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Published: 13 November 2023
Contributor: Michael Goodwin

What is FinOps?

FinOps (or cloud FinOps) is an evolving cloud financial management discipline and cultural practice that aims to maximize business value in hybrid and multicloud environments. 

FinOps is a portmanteau of finance and DevOps, emphasizing that IT, finance and business teams must collaborate to bring financial accountability to the cloud and make informed, data-driven decisions when managing tradeoffs between speed, cost and performance.1

There’s a misconception that FinOps means becoming cheap with cloud spend. Actually, FinOps is about removing blockers, empowering engineering teams to deliver better features, apps and migrations faster, and enabling a cross-functional conversation about where to invest and when. Sometimes a business will decide to tighten the belt. Sometimes it’ll decide to invest more. But with FinOps, teams know why they’re making those spending decisions.2

Rapid adoption of cloud infrastructure has challenged traditional consumption models and procurement cycles. FinOps addresses this challenge by bringing procurement under the centralized control of a dedicated FinOps team. This team advises all stakeholders on best practices for cloud cost optimization. It creates a common language that allows organizations to efficiently operate at scale in the cloud.

FinOps is both a discipline and cultural practice and it also refers to the FinOps Foundation (link resides outside of ibm.com). The FinOps Foundation is a nonprofit trade organization and is part of the Linux Foundation. The organization is comprised of companies and certified practitioners promoting the FinOps discipline.

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Why FinOps adoption is growing

Public cloud spending has risen dramatically in recent years, driven by the increasing adoption of cloud-native infrastructure services. Gartner® forecasted that worldwide end-user spending on public cloud services would expand by 20.4% in 2022 to nearly USD 500 billion, reaching nearly USD 600 billion in 2023, with more than 40% of enterprise workloads deployed in the cloud.3

This acceleration in cloud migration and investment is paralleled by concerns about wasteful spending. Flexera's 2022 State of the Cloud Report found that, for the sixth year in a row, optimizing the existing use of cloud was the top initiative among surveyed organizations. (Migrating more workloads to the cloud came in second). In addition, respondents reported that public cloud spend was over budget by 13% on average, that cloud spend is expected to increase by 29% in the next 12 months, and that a self-estimated 32% of cloud spend is wasted.4 (Cloud spend has grown significantly in part because over allocating resources is the most common method used to mitigate performance risk.)

In short, enthusiasm for cloud computing remains high. It's become clear that the adoption of complex multicloud architectures, and the spending growth that accompanies it, necessitates an overhaul in the financial management of IT.

FinOps has emerged as the management discipline for organizations looking to optimize costs using best practices designed to maximize returns on cloud investments.

The three pillars of FinOps: Inform, optimize, operate

Adopting FinOps requires a cultural shift within an organization that facilitates communication and collaboration between previously disparate teams. Crucially, it also calls for engineers and product owners to take responsibility for their cloud spend, treating cost as they would any other efficiency metric. To empower engineering teams in this endeavor, and render a FinOps model effective, IT, finance and business teams must work together. They can receive guidance from a centralized FinOps team. Together, they can establish cloud cost management controls that account for licensing constraints and do not negatively impact performance. FinOps practices must also not hamper product innovation or release velocity.

The FinOps Foundation has defined the FinOps journey in three phases—Inform, Optimize and Operate—and a company may find itself in multiple phases at once depending on where each team or unit is in their FinOps maturity.The move to FinOps is not a linear process that is completed after the third phase, but a process that should be continually repeated as an enterprise matures in its FinOps model.

Let’s explore the phases of the FinOps journey:

Inform: Inform is the first phase of the FinOps framework. It’s about empowering all stakeholders with the information and understanding that they need to make informed, cost-effective decisions around cloud usage.

For instance, when an IT team understands which cloud resources are deployed and available, they gain better visibility. This visibility allows them to allocate associated spend contextualized within the business units that consume cloud, and chargeback accordingly. This includes understanding how applications are using cloud resources. For example, consider your USD 10,000 monthly cloud bill. The team can determine what portion is allocated to the applications that support the finance applications versus the external website applications.

Optimize: Optimize is the next phase of the FinOps framework, and it focuses on discovering opportunities for savings. Where can your organization rightsize resources and benefit from discounts based on current usage? For example, if you’re running a virtual machine (VM) on a particular node and it’s costing you USD 1 per minute. You could save money by moving that VM to another node that costs only USD .08 per minute?

This is a great opportunity to take advantage of pricing and discounting opportunities, but only if you can apply the correct licensing constraints to the equation to find those licensing savings. You wouldn’t want to move to another node and find that your license doesn’t apply and you’re spending four times that of the previous placement.

Operate: Operate is the final phase of the FinOps framework, where organizations continuously evaluate their performance against business objectives and look for ways to improve their FinOps practice. Once optimization efforts are in place, automation empowers organizations to implement policies that will continuously adjust cloud resources to control cost without impacting performance.

Automatable policies that safely reduce cost while also adhering to license compliance policies and constraints allow for greater governance when executing processes. For example, being aware of the license compliance costs incurred when moving workloads to new nodes to improve application performance.

FinOps core principles

The FinOps Foundation outlines six principles to guide data-driven decision-making in the FinOps model. The principles are not hierarchical but should be used in conjunction throughout the FinOps lifecycle.6

Teams need to collaborate. It’s imperative that teams work together to improve the FinOps practice and achieve continuous improvements in efficiency and innovation. Collaboration between cross-functional teams can enable financial operations to match the speed and granularity of IT. This collaboration empowers engineers to treat cost as they would other efficiency metrics. It also helps to establish standardized governance and controls around cloud management and usage.

Everyone takes ownership for their cloud usage. The visibility gained in the initial inform phase gives feature and product teams the insight needed to effectively manage their cloud usage and keep spend within their predefined budget. Establishing and tracking targets at the team level helps to build accountability from the ground up.

A centralized team drives FinOps. FinOps is a distributed process, with organization-wide involvement, but it must be owned by a centralized team. A dedicated FinOps team can compare cloud providers and services, and take advantage of committed-use discounts, reserved instances, upgrades and volume discounts. A centralized buying process also gives an experienced team the responsibility for handling rate negotiations and cost allocation to teams.

Reports should be accessible and timely. Such reports promote more efficient decision-making, including taking corrective action on under-or over-provisioned resources and capitalizing on the automation opportunities that drive continuous improvement. Understanding workflows, rightsizing resources and properly predicting the need for cloud services in near real-time are key elements of FinOps success.

Decisions are driven by business value of cloud. FinOps is not just a cost-cutting strategy, but a practice designed to maximize business value. As such, value should drive all decisions. Tools like trending and variance analysis can help teams understand cost increases, while internal and peer-level benchmarking can help gauge how the company is performing. Rather than reflexively cutting costs when expenses rise, weighing cost, growth and performance comprehensively allows teams to make value-based decisions.

Take advantage of the variable cost model of the cloud. To ensure maximum value from cloud spend, companies must take advantage of cost savings opportunities in the cloud cost model. This cost model includes comparing pricing options and usage discounts offered by various service providers and rightsizing instances and services purchased.

Who are the key FinOps stakeholders?

Titles vary by organization, but there are generally five key FinOps stakeholders as defined by the FinOps Foundation (link resides outside of ibm.com):

Executives. Executives such as a CTO, CIO, CFO or Head of Cloud Center of Excellence focus on delivering complex, large-scale IT projects. They also foster accountability and transparency, and make sure that teams adhere to budgets.

Business or product owner. Usually a Director of Cloud Optimization, cloud analyst or business operations manager form part of the business or product owner teams. These team members are responsible for bringing new products and features to market. They also focus on accelerating product growth year over year. Product owners are typically critical stakeholders in automating cloud infrastructure.

Engineering and operations. Software and systems engineers, cloud architects, service delivery managers and other engineering and operations team members help speed the delivery of high-quality services while keeping business operations flowing. To do so in an effective FinOps operating model, these teams work together to establish accountability practices in engineering teams. They also identify anomalies, rate reductions and areas for cost avoidance that make the delivery of apps and services more cost-efficient.

Finance and procurement. Finance and procurement team members use information from the FinOps team to negotiate the most favorable contracts, exercise discount and volume commitment programs, and create cloud budgets, forecasts and cost reports.

FinOps practitioner. FinOps practitioners lead the cultural shift required for FinOps success, uniting business, IT and finance teams to optimize cloud usage and increase business value. Using their knowledge of the FinOps framework, its principles and capabilities, they focus on several key areas. These areas include establishing a FinOps culture and educating the organization on best practices. They also set benchmarks, create visibility around cloud costs, and guide budgets and forecasts.

What is FinOps reporting?

FinOps reporting is the practice of consolidating and visualizing billing and licensing data into a single unified view across multicloud and hybrid environments. Successful FinOps practices require that organizations tear down silos and create a culture of shared responsibility to engage all stakeholders. Accurate and detailed reporting of hybrid and multicloud environments is necessary for organizational acknowledgment of FinOps processes and the value added.

Essential components of FinOps reporting include several key elements. First is the cost visibility of the entire environment, including billing data and detailed usage information. Next is cost allocation across multiple dimensions such as cost centers and teams, including budgeting and forecasting. Lastly, there are chargeback and showback capabilities.

What role can automation play in FinOps?

Cloud optimization is not a one-off exercise to reduce cloud spend. Complex hybrid and multicloud environments regularly change based on demand for different applications and services. To avoid performance risk, resource allocation must dynamically respond as demand changes.

Cloud optimization requires that applications get exactly the resources they need to perform, continuously and automatically. Organizations on their FinOps journey realize that dynamic resourcing is the only way to truly optimize their cloud estate and ensure performance. Automation has become central to FinOps practices because it is impossible to manually resource applications in real-time and at scale.

Why do you need reporting and automation in FinOps?

To achieve maximum benefit, FinOps practices must leverage both reporting and automation in their cloud operations. According to the FinOps Foundation, advanced reporting means that greater than 90% of cloud spend can be allocated and there is little variance between forecasted spend and actual spend. 7 Mature FinOps reporting also requires that an organization should have specific KPIs set as measurements of success.

By combining advanced reporting with automation, organizations can increase ROI on cloud investments by continuously identifying efficiency opportunities and taking cloud optimization actions in real-time. Furthermore, organizations can take advantage of metric-driven optimization by automating dynamic resourcing so that a cloud environment’s underlying infrastructure always resources to meet service-level objectives.

Cloud operations that leverage both advanced reporting and automation ensure optimum end-user digital experiences while reducing cloud spend.

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1,2 What is FinOps, FinOps Foundation, 2022
3 Gartner Forecasts Worldwide Public Cloud End-User Spending to Reach Nearly USD 500 Billion in 2022, Gartner, 18 July 2022
2022 State of the Cloud Report, Flexera, 2022
FinOps PhasesFinOps Foundation, 2022
FinOps Principles, FinOps Foundation, 2022
FinOps Maturity Mode, FinOps Foundation, 2022