What is FinOps?

What Is FinOps and How Does It Help Control Cloud Costs?

The growth of cloud technology investments has brought unprecedented opportunities for organizations to innovate and scale. But cloud growth also introduces challenges as companies need to manage and optimize their cloud spend in order to achieve ROI. Solving these challenges is easier when companies understand FinOps.

What is FinOps?

FinOps is an emerging discipline that combines operations, finance, and cloud financial management to help organizations optimize their cloud costs and resource utilization. Created by the FinOps Foundation, this strategy is a combination of guidelines, tools, and cultural practices that assist businesses in gaining financial control through improved collaboration and by leveraging technology platforms to monitor expenses as a means to optimize cloud spending.

FinOps is a relatively new concept, and it’s gaining popularity as organizations increase their reliance on cloud computing and outsourced cloud services. FinOps is a strategy or framework that combines financial management best practices with DevOps methodologies, designed specifically to control costs and optimize the use of cloud services. FinOps can also be technology solutions and services that streamline cloud financial management operations and improve financial control, accuracy, and visibility.

Because FinOps brings together financial teams, IT and engineering teams, and business leaders, it also helps organizations foster collaboration and communication. When these functions enjoy closer relationships, they’re more likely to align costs and budgets with technical, business and financial goals.

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What Problems does FinOps Solve?

Cloud innovation remains a top priority, but companies must find ways to invest responsibly given today’s economic headwinds. Even with companies preparing for a recession, more than 80% of IT decision-makers surveyed by IDC expect spending to stay the same or increase in 2023. Thus, business leaders must balance the increasing need for cloud services with strict financial controls, ensuring they reap the most value from their technology investments.

They need better ways to manage their cloud resources and cloud spending.

Optimizing cloud costs is a top concern for business leaders, especially in finance and IT. However, leaders across functions often prioritize different aspects of finance optimization. Finance leaders, for example, typically focus on optimizing costs, managing invoice payments, negotiating well-structured contracts and avoiding late fees and downtime. They need to be able to budget and forecast appropriately while addressing compliance concerns.

For IT leaders, optimization means operational efficiency, scalability, and speed. They’re concerned with how well they’re utilizing the tools they already have and whether digital transformation investments are delivering the expected value.

FinOps brings both of these types of leaders together by providing a holistic approach to controlling cloud expenses that aligns with the organization’s goals. FinOps gives leaders the visibility and insights they need to make data-driven decisions, making more efficient use of their cloud assets and gaining control over cloud costs.

Learn more about the key principles and phases of FinOps and how to get started at your organization.

How is FinOps Different from Cloud Expense Management?

If you’re already familiar with cloud expense management, you might be wondering, “Is FinOps the same thing?” Both involve cloud financial management approaches, such as cost optimization, expense reporting and analytics, budgeting and forecasting. But cloud FinOps is a structured model for cloud cost optimization. It adds another layer to cloud expense management by providing a standardized approach for it, called the six principles of FinOps, and the three iterative phases of FinOps.

Additionally, FinOps focuses on corporate cultural shifts to align key stakeholders, improving collaboration between engineering, finance, and operations departments in an effort to align cloud spend with business goals.

One of the most important aspects of FinOps is how the model achieves financial accountability. Beyond saving money, FinOps focuses on understanding and optimizing the value that cloud services deliver to the business. When you develop a FinOps framework, you’re contributing data-driven decisions that unlock the greatest possible return on investment, rather than just cost-cutting.

What Are the Key Principles of FinOps?

The FinOps approach is based on pillars such as continuous cost optimization, cost transparency and financial controls. Learn more about each of these principles.
Continuous Optimization

FinOps best practice calls for continuously monitoring cloud costs to keep them under control. Continuous optimization refers to the ongoing refinement and improvement of cloud infrastructure and spending. While some expense management efforts are one-time cost reductions, FinOps establishes a continuous cycle of monitoring, analyzing and refining cloud usage and spend. This approach is especially useful for rapidly changing businesses: As your requirements and usage shift, you need a structured approach for analyzing and adapting cloud infrastructure and applications.

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Improved Transparency and Communication

Improving cloud cost structures requires an understanding on how you’re being charged and where your spend is going. To provide transparency and clear communication to all stakeholders, you need clear visibility into cloud service costs and expenses across the organization.

Cloud cost visibility is only as good as your system for tracking and categorizing services, usage, and expenses. One way to get more detail into cloud costs is with cloud cost allocation. This process involves using tagging features to label cloud service instances and processes as a means to track and break down cloud costs by department, project, or business unit. When FinOps practitioners know where costs originate, they can visualize the impact of cloud usage on project, department and enterprise budgets.

Another way to improve transparency and communication is by establishing a cloud governance framework. Such a framework provides structure to how cloud costs are managed, and it defines roles and responsibilities while formalizing policies and procedures around cloud usage. These frameworks are most effective when employees receive training on what they should and shouldn’t do.

Cloud governance clears the haze and shows who’s responsible and accountable for cloud costs. When these frameworks are backed by clear communications and documentation, employees are clear on what they need to do — and how to do it.

Transparency and communication can slip over time, so build in regular checkpoints, reviews and audits so you can identify new areas of cost optimization or cure potential trouble spots.

Implementation of Financial Controls

Financial controls are essential to FinOps because they reflect organizational efforts to monitor and reduce cloud costs. Examples of such controls include forecasting, budgeting, cost allocation methods and usage limits.

For example, you might set your cloud budget based on historical and projected usage, as well as business goals. Cost allocation activities identify optimization opportunities on multiple levels, including within projects, departments or business units. Usage limits, meanwhile, are a type of threshold for unauthorized or unexpected usage levels, including storage or compute resources.

What Are the Phases of FinOps

The FinOps is a continuous lifecycle of activities across three phases — inform, optimize and operate. Here’s what happens during each phase.

Inform: Collect and Analyze Cloud Service Information

The primary focus of the inform phase is to collect data and create insights to guide decisions about how to best reduce costs and accelerate financial management responsibilities. It is defined by creating a centralized inventory of all cloud services, providers, and costs. This phase includes the gathering of data related to cloud services, including contracts, invoice collection and validation, approval processes, and bill pay. But it also includes collecting cloud service usage data, establishing baselines, and ensuring advanced analytics and artificial intelligence are in place to generate insightful reports for decision-makers. Trends analysis and efficiency analysis are essential in this phase.

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Optimize: Create a Plan for Cloud Optimization

The optimize phase takes what was learned in the inform phase to generate insight into cloud waste and identify areas for cost optimization. This phase should make recommendations addressing areas such as how to best cut cloud costs, reallocate unused cloud infrastructure instances, and optimize financial management processes for greater efficiency. In this phase, a strategy and plan is shaped to take action based on the findings, helping to reduce cloud waste.

Some of the optimization opportunities available include negotiating better rates with providers through discounting, sunsetting little-used or outdated cloud applications and adopting cost-saving features — like an automatic pause for services when they’re not needed.

Get tips for cutting cloud costs here.

Operate: Capitalize on Cloud Cost Savings and Efficiencies
In this phase, the focus is on executing the cloud cost optimization strategy. Taking action based on the findings to reduce waste and modify services as needed. During and after implementation, you’ll recognize savings, make more efficient use of cloud services and monitor on an ongoing basis for more opportunities. Updates might be necessary based on the savings achieved, new data or changing conditions.

What Are the Benefits of FinOps?

While FinOps focuses on cloud governance, those aren’t the only benefits. Learn more about how FinOps helps organizations.
Cloud Cost Savings and Resource Optimization
FinOps solutions include dashboards and analytics tools that help teams identify areas of overspending and underutilization, making actionable recommendations. From there, organizations can make adjustments to their cloud services, maximizing their resources and cutting cloud costs. FinOps also enables organizations to get ahead of cost optimization rather than only reacting to events.
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Greater Transparency Into Cloud ROI

With FinOps, teams can track and monitor usage, resource utilization efficiencies, and costs.
When your organization has tagged, centralized, and standardized data across multiple cloud services, expense insights are overarching and linked to all associated cost centers across the organization. This allows for cloud clarity with visibility into innovation spending trends and cloud ROI. With their finger on the pulse of cloud ROI, organizations can use data to make long-term decisions aimed at investing responsibly – only where the company recognizes the greatest returns and business value.

Increased Efficiencies Through Automation

Automation tools provided by FinOps allow for increased efficiency throughout the organization. Billing, procurement, and cost allocation are just three potential areas of improvement. For instance, FinOps solutions use integration and workflow automation to quickly collect expense data, evaluate it, and immediately make recommendations. They also use automated processes to help teams quickly adjust cloud services based on the cost-cutting recommendations. Automating manual processes saves time, prevents financial errors, and gives people time back in their day.

Improved Communication and Collaboration

FinOps bridges the gap between critical business units, including DevOps, finance, procurement and IT operations. It provides alignment and increases visibility into the financial impact of IT decisions. FinOps also encourages a culture of accountability and transparency, which leads to better decision-making and cost optimization.

How Can Organizations Successfully Implement FinOps?

The starting point for FinOps is building the foundation — creating a culture around FinOps, collecting information, evaluating it, executing a plan for optimization, and measuring results. Learn more about each of these areas.

Create a FinOps Culture

A FinOps culture starts with buy-in from executive leadership, although it extends to every level of the organization. Organizations must have a cultural ethos where everyone is responsible for controlling cloud spending. At the same time, be sure to define clear roles and responsibilities around cloud spend management.

Because FinOps is a shared responsibility, train employees across job roles to identify the difference between acceptable and unacceptable cloud costs — and how to respond when they spot cost overruns or suboptimal usage.

Embrace Automation

Automation is another important pillar of FinOps. Automate as much of the cloud cost management process as possible to save time and money. Cloud expense management platforms are built for this purpose.

Areas where automation is imperative include collecting cloud infrastructure and application information, tracking spending, identifying waste, removing waste, and preventing overspending. For example, set alerts to trigger when specific cloud service limits and cloud spending levels are breached. Or create automatic usage caps for cloud applications based on time period or user group.

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Analyze Results Regularly

Measurement and evaluation are key to successful FinOps implementations. Establish the key metrics you’ll rely on for tracking cloud costs and performance. Find a platform that helps you visualize and understand those metrics, along with reporting mechanisms that distill the information for key stakeholders.

When you establish a culture of cloud cost management, stakeholders expect to see regular updates about FinOps processes and whether the business is making progress.

What’s the Future of FinOps?

As organizations increase their dependence on the cloud, they need cost-effective and efficient ways to manage that spending. FinOps provides the framework they need, and the market continues to provide sophisticated FinOps solutions and services. If your stakeholders are still asking, “What is FinOps?” there’s no better time to get them acquainted. While adopting FinOps takes time, the potential cost savings and operational efficiencies make the process worthwhile for any organization that uses cloud computing services. With the right tools, processes and people in place, cloud FinOps can be a long-term differentiator in managing the cost of cloud innovation and delivering more value to customers. If you’re looking to reduce and govern cloud costs, partnering with a trusted cloud expense management expert like Tangoe can get you the most return on your investment. The sooner you act, the more you can save. Learn why research suggests cloud spending is set to reach sky-high levels.

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