Optimize Your Cloud Spending with FinOps

With the growth of cloud operations, companies must ensure they are making decisions that will enable them to maximize business value in these environments. But cloud operations can be complex, meaning that no one department has the full view of the implications of any business decision. A collaborative approach ensures that organizations use their resources as wisely as possible to optimize spending and meet important business goals.

The practice of having IT, finance, and business teams working together to make these decisions is known as FinOps, which combines “finance” and “operations.” FinOps emphasizes the need for data-driven decisions to help companies manage tradeoffs between speed, cost, and performance. The following video describes more about the need for FinOps:

In the sections below, we explore how FinOps works, why it’s growing, some of the challenges involved, getting started, and, most importantly, how it can help you optimize your cloud spending. But first, let’s take a look at how FinOps came to be.

History of FinOps

In the past, companies followed processes for making good technology investments for their business, including centralizing procurement, purchasing in volume, and negotiating with vendors to get the best pricing. When the digital age emerged, organizations used those same methods to ensure optimized spending for computing equipment such as hardware and software.

However, as cloud computing has become more ubiquitous, spending strategies have not kept up. According to TechTarget, “The loss of centralized procurement, gaps in financial accountability, and complex cloud pricing structures rapidly led to financial waste in excess, redundant or unnecessary cloud computing usage.” The concept of cloud cost management emerged, and organizations started implementing practices—such as tracking usage and optimizing resource allocation—to monitor and control their cloud spending.

FinOps takes these practices to the next level, providing a more holistic approach to paying for computing power. Early FinOps practitioners identified the need for a collaborative approach that brings together all interested departments—finance, operations, and engineering—to optimize cloud costs and drive business value.

As the FinOps concept gained traction, the FinOps Foundation was formed in 2019 to help advance the principles and practices of FinOps. The foundation provides a platform for FinOps practitioners to collaborate, share knowledge, and develop best practices.

Since then, FinOps has continued to gain respect as organizations have come to rely on its principles to optimize costs and cloud usage, thereby gaining the many benefits of this approach, including improved efficiency, faster time to market, and increased revenue. The FinOps ecosystem has grown around greater adoption, with more tools, platforms, and services being developed. Cloud providers are also responding by building such tools directly into their platforms.

How FinOps Works

The primary goals for FinOps teams include evaluating workload needs, determining effective cloud architectures, negotiating the best pricing for cloud services, creating a common pool of cloud resources to be accessed by various teams, and using best practices for maintaining and paying for cloud services. FinOps works according to a life cycle composed of three stages: inform, optimize, and operate.

• In the inform stage, FinOps team members are tasked with ensuring all stakeholders have the information they need, as well as the understanding to make informed decisions about cloud usage based on that information. According to a recent IBM article, “This includes understanding how applications are using cloud resources. For example, from your USD 10,000 monthly cloud bill, what portion is allocated to…the finance applications versus the external website applications?”
• The optimize stage involves activities that enable discovering opportunities for cost savings. They include analyzing where the company can adjust resources to gain discounts. The IBM article provides an example, stating, “If you’re running a virtual machine (VM) on a particular node and it’s costing you USD 1 per minute, could you save money by moving that VM to another node that costs only USD .08 per minute?”
• In the operate stage, the company examines cloud performance to ensure its use is supporting business objectives. If not, the company can further adjust cloud usage and cost. When a solid practice has been established, the company can automate this three-step process to ensure resources will continue to be deployed effectively.

The core principles listed here underlie FinOps processes:

• Collaboration. By definition, FinOps teams are composed of members from different company departments. These participants must collaborate to arrive at the most beneficial decisions for the organization as a whole. In addition, they must work together to improve the FinOps process itself, by learning from each action and its results.
• Ownership. FinOps teams arrive at decisions that benefit the entire organization, but each company department must take steps to ensure their actions contribute to those benefits. Department representatives must ensure the allocated resources go as far as possible by taking responsibility for their portion of and spend for cloud utilization.
• Centralization. While numerous departments may be involved in FinOps, the process works best when companies have a centralized team that does the direct work of comparing cloud services, taking advantage of discounts, handling rate negotiations, and allocating costs to various departments. Such teams also communicate with the company as a whole to ensure buy-in and a culture of FinOps sensibility.
• Reporting. Reporting is a critical component of FinOps because it enables better decision-making. Reports can show when resources are over- or under-provisioned and where automation might enable further value.According to the IBM article, “Essential components of FinOps reporting are cost visibility of the entire environment, including billing data and detailed usage information, cost allocation across multiple dimensions such as cost centers and teams, budgeting and forecasting, and chargeback and showback capabilities.”
• Value. A common misconception is that the purpose of FinOps is getting the lowest cost on cloud computing services. But FinOps decisions are driven more by value than cost. That means companies might be willing to pay more for higher performance, quality, or security. Higher spend for resources that might bring in more revenue later may also be acceptable.
• Cost. While value is more important than cost, cost is still a consideration for FinOps teams. The fees paid to cloud computing providers must be considered alongside other company expenses, especially other technology investments.

A variety of stakeholders typically collaborate on FinOps teams:

• Executives, such as CIOs or CTOs, focus on factors like team efficiency, accountability, budget management, and transparency. They may serve as supporters of FinOps efforts or demonstrate collaboration by working with other executives to share information about the role of cloud within the organization.
• Product owners are department heads or project leaders responsible for managing cloud workloads. They contribute information about how their teams realistically use cloud services.
• Engineers—including software engineers, systems engineers, cloud architects, and engineering managers—understand and use cloud technology most directly. They speak to important matters involving the technical aspects of cloud usage.
• Finance professionals negotiate with cloud providers and help to establish budgets, manage accounting, and implement cloud forecasting.
• Practitioners who specialize in FinOps lead others through the collaboration process.

Why FinOps Is Growing

The acceleration of cloud adoption and its associated costs have brought on concerns across companies and industries about wasteful spending. At the highest level, FinOps helps companies to avoid overspending and ensure that what they do spend on cloud services offers the best ROI. Other benefits include the following:

• Higher revenue. FinOps helps businesses to manage their budgets more strategically, which can free up funds to invest in revenue-generating activities like product research and creation, marketing, and business development.
• Increased efficiency. FinOps helps companies monitor and optimize resource usage, enabling them to eliminate unnecessary expenses, take advantage of cost-effective alternatives, and streamline processes.
• Improved product quality. FinOps helps organizations allocate resources more effectively, resulting in better testing environments, increased automation, and improved product quality.
• Greater flexibility. FinOps monitoring includes watching customer patterns for increases or decreases in use. Either way, companies can scale appropriately, ensuring the best use of cloud and financial resources.
• Decreased time to market. FinOps automates much of the process of ensuring efficiency in cloud spending and usage, leaving more time available for product development, testing, and deployment. This accelerated development cycle ensures faster time to market for new products, features, and updates.
• Reduced dependency on on-prem equipment. FinOps helps organizations optimize their cloud resource usage, resulting in reduced dependency on traditional on-prem data centers and reduced costs associated with hardware maintenance, upgrades, and energy use.

Challenges in FinOps

While FinOps can be highly beneficial for companies, as noted above, those who practice it face challenges. The following areas represent some of the most common obstacles for FinOps practitioners:

• Promoting organizational adoption. A successful FinOps operation requires buy-in across the company and ensuring various departments—including finance, operations, engineering, and leadership—are willing to embrace FinOps principles and practices. Such alignment may require education, communication, and demonstration of the value of FinOps value through tangible results.
• Arriving at unit economics. Discerning the unit economics of cloud resources means determining the cost and value associated with cloud services and products. It is essential for effective cost management. However, the process can be complex, requiring detailed financial analysis.
• Empowering engineers. A FinOps culture requires enabling engineers to take on responsibilities they might not have had in the past. Organizations may need to provide them with tools, training, and cost data to ensure they can reliably and consistently take actions that will contribute to successful FinOps efforts.
• Reducing waste. The two primary objectives of FinOps are the elimination of wasteful spending and optimizing resource utilization. But identifying areas for improvement can be challenging, especially in complex cloud environments. The activities require ongoing monitoring, data analysis, and proactive resource optimization.
• Implementing governance and policy. Developing and implementing governance policies for FinOps is essential to ensure consistency, compliance, and accountability. However, defining and enforcing such policies across different teams and projects can be complicated.
• Forecasting accurately. Predicting future cloud spending is essential for budgeting and resource planning. However, accurately forecasting cloud spend can be difficult, given the many factors that impact it, such as fluctuating demand, evolving infrastructure requirements, and changing pricing models.
• Enabling automation. To achieve efficiency and scalability, companies must automate cost optimization processes and resource management. However, integrating FinOps practices with existing automation frameworks and tools can be tough, as doing so requires specialized skills like identifying automation opportunities, integrating cost management into CI/CD pipelines, and leveraging cloud provider APIs and automation tools.
• Reporting container costs. Containers have become a popular cloud deployment strategy, but they can frequently change, making it difficult to accurately assign costs. To understand the cost impact of containerized applications, organizations must develop reliable methods for cost tracking and reporting.

Getting Started with FinOps

Organizations that want to take advantage of what FinOps can do for them should start their journey with a cloud audit. This exercise should identify which cloud services are currently being used, what they are being used for, and how much they cost. As a follow-up, gather information from each department about the state of their current cloud use, how it could be improved, and how other departments affect that use.

A good next step is to create a cloud center of excellence (CoE) to coordinate the company’s FinOps plan. It should be multifunctional and include resources for reporting, analysis, sourcing, and financial planning. The CoE can create the central strategy and parameters for how the organization spends on cloud services based on the company’s goals.

As FinOps should be a cultural practice, the CoE should devise ways to spread its approach throughout the organization. According to a CIO article, “Designating a FinOps practitioner is an essential first step. This individual will need sponsorship from a C-level executive to establish a cross-functional team and hold them accountable for meeting regularly and hitting metrics.”

Next, the organization should select a tool, such as AWS Cost Explorer, to support FinOps actions and take steps to use it as a single source of truth for cloud spending. The FinOps team should set up a dashboard to track and display agreed-on metrics and make it available to all stakeholders.

The company should then prepare for the adoption of the FinOps initiative. FinOps team members should train and prepare each department for its critical role. Launching the FinOps program should be done in phases, using smaller projects as proof-of-concept to enable more complex efforts.

Finally, companies should strive to learn as much as possible about FinOps. One source is the FinOps Foundation which, according to the CIO article, is “a program of the Linux Foundation dedicated to advancing people who practice the discipline of cloud financial management through best practices, education, and standards.”

The Future of FinOps

The future of FinOps holds great potential as companies continue to adopt cloud computing innovations and seek effective cost management for them. This strategy will continue to evolve in various ways.

As organizations adopt multi-cloud or hybrid cloud strategies, analysis tools and solutions will evolve to include the complex considerations involved in these implementations. FinOps will involve managing costs and optimizing resource allocation across these diverse cloud environments.

Cloud providers themselves will also play a part in more effective FinOps by integrating FinOps principles directly into their platforms, enhancing their native cost management tools and offerings. These solutions will enable greater visibility into cloud spending and help to streamline cost management processes.

The progress of AI technologies will also enhance FinOps implementations with algorithms that can be used to analyze cost and usage data, identify cost-saving opportunities, and provide accurate usage forecasts. These tools will also get better at recommending resource allocation efforts.

Automation will play a vital role as cloud environments become more complex. Organizations will continue to be able to efficiently manage costs and optimize resource allocation with greater automation platforms. These tools will evolve to provide more intelligent and predictive capabilities, helping organizations achieve greater efficiency and cost optimization.

Additionally, FinOps practices will increasingly focus on sustainability and environmental impact by incorporating considerations related to energy consumption, carbon footprint, and green initiatives. Organizations will seek to optimize cloud resource usage not only from a cost perspective but also with a focus on minimizing environmental impact.

As FinOps gains wider adoption, industry standards and certifications related to cost management in the cloud will emerge. They will provide guidelines and best practices for organizations to follow, ensuring consistency, transparency, and accountability in their FinOps implementations.

Overall, FinOps is poised to evolve with other technologies and considerations in yielding to companies the most accurate and effective ways of reducing waste in cloud usage and spending. As a result, organizations can expect to achieve greater cost optimization, resource efficiency, and financial outcomes in their cloud operations.