Cloud FinOps - What it is and Why You Need it

Introduction

This article explains Cloud FinOps in detail. What is it? Why do we need it? When to use it? etc. Let's understand the below points to get insights on FinOps.

1. Need for a Cost Optimization Framework in the Cloud
2. What is FinOps?
3. Why is FinOps important?
4. The key features of FinOps
5. The FinOps Operation Model
6. FinOps Principles
7. FinOps Lifecycle
8. Summary

Need for a Cost Optimization Framework in the Cloud

As organizations increasingly adopt cloud computing, the cost of cloud services has become a major concern. Cloud computing offers tremendous benefits, including flexibility, scalability, and cost-effectiveness. However, cloud costs can quickly spiral out of control without proper management. More control is in the hands of end users, leading to a lack of governance in terms of cost optimization and economies of scale.

Along with this, there are a couple of other reasons, like,

Poor coding & architectural practices can lead to overspending in the Cloud as multiple architectural options are available while designing a solution; this must be well thought through and aligned with business needs and best practices.

More flexibility in Cloud leads to a waste of resources on the Cloud. For instance, Instances are not shut down/destroyed even after a POC is completed. These unwanted resources cost are again a burden to the organization.

Also, lack of coordination between IT and Finance.

Therefore, it's essential to have a cost optimization framework in place to manage and optimize cloud spending.

What is FinOps?

FinOps is cloud financial management, and it's more of a collaborative effort between finance and operations, where cloud spending is moderated and optimized. It involves aligning business, finance, and technology teams to understand cloud usage and expenses better and then implementing strategies to optimize cloud usage while maintaining business objectives.

The role of FinOps is to help maximize the value created by the spend and to ensure you get the most value out of every dollar you spend in the Cloud. It's the method of ROI and cost optimization.

Image source – FinOps Foundation

One of the most important concepts in FinOps is Unit Economics. The idea is to measure cloud spending against a business metric (total revenue, shipments made, paid subscribers, customer orders completed, etc.)

Unit Economics relies on almost every aspect of FinOps, including tagging, cost allocation, optimization, and FinOps operations.

Why is FinOps important?

1. As more and more companies move their workloads to the Cloud, the cost of cloud computing has become a significant portion of their overall IT budgets. Also, the constant push for innovation and greater agility has fuelled cloud growth so far. Therefore, it is essential to clearly understand cloud spending and how it impacts the company's financial bottom line.
2. Cloud service providers offer a wide range of pricing models, discounts, and options that can be confusing and difficult to understand. Billing mechanisms can be complex to manage, even for mature cloud users. FinOps provides a framework for understanding and optimizing these pricing models to ensure that companies are getting the best value for their money.
3. The dynamic nature of the Cloud, like the elastic scaling of cloud resources, could lead to huge bills quickly if usage is not measured and monitored continuously. FinOps enables teams to track spending, identify areas where cost savings can be made, and implement changes quickly.

Key features of FinOps

• It provides a cloud cost operating model to meet the cost challenges of cloud adoption.
• Provides a governance framework to optimize spend on the Cloud.
• It brings more coordination between IT, the business, and finance to take ownership of cost controls.
• Introduces a new culture where cost optimization is seen more holistically.
• Implementation of best practices such as tagging strategy to enable easy identification and classification of assets.
• Ensure real-time visibility of costs so that on-time analysis can be done before it gets out of control.

FinOps Operation Model

The figure below demonstrates how organizations operate in the FinOps model. The ownership is driven and supported by a central group.

Image source – FinOps Foundation

FinOps Principles

FinOps is built around six core principles. The below image clearly explains these principles.

Image source – FinOps Foundation

FinOps Lifecycle

The FinOps lifecycle typically consists of three phases.

Inform

In this phase, the focus is on educating stakeholders about the Cloud and its associated costs. The goal is to build awareness and provide a baseline understanding of cloud financial management.

Primary actions in Inform phase are,

• Strengthen and communicate cost governance processes
• Provide training and initiate culture shifts
• Implement tagging hierarchy
• Report and track untagged resources
• Allocate shared costs to create accurate showbacks
• Create and distribute showback reports

Optimize

In this phase, the focus is on optimizing cloud spending. This involves identifying cost inefficiencies and waste and taking steps to reduce costs. This phase often involves implementing tools and processes to help with cost optimization.

Primary actions in Optimize phase are,

• Define clear service level objectives
• Build and publish resource utilization metrics
• Report cost avoidance metrics to relevant stakeholders
• Take action to rightsize, start/stop processes
• Build pricing calculators to design with cost in mind
• Create and distribute benchmark reports to relevant FinOps Personas

 

Image source – FinOps Foundation

Operate

In this phase, the focus is on day-to-day cloud financial management. This involves monitoring cloud usage and costs, identifying trends and anomalies, and taking action when necessary.

Primary actions in Operate phase are,

• Automate optimization processes (e.g., rightsizing & start/stop resources)
• Measure unit cost economics to drive accurate budget forecasts
• Monitors spend real-time
• Build companywide consumption KPIs, identify spending patterns, and better forecast cloud use.
• Quantify and report optimization ROI

Summary

FinOps is important because it provides a structured approach to managing cloud spending, which helps companies to save money, make data-driven decisions, and optimize their overall cloud strategy. FinOps is not always to do things the cheapest, but to do things in the way that develops the most value. FinOps brings together business, finance, and tech under one umbrella.

FinOps is a cultural practice to be able to work together and collaborate!

Happy Reading!