Technologies | December 14, 2023

Understanding Cloud FinOps principles – your key to effective cost management

Read the article to learn what FinOps is, what the best practices in cloud management are, and how to control cloud costs so they bring business value rather than waste.

Understanding Cloud FinOps principles – your key to effective cost management

In 2023, more than 80% of companies, regardless of size, indicated that managing cloud costs was challenge number 1 for them. At the same time, recent McKinsey research shows that business leaders are not interested in FinOps until cloud costs exceed $100m per year. For that price, you can buy over 40 Bugatti Veyron 16.3 Grand Sport Vitesses or a private island paradise off the coast of Central America. This is not to say that the cloud trend is slowing down – instead, the importance of tools for cost management is rising.

What is Cloud FinOps and why is it important?

At a time when everything in technology is “OPSized”, the term FinOps may bring to mind another buzzword or trend. FinOps, however, is a pivotal set of practices and tools for automating cloud cost management. Despite the advantages of the cloud, this has become a major concern. At some point, companies see that the cost of cloud services is higher than they expected. The reasons behind this could be the use of too many applications, underutilized Virtual Machines, capacity-related aspects, or the use of “on-demand” services.

This is when FinOps comes to the rescue. The FinOps culture has been inspired by the DevOps model, which consists of continuous improvement, constant communication, and collaboration among all teams involved. Let’s delve deeper into it.

Definition of FinOps by the FinOps Foundation

The FinOps Foundation, an entity popularizing Financial Operations practices dedicated to professionals, describes FinOps as “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”.

Understanding the principles of Cloud FinOps

It is not sufficient to simply implement a FinOps tool and believe that things will happen automatically. To begin managing cloud expenses, it is worth starting with an understanding of FinOps principles. FinOps is a cultural transformation that involves changing attitudes toward cloud computing capabilities and cloud usage at the level of both organizations and individual units. The principles below were proposed as part of the Cloud FinOps book in 2019 as a joint AWS statement.

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FinOps fundamentals:

  1. Collaboration – The FinOps discipline brings a blend of finance and cloud operations. This means that financial, technology, product, and business teams are all involved and collaborate swiftly to make the most of cloud resources.
  2. Business Value – You see the cloud as an innovation engine and use it to make decisions. Cloud technology offers numerous benefits for businesses, including cost savings, flexibility, scalability, and improved collaboration. As a result, many organizations are leveraging the cloud to drive their decision-making processes.
  3. Accountability – Each team is responsible for overseeing their cloud usage within their allocated budget. The technical teams are accountable for ensuring the cost efficiency of the cloud in the context of software development, while the engineers are responsible for managing expenses related to architecture and design.
  4. Reporting – Cloud cost analyses are available in real-time to everyone regardless of the level of the organization, and in case of any abnormalities, improvement actions are taken immediately. This can result in more efficient and cost-effective decision-making as well as improved overall financial performance for the organization.
  5. Centralization – One centralized FinOps team (Centre of Excellence) safeguards respect for FinOps practices. This is similar to having a security team within a company: this team promotes best practices and monitors them, but each individual and their team must be aware of security standards and respect them.
  6. Flexibility – A centralized FinOps team allows particular teams to focus on their areas. By taking on the responsibility of monitoring and optimizing costs on behalf of the organization, a centralized FinOps team enables engineers to concentrate on developing and improving products without getting bogged down by financial concerns. Similarly, business users can focus on their specific responsibilities.

The importance of FinOps in cloud financial management

According to IDC, the phenomenon of cloud waste affects 10-30% of companies. In times of economic uncertainty and inflation, the popularity of FinOps is booming. Today more than 60% of companies surveyed indicate that optimizing cloud costs to save money is their top priority. The most important value that FinOps brings is the reduction of cloud waste with better control over spending and cloud utilization.

The $100 million pitfall and other traps in managing cloud costs

Businesses led by the desire to save money are turning to the cloud. Business Value and Optimization in Cloud FinOpsOnce migrated, it’s time to ask the question: what now? Here are the most common strategic pitfalls after migrating to the cloud as laid out by McKinsey analysts.

1. Let’s see what happens – a $100m pitfall  

Companies are moving to the cloud and waiting to make optimization decisions based on the principle: “Let’s see what happens”. This is the strategy adopted by as many as 50 percent of companies. Only when annual cloud costs exceed $100 million do business leaders begin to take an interest in lowering cloud costs. Such a strategy is risky. The longer they wait to implement the FinOps strategy, the more work and time they have to put into the optimization later; meanwhile, their costs continue to rise.

2. Let’s focus on operational activities first

After cloud deployment, 70% of businesses focus on operational activities such as budgeting and cloud policies. At the same time, measurable value would come rather from strategic activities: accurate cost forecasts and cost optimization, changing habits in the context of the cloud, and managing economics in units. Such a fruitful strategy is embraced by only 30% of respondents.

3. We just need to set up a cloud FinOps team and don’t have to worry about their skills

Simply adopting the FinOps culture is not enough for business value to emerge. 85% of FinOps Teams contain cloud architect competencies and nearly 70% have financial analysis competencies. At the same time, skills in understanding business requirements, predictive analytics, and cloud market knowledge are overlooked. Such a competency gap affects optimization effectiveness. Bear in mind that only a holistic approach will make FinOps a success.

Business Value and Optimization in Cloud FinOps

In contrast to the above, you can adopt a sound strategy – deploy competent FinOps as early as possible to involve business leaders in strategic decisions more quickly. According to a McKinsey report, businesses taking advantage of cloud FinOps can reduce cloud spending by even 20 to 30 percent.

The FinOps lifecycle

Now it’s time for more specifics on FinOps. The FinOps lifecycle consists of 3 iterative phases: informing, optimizing, and operating.

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The FinOps lifecycle

  • Informing – This is the first phase in the FinOps lifecycle, allowing for cloud cost allocation and visibility. It is crucial for business and financial stakeholders as they can get insight into estimated ROI and budget predictions.
  • Optimizing – When teams are informed, they need to optimize their cloud usage. In this phase, FinOps cloud teams identify areas to optimize and act.
  • Operating – The business is constantly assessing their goals and measuring their progress. The measures of their operations are in line with the goals thanks to considering efficiency, quality, and expenditure.

FinOps Personas

You already know that one of the foundational pillars of FinOps is collaboration. Here’s a list of the personas involved:

  • FinOps Practitioner
  • Executives (CEO, CIO, Head of Infrastructure, etc.)
  • Product Owner
  • Software engineers
  • Ops team members
  • Finance and Procurement teams
  • Sustainability Practitioners
  • …and last but not least – ITAM leaders and members who work closely with experts in the scope of architecture and security.

FinOps & Security

It’s important to use common sense while reducing cloud costs and keep the right balance (that is, adjust the security features to your resources). A poorly secured cloud can generate millions of dollars in expenses. On the other hand, overprotection will also affect costs.

Implementing the Cloud FinOps Framework

The FinOps Foundation framework offers a set of practices for setting up and thereafter excelling in Financial Operations. It is an open-source guide that is being continuously developed by the community and contributors. The framework provides knowledge on:

  • FinOps Core Principles – 6 essential points on creating cross-functional teams, collaboration, ownership, data usage, and optimizing resources.
  • FinOps Phases – iterative phases of informing, optimizing, and operating.
  • FinOps Capabilities – functional practices aimed at empowering people by distributing knowledge, engaging them, achieving business goals, and constantly improving FinOps maturity in the organization.
  • FinOps Domains – these represent the particular capabilities businesses must complete as part of FinOps practice. 
  • FinOps Maturity Model – based on the “Crawl, Walk, Run” approach, enabling companies to start small and grow gradually in terms of understanding and practicing effective FinOps. 
  • FinOps Personas to Implement the FinOps Framework, you need to cooperate with the key personas mentioned above.  

In that context, implementing the FinOps framework means establishing accountability and stakeholders, applying the cloud Financial Management Lifecycle and optimization, respecting and implementing principles and best practices, and finally enabling cost optimization by setting up cross-functional teams.

Also read: New pricing model called benefit-based or gain sharing

FinOps best practices

There is no one simple recipe for successful FinOps. Still, certain FinOps best practices will get you closer to your goal.

  • Take advantage of the collective effort – this approach requires hard work, but remember: many hands make light work. Therefore, synergy in action will be your ally.
  • Choose the right FinOps tools – there are dozens of recommended cloud optimization tools on the market, ranging from native solutions (such as Azure Cost Management tools, Google Cloud Cost Management, and AWS Cost Explorer), to third-party software (CloudZero, Harness, Densify, and CloudChkr, to name a few). Choosing a tool is a topic for a separate article – you must consider your organization’s needs, the costs of the tool, ease of use, integrations, and capabilities.
  • Undertake due diligence – cloud optimization is a constant process since your cloud needs for resources, applications, services, or Virtual Machines will continue to evolve.

Summary – controlling cloud spend with Financial Operations

Cloud migration is the way to go and a real asset to companies. The role of the public cloud is growing, and companies are looking for options to optimize their cloud usage and spending. As practice shows, in these uncertain times, companies are not giving up on cloud deployments and migrations but are looking for ways to control cloud spending and cloud cost optimization. Thanks to the FinOps program, businesses can manage their cloud expenditures effectively and cut cloud waste by up to 30%.

nearshore 2021.11.25 cover


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