The concept of FinOps is relatively new: just a year ago the book “Cloud FinOps: Collaborative, Real-Time Cloud Financial Management” was released, postulating the basic principles of the FinOps approach. In chapter 1, the author J.R.Storment discusses the central theme, or what would be the basis of the FinOps approach, what he calls “Unit Economics”. The idea is to measure cloud spend against a business metric, such as total revenue, deliveries made, paid subscribers, customer orders completed, etc. Choosing the right business metric, however, is a complex process, as the metric is directly related to Unit Economics and also supports almost all pillars of FinOps, including allocation and cost optimization.
Right at the beginning of the book, the warning is clear:
“You should keep business metrics in mind throughout the book and as you implement FinOps in your organization. As your practice matures, you will be able to implement and see the value of Unit Economics.”From the book: “Cloud FinOps: Collaborative, Real-Time Cloud Financial Management”
To the letter, Unit Economics means exactly what you thought: something like “unitary economy”, or “economy of the unity of things”. Does it seem weird? So let’s think about this: what is the value, in terms of business, of knowing: “it costs X dollars to serve customers who generate Y dollars in revenue”? Doesn’t it seem evident that this context is ideal for successful business planning? That’s why business metrics are so important, as it shifts the focus of the decision on money spent on the cloud to the efficiency and value of investing in the cloud. And this is basically the mantra that drives Unit Economics, an “Era” of cloud computing that has just started.
Sooner or later, it is a fact that financial accounting would fall on the costs of cloud computing in companies – nothing more natural for an economy increasingly based on the allocation and scaling of resources in the cloud. As each small unit of this cloud generates a cost that needs to be rigorously accounted for, organizations over the past few years have had no choice but to adapt the financial accounting to the variable (highly flexible) spending model of the cloud. Also, this is a cultural transformation that has just begun, so, it still has a lot to evolve and shape the cloud computing services market from now on.
It is quite a transformation: with FinOps, each operational team, from different areas, can access data practically in real time in order to make intelligent decisions that result in more efficient cloud costs in terms of speed, performance, quality and availability of services. Thus, the traditional model of a Purchasing team identifying and approving costs comes into question. In its place, a multidisciplinary FinOps team adopts a series of best practices in contracting services, which allows bringing together technology, business and finance to optimize the management, rate and discount of the cloud service provider.
The 3 key elements of FinOps are:
Just-in-time basically refers to processes carried out “in the ideal time”. Here it is worth telling an interesting story about the so-called “Prius effect”. The “Prius Effect” is a phenomenon created when the Toyota Prius hybrid car introduced real-time feedback on gasoline consumption. It was observed and documented that a large subset of drivers responded to data by driving in a way that reduced fuel consumption. In other words, real-time monitoring has the effect of changing the behavior required by multidisciplinary teams to perform processes “at the ideal time”.
FinOps work teams that are able to establish a culture of self-governance in the organizations, with cost awareness that can promote both the accounting and business agility needed to manage and optimize costs while balancing the speed and benefits of the cloud; this is not an easy equation. But it is the one that promotes innovation in a technological world of rapid and continuous digital transformations.
Because of this complexity, the reference book by J.R.Storment deals with the 6 basic principles of FinOps:
1. Teams need to collaborate. This means that the finance and technology teams work together in near real time, as the cloud operates by resource and per second. The teams work together to continuously improve efficiency and innovation.
2. Decisions are driven by the business value represented by (expensive!) cloud resources. This means that Unit Economics and value-based metrics better demonstrate business impact than aggregate cloud spending.
3. Everyone takes ownership of their cloud usage. This means that individual resources and product teams have the autonomy to manage their own use of the cloud in relation to their budgets.
4. FinOps reports should be accessible and timely. This means that rapid feedback cycles result in more efficient behavior.
5. A centralized team drives FinOps. This means that automation centralized in FinOps reduces duplicated effort. For instance, it eliminates the need for engineers and operations teams to think about fee negotiations; instead, the focus is kept on optimizing the use of the cloud.
6. Take advantage of the variable cost model of the cloud. This means that the variable cost model of the cloud should be seen as an opportunity, not a risk. Small continuous adjustments in the use/optimization of the cloud are always necessary.
A very important and sometimes overlooked point is that a successful FinOps practice does not require giant cloud deployments or a multimillion-dollar cloud account. The sooner the FinOps culture is implemented in the organization, the easier and simpler it will be to make more informed business decisions about spending in the cloud, even with the sizing of operations.
No matter how a company decides to implement FinOps, the first critical step is to gain visibility in an almost real-time way, so that everyone can see what’s going on and detect overspending in the cloud before it becomes too big and out of control. While this visibility is achieved, FinOps teams begin to “educate” the entire business cycle. As cross-functional teams work together, the finance department will learn more about the language of the cloud, while engineers will begin to understand more about financial concepts.
The value of starting as early as possible in this cultural change cannot be underestimated, and the benefits of a FinOps practice can be felt and measured almost immediately.
One of the most important aspects of cost optimization is the correct organization of Cloud Accounts and the environments where applications are running. It is a good practice to apply tags that identify the environment in all resources present in cloud accounts, allowing initial analyzes by the environment.
Complementary to the analysis of cloud accounts by the environment, the inventory of Products, Applications, and Services is very valuable, as it gives us visibility of which resources are used by the Product or business unit.
One Platform helps organize your Product accounts and environments and will bring you inputs to optimize cloud costs.