With interest rates and inflation rising to levels not seen for over a decade, cost pressures are cranking up on organisations of all sizes, in all industries. This macroenvironment is driving leaders to search for organisational efficiencies. Because of its OpEx impact on a company’s finance and cash flow, the expanded adoption of cloud has become a top consideration. Technology executives need to stand ready to explain the cost of their cloud environment and how they’re optimising spend while contributing to business growth. Quantifying an organization’s cloud financial game has always been important; recent global events have only heightened this.
Consumption of cloud services has boomed in recent years. According to an IDC report at the end of 2022, spending on shared cloud infrastructure increased 24.4% in the last quarter compared to just one year earlier. Long term, IDC has forecasted a compound annual growth rate of 12.9% over the five years beginning in 2021. With cash cheap to access in the last decade, organisations were keen to invest in transformation programmes to unlock new capabilities with new technologies, driving consumption to these record levels. However, with post-pandemic inflation and rising interest rates, cloud spend is now under the spotlight to ensure it’s optimised, efficient and provides an attractive return on investment.
Historically IT has been one of the first places companies examine to find cost efficiencies. It is therefore no surprise that we are seeing a magnifying glass placed over cloud footprints. The OpEx and “pay-as-you-go” finance model of cloud service providers represents a chance to deliver immediate monthly savings. Throughout our work at Eviden, we are seeing renewed efforts across the board to tighten belts and quantify cloud spend relative to revenue.
Overspending on the public cloud is a real challenge, and it’s fair to assume a level of waste occurs across cloud estates. The most recent Flexera report identified how a significant percentage of public cloud costs are being wasted – estimated at around 32%. Within a CTO’s budget, public cloud is a logical first stop to streamline operations and reduce waste.
Although they do provide technical and commercial levers to reduce and optimise spend, hyperscalers are incentivized to have customers consume more. This is the downside of having access to cutting edge technologies at the touch of a button. Cloud consumption will undoubtedly keep growing as architects and engineers build more with the latest services, especially considering Gartner’s 2023 prediction showing that cloud is now into the “mass adoption” phase. Enterprises will continue adopting cloud-native technologies to give them a competitive advantage over competitors welded to legacy platforms.
The perfect storm is brewing for technology leaders to quantify their cloud spend and explain the value it brings. To grow and manage cloud environments in a healthy and efficient manner, organisations need to up their financial game by investing not only in FinOps, but also in Cloud Economics and in raising the Financial Quotient of their technology teams. This will equip CxOs with the information they need to demonstrate the value cloud technology brings to their organisation.
FinOps
FinOps is the financial management discipline of consuming cloud resources and managing their costs. At both a strategic and operational level, organisations should be continuously maturing their FinOps practices to search for greater efficiency. From automating optimisations like scheduling and utilisation, to accurately delivering showback/chargeback models with clear visibility, FinOps should be at the forefront of anyone managing a cloud environment.
Tagging
Having a clear and consistent tagging policy is a core component of a FinOps strategy. Tagging workloads and resources to appropriate business units, and potentially their users, is critical to controlling spend. Some organisations take the command and control approach by forcing users to apply tags before they can spin up new instances or services. Others adopt a guide and support approach. For both these approaches, organisations need an internal model to incentivise engineers to tag what they build so cloud costs can be accurately monitored and forecasted. Without the visibility that tagging provides, organisations face an uphill battle to rein in unsupervised spending.
Showback & Chargeback Model
With tagging in place, the next step in maturing a FinOps practice would be designing and implementing a showback or chargeback model. Using the insights from tagging, the FinOps team can appropriate cloud costs back to business users to show/charge them based on their consumption. As a key FinOps capability, this should be done to empower teams to have a culture of accountability and optimisation when building, deploying and consuming IT resources. After all, if someone else pays for your cloud usage, cost is a concern for later, especially when engineers are being pushed for innovation and agility. Having a refined showback or chargeback model means the consumers of cloud services know exactly what they are consuming on a minute-by-minute basis and can be guided to make cost conscious design decisions.
Tooling
Tooling is a commonly overlooked element of FinOps. To accurately monitor and forecast costs, you need to select the right tooling set to collect the right data and insights that match your priorities. Avoid relying on generic tools or billing information. There is a wide marketplace of options, and we tend to see tooling decisions driving FinOps behaviours. Cloud-native tooling provides insights into a plethora of data for teams and leaders to make informed decisions around their spend – where to invest, and where to cut back. But identifying the right tooling and data combination can be challenging, so pinpoint priorities and work backwards. For example, some tools will point you towards ensuring high levels of instance utilisation, whereas others solely focus on Reserved Instances (RIs) or Savings Plans (SPs). RIs and SPs are options for obtaining compute capacity at a discounted rate for a certain amount of time. For many organisations, access to this data is a new way of working compared to traditional on-premise monitoring tools, so implementing these new processes into their operating model is challenging. Don’t be afraid to test and experiment with different tools to see which provide the best fit for your organisation and its targets. We generally see organisations adopt two to four individual tools in this space, so conduct a thorough search and see which combination works best for you.
Cloud Economics
If FinOps is the operational approach to cloud costs, Cloud Economics is the strategic approach. Rather than solely focussing on the immediate environment and quick wins, organisations need to strategize and have a plan for maturing their cost management capabilities. Working with the Finops Foundation’s framework of “Crawl, Walk, Run” can enable you to benchmark where your organisation is and create a strategic roadmap to improve your capabilities.
One element of Cloud Economics that mature organisations can use to quantify their cloud spend relative to revenue is to create a unit economic model. This helps determine the cost of transactions and services run in the cloud related to business activity and growth. For example, as a digital media company, this could be the cloud cost for a customer to use their application to place and run a new advertisement on their platform. For a hotel, this could be understanding the IT cost per digital reservation. Leveraging unit economics brings a range of benefits – from CTOs and IT teams having the data to quantify the cloud’s role in financial performance, to more accurate cost forecasting and profitability. Use unit economics to move away from targeting quick wins to reduce the monthly or annual CSP bill. Instead, focus on the business value achieved per unit of cloud spend. A good scenario is where cloud usage is rising, mirroring business growth, but the cloud unit cost is falling through optimising the overall estate. With a mature unit economic model in place, leaders can use the insights to make informed decisions about how best to use the cloud to maximise business advantage – through investing in the right applications, as well as tracking technology innovation against business targets.
Once you’ve established the fundamentals of FinOps and Cloud Economics inside the organisation, start thinking about how to mature them. As mentioned, the FinOps Foundation, which provides dedicated training and certification for cloud finance, has developed a maturity model around “Crawl, Walk, Run.” Use the research and lessons learned from other organisations to identify where you stand according to measures such as levels of automating optimisation, accuracy of spend forecast, and tagging levels. Identify your weakest areas and bring the team together to set a plan to improve and remediate. Reaching “Run” maturity will equip organisations with the people, processes and technologies to efficiently manage cloud spend and reduce the chance of underutilisation and overspending, and will maximise the contribution of IT to revenue growth and organisational efficiency.
Financial Quotient
To maximise cloud spend, you need architects and engineers thinking like accountants when they design and build services. Having the right tooling, processes and models to control cloud costs can be undermined if the level of Financial Quotient inside your technology team is low. The priority should be getting people trained and certified, developing the financial understanding they need to build efficiently in the cloud while considering cost implications.
Teach your engineers how to find, architect and build for cost savings, and reward them for doing so the same way you would reward them for launching a new app or adding a new feature. For example, The FinOps Foundation offers both “Practitioner” and “Professional” level accreditation and training courses, while other organisations provide specific training and advice on optimising certain technology stacks. Cloud Services Providers also offer well-architected training courses where cost optimisation and operational efficiencies are core pillars. Give your people the skills to succeed and they will help bring down your cloud costs, providing the CTO with the ammunition to go out to the wider business and bang the drum about how successful the IT organisation is!
Invest in training your existing talent before going out to market to recruit. FinOps is a relatively new area, with a recent FinOps report revealing that most professionals only have one year of experience. Consequently, the pool of talent is only starting to grow – so salaries will be high. Most organisations already have the talent internally to succeed in implementing FinOps and Cloud Economics. Look inside your organisation to develop the skills you prioritise. FinOps is a crossover between Finance and IT. Consider building IT and FinOps teams in parallel to see who may have the quantitative capacity to upskill into a FinOps professional. Widening the net of potential internal recruits and focusing on training can help jumpstart your FinOps transformation.
Summary
Cloud cost pressures are spreading across every industry. Budgets are tightening, so cloud usage and costs must be optimised. Organisations need to up their financial game to manage their cloud costs. The combination of FinOps, Cloud Economics and raising the Financial Quotient of your IT team is critical to bringing down your monthly cloud bill and demonstrating to the business the value technology brings. From our experience working alongside customers and seeing industry reports, we know there are inefficiencies in the cloud footprints of most organisations. Now is the time to seek them out.
But remember: not all cost savings are the same. Flipping compute workloads over to a three-year savings plan may unlock immediate savings, but could hurt in the long run as you’re locked into buying that original compute capacity regardless of any optimisation you might achieve. Be strategic and consider the future implications before rushing to switch off instances and reduce workloads. Elements like unit economics can provide the data to make informed and savvy decisions about where to optimise for cost and where to optimise for performance.
FinOps is a new discipline. Most certified practitioners or professionals won’t have more than three years of experience. Find a partner who can provide practical guidance to help optimise and manage your cloud spend. Look for the people who not only find immediate solutions, but also set the long term foundation for your team to continue optimising after they’re gone, through collaboration, knowledge sharing and upskilling.
By upping your financial game, you can move your organisation away from considering only the base monthly costs of cloud consumption. Give yourself and your team the ability to communicate to senior leadership what your cloud spend means for the business.
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