Draft:Cloud FinOps

• Comment: Draft is too promotional. Myrealnamm (💬pros · ✏️cons) 19:09, 12 July 2024 (UTC)

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Definition

"FinOps is an operational framework and cultural practice which maximizes the business value of cloud, enables timely data-driven decision making, and creates financial accountability through collaboration between engineering, finance, and business teams.".

The Origin of FinOps

Cloud FinOps is a Portmanteau of finance and DevOps. Born out of the significant changes that cloud computing brought to the finance and procurement processes of IT, the term is designed to signify the importance of teams collaborating to drive successful cloud adoption. The concepts were initially referred to as “cloud cost management” and then changed into “cloud cost optimization”. FinOps specifically focuses on bringing value from cloud services to the organization which is one of the main reasons it has become prevalent over other terms such as cloud cost optimization, which doesn’t obviously cover concepts such as cost allocation and “cloud economics”, which doesn’t call out the cultural aspects driven by collaboration. Cloud Financial Management (CFM) is still a term often used and has generally been used by Amazon Web Services (AWS), while the term is considered similar to FinOps, some argue they should not be used interchangeably.

Timeline of the rise of FinOps

• 2006 - The birth of Cloud and services such as AWS EC2 which begins the move from Capex towards Opex Pay as you go compute consumption creating a paradigm shift.
• 2008 - GCP launches adding multi-cloud complexity but also generally using very different concepts and naming conventions to AWS.
• 2010 - Microsoft Launch Azure, adding further multi-cloud complexity, they also release paper on Economics of Cloud from which the term Cloud Economics is coined.
• 20010-2017 - Rise of the second generation of cloud, more organizations start to serious incorporate cloud into their strategies.
  • Growth of cloud usage, introductions to the challenges of moving IT spend from Capex to Opex, removing financial control for the finance teams.
  • Lots of shadow IT for cloud usage, reducing control of costs and IT for the IT teams.
  • Bill shock begins to start as cloud grows over the years.
• 2012 - Large forward thinking organization who have heavily invested in the cloud start enacting what will later become known as FinOps.
• 2012-2019 - FinOps begins to come to being simultaneous across the world in different organizations.
• 2019 - FinOps Foundation Founded and Cloud FinOps first edition released
• 2020 - FinOps Foundation becomes part of Linux Foundation.
• 2022 - Cloud FinOps becomes most commonly used term

Financial Operations

It's important to distinguish Cloud FinOps from traditional financial operations (which can also be abbreviated as "FinOps"). While financial operations deal with the management of a company's finances, Cloud FinOps focuses specifically on the financial aspect of cloud operations, blending elements of IT, finance, and business to maximize cloud investment value.

Aim of FinOps

The FinOps Foundation gives FinOps the following definition: “FinOps is an operational framework and cultural practice which maximizes the business value of cloud, enables timely data-driven decision making, and creates financial accountability through collaboration between engineering, finance, and business teams.” - FinOps Foundation Technical Advisory Council.

The definition is widely accepted as the best means to understand the aims of FinOps, with cloud value being seen to be at the heart of the practice. While many organizations came forward with various approaches and concepts around the best way to achieve success in the financial aspects of Cloud, the most generally used is the FinOps Framework from the FinOps Foundation, most recently updated in 2024.

Framework

The most important part of the framework in reference to the Aims of FinOps are the principles

• Teams need to collaborate
• Decisions are driven by business value of cloud
• Everyone takes ownership of their cloud usage
• FinOps data should be accessible and timely
• A centralized team drives FinOps
• Take advantage of the variable cost model of the cloud.

While many are concerned as to why cloud vendors are entering the cloud FinOps space due to the fact it by design should reduce wastage and the costs of cloud, they see it as a way of unlocking value realization and innovation, which then drives to long term consumption of their services.

The Framework also includes: personas, phases, maturity, domains and capabilities.

Table showing Capabilities by Domains - FinOps Framework by FinOps Foundation

Understand Cloud Usage and Cost	Quantifying Business Value	Optimize Cloud Usage & Cost	Manage the FinOps Practice
Data Ingestion	Planning & Estimating	Architecting for Cloud	FinOps Practice Operations
Allocation	Benchmarking	Workload Optimization	Cloud Policy & Governance
Reporting and Analysis	Forecasting	Licensing & SaaS	FinOps Assessment
Anomaly Management	Unit Economics	Rate Optimization	FinOps Tools & Services
	Budgeting	Cloud Sustainability	FinOps Education & Enablement
			Invoicing & Chargeback
			Onboarding Workloads
			Intersecting Disciplines

Benefits, Challenges and Limitations of FinOps

Cloud Value

Understanding value from IT has long been a challenge for organizations, even prior to the adoption of cloud and is something organizations have long being trying to evaluate. Some describe this as part of IT Value Management, which has been around for much longer than FinOps and can be seen in Technology Business Management. So while FinOps often talks about demonstrating value from cloud, the concept of a business understanding the value they realize from technology is not new.

The value organizations receive from the ICT in general has been well researched and is a constant discussion point at the top level of many organizations. Best described here, “The purpose of evaluating Information Communication Technology (ICT) is to gain an understanding of how ICT is contributing to organization performance in a given organizational context.” Organizations have generally considered ICT a cost center, but that discussion has been changing largely due to the hyperscaler cloud vendors constantly pushing the concept of innovation and huge ROI from cloud investments. This hasn't been seen in reality for many organizations, as such FinOps - along with other disciplines that can be classed as IT Value Management - are working to make the returns a reality.

Collaboration

Research suggests that Cloud has a strong potential to support and facilitate business collaboration at a low cost. The financial challenges created around cloud have largely stemmed from a lack of collaboration and understanding between key teams impacted by the paradigm shift created by adoption.

Collaboration between FinOps, finance and engineering personas (amongst others - see FinOps Foundation Framework - Personas) is one of the most important keys to success to effective FinOps, which in turn drives successful cloud value realization and adoption. However, this collaboration is also one of the most common challenges found in FinOps. Without true executive/leadership sponsorship, FinOps is likely to be limited in its impact and alone, without collaboration, FinOps practitioners are unlikely to drive successful outcomes for the organization.

Cost Reduction (and potential carbon benefits)

An important part of FinOps, and the most visible one is cost reduction. This is often the initial reason why a FinOps team is setup.

In the cloud Cost = usage * rate. Resulting in two levers to influence the cost: usage-optimisation and rate-optimisation.

Usage optimisation

Usage, which identify the amount, size and scale of services being used is technical and can be modified by architecture, scalability and implementation choices. The usage lever is in the users' hands.

Reducing usage means consuming less resources, reducing costs, but also allowing the cloud vendors to turn off resources resulting in potential carbon emission benefits. The benefit is potential, as it not known if the cloud vendors turn resources off, or try, for example, to sell the freed capacity as spot instances.

Based on the State of Cloud Research by Flexera in 2024, the amount of IaaS/PaaS compute that's being wasted is down to around 27% down from a high in 2022 of 32%. This still suggests, and note this is based on self-estimates, that organizations are wasting over a quarter of the most commonly used cloud resources. As in the cloud anything that is used is paid for (and in some cases things unused too - see Rate Optimization) this creates not just a waste of cloud resources but also of money and carbon (CO2e). One of the key activities that takes place in FinOps is usage optimization, which looks to reduce wastage to improve the value received from the cloud.^:372-373 --- Chat with Stephen

Application modernization is another way to reduce usage, moving from a pre-cloud datacenter architecture, to a cloud native architecture, more scalable, turning on and off services as the need arise. This is very efficient when usage depends on an external factor, like a public website, where the traffic is not known and cannot be easily forecasted. Application modernization is commonly discussed as a key aspect of successful cloud adoption. FinOps is seen as a way to unlock the investment to allow this very powerful, but expensive form of innovation. It can be achieved in many ways, such as use of microservices, scalability, deployment and execution methodologies and Database modernization^:316-317 (amongst others). This often drives a link between FinOps and DevOps that improve the value an organization can receive from cloud. Also in this space, practices such as agile often come in to play, which can generally improve an organizations efficiencies.

Rate optimisation

Rate is the price and is controlled by the cloud vendors and follows a risk and reward pricing method. Rate optimisation is financial in its nature and the rate-optimisation tools are standard financial tools rebranded. Most commitments can be seen as forward contract of some sort.

Cloud is extremely flexible, with customers being able to consume and be charge for cloud by the second. To provide such flexibility, the cloud vendors need to make multi-year, and in the case of datacenters, decades long investments, which are extremely static (ie non flexible) putting most of the risk of over- or under-investment onto the cloud vendor. To offset some of that risk, cloud vendor's flexible pricing, like the on-demand of pay-as-you-go, includes a 'risk premium'. The more risk a customer takes from the cloud vendor the more the risk premium is reduced (the customer gets a discount)

Align to business

IT has often found it challenging how it, and the investment in IT, is aligned directly to business goals. One argument is that  “IT investment is not always aligned with organizational goals, strategy, resources or capabilities”. Cloud has not so far, generally, proven to be much different, there are still major challenges in aligning cloud costs to business outcomes.

Research undertaken in 2017 which viewed academic research from 2010 onwards found that there were relatively varied motivations for an organization to move to the cloud. In terms of FinOps, it is interesting that specifically Cost effectiveness is cited as a key motivator for cloud adoption. To help drive the value of cloud, it has been generally agreed that the cloud strategy must align to that of the business.  Studies show show “a very strong statistically significant correlation between Cloud Computing Adoption and Information Technology Effectiveness” however “the correlation between Cloud Computing Adoption and Strategic

Alignment was not recognized as statistically significant”. It can be argued that the lack of cloud value realization, and the 2023/2024 drive to cloud repatriation is due to the lack of successful FinOps implementation in those organizations.

Chargeback is aligning cloud costs to the business in its cleanest form for business financial reporting. Chargeback, applied to cloud, is the capability for each dollar of cloud cost to be assigned and charged to an entity in the same business. Cloud Chargeback should be an addition to an existing chargeback approach already in use. The finance department and the billing systems drive chargeback.

Unit Economics specifically has been regarded as one of the answers to this long term challenge, the IT Paradox, of bringing an understanding specifically on how ICT costs deliver value to the business. Unit Economics, in short, are where cost (in this case cloud costs) are compared directly to a business metric. A simple example of this may be cost per conversions for a website. The cloud costs attributed to the website can be divided by the amount of unique visitors and the number of conversions that can be found in other data available to the organization. This would allow an organization to understand how changes to their cloud infrastructure behind the website may have changed the amount of visitors.

Visibility

Cloud Service Providers (CSP) such as Azure, AWS, and GCP have an unprecedented level of cost complexity in cloud computing. Each of these providers offers services, spanning across approximately 19 product categories and encompassing over 150 distinct cloud products. Each product comes with multiple workload types, unique billing formats, spot pricing options, and Commitments. This intricate landscape presents a significant challenge for businesses seeking to gain central visibility, clarity, and data insights for cost-effective decision-making.

Showback is about reporting cost information back to the people that can influence or need to make decision on it. Showback for a finance person might be used for accounting, while a head of engineering might want to keep track of budget, and a developper would benefits from knowing their impact on the cost. Offering showback can change behaviours; it is the Prius effect.

Empowering Engineers to take action

Empowering Engineers to take action has long been seen to be one of the biggest challenges in FinOps, having been one of the top challenges in the State of FinOps data since 2021. The reasons for this are generally considered to be around the FinOps maturity level of the organization across areas such as adoption, education, skills, tools, leadership support, organizational alignment, awareness, and prioritization.^:10

There is a movement within FinOps over the past few years to "Shift Left", i.e. moving earlier in the process. Quite simply put, prevention is better than cure. Moreover, it is important to meet Engineers in their own environment and to build into their processes and ways of working. This has been seen to be far more successful than creating new processes that fall outside of their standard practices. Whether this be considering Agile, DevOps or Kanban in how processes are built it is expected that shifting left will unlock some of the challenges of delivering value that have been seen to date. Another concept that is permeating into FinOps is the concept of Cost as a non-functional requirement. This is aligned to shifting left and has seen a lot of support in 2024 from senior cloud executives.

A solution that has been proven to work very well is the gamification of FinOps through conducting a FinOps Hackathon. The organic nature of a Hackathon is familiar with engineers and when given a FinOps problem statement to solve, it enabled cross functional teams to work together and present real cost saving business value adding solutions to leadership. A FinOps Hackathon educates and aligns teams to build FinOps solutions for the enterprise.^:14