FinOps: Evolving Cloud Financial Management

4 min read

As more organizations are adopting a hybrid, multicloud approach, they are struggling to optimize value and control cloud spend. The answer is FinOps.

FinOps, short for Financial Operations, brings together finance, technology and business to master the unit economics of cloud and to create an operating model for efficient cloud usage. It gives users of the cloud from all parts of the organization responsibilities for planning capacity, meeting goals and managing variable consumption of cloud resources to increase efficiency and meet budgetary requirements and financial goals.

FinOps is a natural companion to DevOps and can be thought of as the discipline for efficient cloud computing usage. It is a combination of systems, best practices and culture change to increase the enterprise’s ability to understand cloud costs, make smart, objective-based decisions and take action to improve value. This requires a revised approach to cost and value management which inherently affects most areas of an organization. From leadership down to the newest junior engineer — everyone has their part to play.

FinOps can be a radical transformation for some organizations, but when done right, it becomes part of the enterprise culture by encouraging cross-functional teamwork. It breaks down functional barriers between development squads, product owners, financial teams and commercial teams. It causes them to collectively rethink and reimagine how they work and collaborate, assigning appropriate accountability and metrics for the questions of: “Am I being cost-effective, and am I delivering value?”

What are the advantages of FinOps?

Cloud brings a change in agility, demand-based consumption and decentralized control, all of which drive innovation and productivity. However, with the increasing adoption of a hybrid, multicloud approach, organizations are struggling to optimize value and control cloud spend.

FinOps tries to address that balancing act, empowering engineering teams with speed and agility, while still requiring them to consider quality and costs. Each team and individual plays a role in FinOps and has responsibilities for which they are accountable. Although changing the culture of an organization may be challenging, there are valuable benefits.

For example, a FinOps framework improves the ROI of cloud spend and increases innovation. It also encourages financial accountability with transparency and ownership, creates cost-efficiency through cloud usage optimization and builds trust and collaboration across teams and departments. Cloud cost management through carefully analyzed trade-offs between quality and speed helps to break down functional barriers between development squads, product owners, finance and commercial teams. Careful attention to forecasting, pricing and procurement lead to cloud cost optimization.

Why should my organization adopt FinOps?

FinOps is a new word and a new practice within organizations, but not a new function — cloud migrations and cost management have been taking place across enterprises for almost a quarter-century. FinOps brings visibility and accountability forward in organizations struggling to manage cloud spending and proper allocations.

Some other challenges that FinOps addresses include the inability to show value from the utilization of the cloud, slow optimization of cloud consumption from development and delivery and lost connections between cloud strategy and enterprise strategy. In order to achieve successful program completion and attain the necessary business value, FinOps program delivery should be bracketed by two simple principles:

  1. What are the pain points being addressed?
  2. What are the frameworks, approaches, tools and personnel required?

In our experience, the most common organizational challenges related to cloud include three main issues:

  1. Overspending on existing off-premises and on-premises hybrid cloud resources (lack of cloud cost optimization).
  2. Lack of cloud resources and business value visibility to leadership and senior executives.
  3. The inability to connect public cloud strategy with overall technology strategy.

The six core principles of FinOps

The methodology is laid out for practitioners by the FinOps Foundation. The Foundation consists of a community of FinOps practitioners and identifies standards and best practices to help members through their FinOps journeys. They have published principles, personas, phases, maturity levels, domains and capabilities associated with building a successful FinOps practice.

The six core principles developed by the FinOps Foundation guide activities associated with the FinOps practice. These principles cover multiple clouds, and as teams around the world gain experience with cloud services, they are re-examined and adjusted as necessary. Here are the six principles, which focus on data-driven decision-making between engineering, IT finance and the business to maximize business value:

  1. IT-wide, cross-function support: Teams must collaborate. Finance, IT and engineering are all interconnected. In FinOps, cost is an efficiency metric, regardless of the team. Defining governance and controls for cloud cost and usage and improving practice to increase both efficiency and innovation throughout the organization is part of FinOps.
  2. Business objectives related to managing costs, innovation and other priorities drive cloud decisions: One of the benefits of cloud is that organizations pay for what they use, but without FinOps, spikes in cloud usage can lead to surprising costs. When teams take business objectives into consideration during planning, those unexpected expenses can be limited or accounted for. Timely, accessible reporting, along with tools like trending and variance analysis provide explanations to all parties about usage and expense by tying the spending directly back to business value objectives. Internal team benchmarking encourages adherence to best practices and helps stakeholders clearly see improvements in cloud financial management. Industry peer-level benchmarking provides a larger view of progress.
  3. Individual accountability for cloud usage and spend: In a successful FinOps practice, teams have the power to manage their own usage of the cloud and can see where that cost fits into the budget. When everyone has ownership and visibility into cloud spend, they can adjust as necessary. Team level targets, whether for engineering teams, design teams or marketing teams, give members accountability for cloud costs.
  4. Accessible and timely reports: Real-time feedback is an important way to improve efficient behavior and increase business value. Visibility of how resources are being used allows for fast adjustments and reduces under- or over-provisioning. As FinOps improves, automation can be deployed to drive continuous improvement.
  5. Centralized ownership of FinOps. Although FinOps is a distributed approach to cloud financial operations, it must be owned by a centralized team. When cloud FinOps is centrally governed and controlled, committed-use discounts, reserved instances, upgrades and volume discounts from cloud providers can be used efficiently. When a centralized buying process is in place, rate negotiations are removed from teams that aren’t equipped for them, driving increased cloud optimization. A centralized team also provides granular allocation of all costs to the teams responsible for them.
  6. Active management of the variable cost model of the cloud: FinOps means that the organization gains an advantage from the on-demand cost model of the cloud, instead of seeing those costs balloon here and there. Right-sizing instances and services means that all teams have appropriate resource levels, while reporting and analyses drive better business decisions.

Where does FinOps stand today?

The State of FinOps Report 2021 is a report from the FinOps Foundation based on surveys of FinOps practitioners. The report gathers the experiences and learnings of people from across a swath of industries as they progress in their own FinOps journeys. Some of the data provides insights into trends and what the future may hold. The following are some of the findings from the 2021 survey:

  • Large companies are adopting FinOps quickly, likely due to the complexity of their cloud environments and large number of teams that need to collaborate.
  • More than 90% of respondents cite FinOps as either definitely or maybe part of their career path, making it clear FinOps is an emerging career path option.
  • At large companies that have reached the “run” stage of FinOps maturity, the average experience of a FinOps practitioner is about three years
  • Only about 15% of respondents say their organization is at the “run” stage of maturity
  • In the 12 months prior to the survey, the average FinOps team grew from four to seven people, and most expect at least 50% more growth in the coming year.

Summary

The FinOps solution requires a cultural shift. When done right, FinOps becomes part of the company DNA, with every choice and action shaped around the questions of: “Am I being cost-effective, and am I delivering value?”

To succeed, the solution needs to be cross-functional and collaborative, breaking down functional barriers involving a wide variety of stakeholders from across the organization. This goes from top to bottom and everywhere in between. Covering the entire organization — from executives down to the newest engineer — FinOps requires both practical action and strategic leadership. By setting targeted metrics to allow responsible and accountable parties to verify that cloud spend is used in the pursuit of business objectives, FinOps is about delivering value, not just cutting cost.

IBM and FinOps

IBM Consulting Hybrid Cloud Advisory Practice leverages client-proven strategies with industry-leading assets and accelerators to bring accountability and visibility to cloud cost management by tying business objectives to squad-level metrics to seamlessly accelerate cross-enterprise adoption. To learn more about IBM's FinOps Offering, please visit IBM Hybrid Cloud Advisory

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