reporting.
Real-time (or near-real-time) reporting is the most powerful tool in a FinOps practice. Once confronted with the financial impact of their decision-making, cloud users engenders behavior changes. You start to create a culture of accountability. Linking productivity KPIs with cost metrics encourages data-driven decision-making and further reinforces accountability.
Implementing a Cloud Expense Management (CEM) solution will give you the visibility, cost transparency, and robust reporting you need. Any effective CEM solution must also provide near-real-time usage tracking linked to spend, so users are aware of the financial impact of their actions. FinOps is the gateway to making better business decisions while innovating.