Every IT and financial executive needs to stay ahead of rising costs in today’s cloud-first business climate, which requires understanding and embracing the latest strategies for managing the cloud’s variable costs. In this article, we will explore the philosophy and key principles of Financial Operations (FinOps), discuss its importance, and highlight best practices for successful implementation.
Cloud Cost Management is Evolving into FinOps
As you might imagine, technology expense management is a practice that has been around for a long time, and now it’s being applied to the cloud to help companies contain out-of-control costs.
- Gartner states it’s common for companies to overspend by 70% in the cloud
- CIO.com research shows 29% of cloud resources go unused or underutilized – other reports show as much as 40% of cloud resources are wasted
- VentureBeat reports 78% of companies adopt the cloud, not all are seeing value of their investment
- Nemertes says 97% of companies use Saas but only 62% have any defined governance for cloud
Today, the practice of reining in cloud computing expenses has evolved into a variety of names like cloud spend management, cloud cost management, cloud cost optimization, or cloud expense management. But most notably, in recent years, these terms have been converging under a new term, FinOps.
The Objective of FinOps
FinOps is a cultural and operational framework that aims to optimize cloud computing costs while fostering collaboration between cross-functional teams.
As a portmanteau of the words “Finance” and “Operations,” the FinOps Foundation defines FinOps as “an evolving cloud financial management discipline and cultural practice that enables organizations to get maximum business value by helping engineering, finance, technology and business teams to collaborate on data-driven spending decisions.”
At its core, FinOps is all about achieving financial control and predictability in the cloud. It empowers teams to manage their cloud costs effectively while enabling more efficient use of cloud services including Software-as-a-Service (SaaS) applications and Infrastructure-as-a-Service (IaaS).
By adopting FinOps, organizations encourage ownership of cloud service costs and usage across all levels, from IT executives to network engineers, finance, and procurement teams. It involves a shift towards a culture of accountability and collaboration, supported by a central best-practices group.
But it’s important to note that FinOps can include strategy, process, as well as technologies and solutions to streamline both the process of cost analysis and optimization as well as expense management, including invoice processing and cost allocations. ZK Research explains in this Buyers Guide for Cloud Expense Management.
Key Principles of FinOps
As a comprehensive framework to cut cloud costs, FinOps consists of six core principles, six domains and capabilities, as well as three key phases and three milestones marking different levels of FinOps maturity. Here is a quick summary of the first six core principles:
- Team Collaboration: FinOps emphasizes the need for teams from various domains, such as finance, technology, product, and business, to work together in near real-time. This collaboration allows for continuous improvement in both efficiency and innovation.
- Business Value-Driven Decisions: FinOps encourages decision-making based on the business value derived from the cloud. Instead of focusing solely on aggregate spend, unit economics and value-based metrics, it encourages conscious teams to work together to handle trade-offs among cost, quality, and speed.
- Service Ownership and Cost Accountability: In FinOps, every leader and team takes ownership of their cloud usage and costs. Engineers, departments, and product teams are empowered to manage their cloud usage within budgetary constraints. Decentralizing decision-making around cost-effective network architecture and application optimization allows for greater agility and cost control.
- Timely and Accessible Data: To control costs, you must first know what you’re spending. FinOps promotes the availability of real-time cost data, which enables teams to make informed decisions promptly and on an ongoing basis. Accessible and timely reporting and visibility into cloud service utilization at all levels of the organization drives lower costs alongside sharper financial forecasting, planning, and cost benchmarking for comparison purposes.
- Centralized Team and Support: While FinOps encourages ownership and accountability at the team level, a central FinOps function is essential to enable organizational change and drive best practices. This team provides guidance, evangelizes FinOps principles, and establishes corporate standards and governance for the cloud, centralizing the contract rate or service cost, the length of time the company will commit to the service, and how to leverage discounts for economies of scale. This allows technical teams to focus on optimizing cloud service usage while streamlining contract negotiations and procurement processes across corporate financial structures.
- Embracing the Variable Cost Model: FinOps encourages organizations to embrace the variable cost model of the cloud. Rather than viewing it as a risk, they see it as an opportunity to deliver more value. Agile iterative planning, just-in-time services, and proactive system design with continuous cloud optimization are preferred over static long-term plans.
Best Practices in FinOps
Implementing FinOps involves leveraging best practices in cloud cost management. Here are a few examples:
- Cost Monitoring and Tracking: Utilize cloud spend management solutions or cloud cost management technology platforms to track and monitor cloud applications and infrastructure costs. These tools apply advanced analytics and AI-based automation to identify opportunities for cost savings, reduce any wasted resources, and leverage discounting opportunities to multiply savings.
- Resource Right-Sizing and Optimization: Continuously evaluate and optimize resource usage to match actual business requirements. All too often, rapid changes to the business cause cloud resources to be misaligned with needs. Identify idle resources, unused services, and oversized instances to eliminate waste and reduce costs.
- Automation and Cost Governance: Automate the provisioning and deprovisioning of resources to minimize manual errors and reduce unnecessary expenses. Establish policies and controls to ensure cost governance and prevent cost overruns.
- Continuous Cost Optimization: Implement a culture of ongoing cost optimization by regularly reviewing and refining cloud network infrastructures and applications, reducing redundant services, leveraging the most cost-effective services, and exploring optimization techniques like reserved instances, spot instances, and serverless computing.
- Collaborative Budgeting: Foster collaboration between engineering, finance, and business teams during the budgeting process. Encourage transparency and communication to align cloud investments with business objectives and optimize costs.
FinOps Challenges and Considerations
When implementing FinOps, organizations may face challenges such as unexpected increases in cloud service usage, unknown or unrecognized application usage (also known as Shadow IT), variable pricing models causing unpredictable costs, and limited visibility into cloud spend. Addressing these challenges requires a combination of adopting appropriate cloud cost management software, establishing clear governance processes, and fostering a culture of cost awareness and optimization.
FinOps offers a transformative approach to managing cloud costs and driving collaboration across teams. Some studies show companies save as much as 56% on cloud costs as the result of applying cost management practices. Here at Tangoe, we find that the average savings are in the neighborhood of 40%.
By adopting the principles of FinOps, organizations can optimize cloud expenditure, improve financial control, and foster a culture of accountability and ownership. Successful implementation of FinOps involves leveraging the framework’s core principles to establish an ongoing practice or standardized discipline for cost control but also backing the strategy and process with cloud cost management tools that allow for deep analysis of cloud usage and automate the processes for it. Embracing a continuous cost optimization mindset is also critical. With FinOps, organizations can harness the true potential of the cloud while maximizing business value and efficiency.
Learn how Tanoge helped a research firm control spending in 30 days with its FinOps solution.