Many IT leaders are investing in cloud migration as part of their digital transformation strategy, but the industry’s success record has been patchy. According to a 2021 report by McKinsey, poorly orchestrated cloud migrations could cost enterprises up to US $100 billion over the next three years.
With traditional cost management approaches offering limited success, organizations are now looking at a new cross-functional way of controlling Opex. FinOps, a recent practice of cloud financial management, seeks to inculcate cultural change to help organizations maximize the business value of their cloud spending.
The global cloud FinOps market is expected to grow at a CAGR of 18.8% between 2023 and 2028, from US $832.2 in 2023 to US $2,750.5 million in 2028, according to a 2023 report by Global Market Research Estimates and Consultants report.
The case for cost tracking and management
Following the pandemic, organizations rushed to move data centers to the cloud. The flexibility to scale rapidly, access to a wide range of services, and the ability to deliver faster time-to-market were major factors drawing organizations to the cloud.
Think of the cloud as an “all you can eat” buffet, except for one minor difference. There is a charge for everything you eat. When an organization moves to the cloud and has access to scalable infrastructure, higher performance, and round-the-clock availability, engineers and developers tend to innovate in a way that may or may not translate into revenue for the company while costs pile up.
CIOs and CFOs quickly realized the need for tracking and managing costs. Often, a CxO’s approach would be to set up a team of IT professionals who used tools made available by the cloud service provider to track usage and generate reports with recommendations on what to optimize or improve. Attempts to action these recommendations would lead to a decrease in the cloud bill.
However, only about 20-30% of the recommendations could be implemented, on average, independently by IT professionals. Collaboration with resource owners was necessary to action the other recommendations. This involved explaining what needed to be done and why, to the resource owners (engineers) responsible for running their jobs, testing, and R&D workloads.
Cloud Cost Management and Optimization (CCMO) practices helped to solve immediate problems to an extent. For the long term, however, the siloes between engineering, finance, and procurement had to be broken to realize the benefits of moving to the cloud.
Introduction to FinOps
Managing cloud systems can be complicated due to various factors such as unmonitored usage, unused licenses, unsecured access, variable cycle costs, inefficient coding, and expenses related to monitoring tools.
There is a need for collaboration between Finance and Operations with executive sponsorship to bring accountability to cloud spending across the organization - FinOps shows the way.
A typical FinOps practice is cross-functional and has representation from finance, procurement, engineering, operations, infrastructure, business, and executive leadership. FinOps can function as an independent practice or part of a CCMO Center of Excellence (COE) capability.
The FinOps Foundation suggests adopting an iterative approach to manage variable spending in the cloud. This lifecycle consists of three distinct phases:
- Inform - Teams gain visibility into the cloud environment and see what they are spending on and why.
- Optimize - Teams identify efficiency optimizations and align goals accordingly.
- Operate - Teams continuously evaluate processes to ensure that IT, finance, and business meet their goals.
According to the FinOps Foundation maturity model, a “crawl, walk, run” approach to performing FinOps enables organizations to start small and grow in scale, scope, and complexity as business value warrants maturing a functional activity.
Benefits of a FinOps practice
For a successful FinOps practice, it is critical to secure leadership buy-in. As a next step it is important to establish a multidisciplinary team with representation across the organization from engineering, finance, and operations to collaborate and achieve the following benefits:
Drive more revenue
Remove blockers and enable engineering teams to deliver better features and apps to customers faster. The organization should make data-driven spending decisions collaboratively to target revenue opportunities.
Increase cloud value
The unit economics model, prioritized in FinOps, is a Key Performance Indicator (KPI) for collaborative cloud usage, measuring value rather than absolute spending. If cloud spending has enabled the organization to deliver a product or service to more customers or subscribers, the unit metric (cost per customer, for example) comes down—and the profit increases.
Faster time-to-market
Increase the speed at which products and features can be released through insights and automated processes. For a UK-based telco, the time-to-market for cloud-based services fell by 40 percent through the development of a Digital Cloud Services Platform.
Streamlining cross-group communication on costs
Bridge communication gaps and foster greater collaboration between various functions such as developers, operations, cloud teams, finance, business leads, and executive leadership. Address cost-related challenges arising from redundant initiatives or cloud storage that require optimization.
Transforming organizational culture
Build a culture of responsible resource consumption where business teams take accountability for their actions. This makes it easy to see waste and act while holding those not buying into the culture, accountable.
Risk mitigation
Guidelines published by the FinOps organization help businesses with aspects of identifying vendors, negotiating cloud provider costs, and securing their cloud strategy.
Organizational sustainability goals
Optimizes cloud spending that lowers the carbon footprint and aligns with the organization’s green initiative.
Success stories
A 2020 survey by the FinOps Foundation observed that organizations that implement FinOps practices experienced significant cost savings and improved resource utilization (FinOps Foundation, 2020):
- In a 2019 case study published by the FinOps Foundation, Nationwide Insurance saved over US$4.3 million in annualized cloud costs after adopting FinOps.
- By implementing FinOps Atlassian managed to save 66% in cloud costs (Atlassian, 2020).
- By leveraging FinOps principles and using cloud cost management tools, Samsung achieved cost savings of around 30% on its cloud spending.
- Schneider Electric, a multinational energy management and automation company, leveraged CloudHealth (VMware platform) to optimize its cloud usage, leading to a 30% reduction in their cloud costs.
