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The 6 Principles of FinOps
By Jonas Lazar, SoftwareOne
13 Dec 2021
Often, organizations find themselves struggling to manage cloud spending. They know that their business operations gain speed and agility by using cloud services. However, they struggle with the variable cost structures, which can lead to overrun costs. That’s why organizations turn to Cloud Financial Management (FinOps) to maximize the value of their cloud migration strategies. Moving away from on-premises IT infrastructures means embracing new ways of managing IT spend. By taking a closer look at the FinOps framework’s six principles, organizations can do more than save money; they can gain more value out of each dollar they spend on their cloud resources.
The fundamental difference between "saving money" and FinOps strategies is the difference between saving money and gaining value from money spent. However, to optimize the dollars spent, organizations need cross-functional teams to build purposeful cloud usage.
With FinOps, different organizational stakeholders come together for a common purpose. Collaboration across Finance, Procurement, Development, Engineering, and business leadership teams is the heart and soul of FinOps.
However, this type of collaboration has proven elusive. Different teams have different key performance indicators (KPIs) and have little incentive to communicate with one another. Rather, these KPIs encourage them to make decisions independently, leading to a lack of collaboration.
When these teams start communicating with one another, they drive better results. The first step would be to establish a unified view into how the teams spend money in the cloud. Then, collaborate with Finance and other stakeholders to determine shared goals for your FinOps initiative. Ensuring that your teams can easily work together will create a strong starting point for the program’s direction.
2. Business Value Drives Cloud Decisions
To understand the source of cloud costs, organizations need the ability to detect anomalies by using trending and variable analysis. They need to engage in these activities proactively. If they take a reactive approach by waiting for and analyzing their invoice, they will have already spent the money. Proactively detecting these trends and anomalies determines the cloud’s value and enables companies to control costs.
One model for reviewing costs is the Iron Triangle which consists of quality, speed, and cost. If an organization wants better quality, then it likely needs to pay more. If the organization focuses on speed, then it might need to sacrifice quality. Focusing on costs, if done improperly, can harm both quality and speed. This is because a cost-focused approach often leaves teams lost in the details rather than looking at the bigger picture.
To truly maximize the cloud’s business value, organizations need to measure business value for their projects through an internal rate of return (IRR). This encourages businesses to focus on how profitable their future investments will be, instead of focusing solely on quality, speed, or cost. This requires visibility into your entire cloud estate, but it is the best way for organizations to control spending as they establish a FinOps program.
As a natural extension of collaboration, accountability requires FinOps teams to drive clear KPIs for each type of user. Based on the team’s goals, the KPIs for each might be different. Typically, organizations should choose KPIs that fall into the Iron Triangle methodology. This will ensure every team can work to their strengths while working to help other teams.
Some teams may focus on speed, others may focus on innovation, and some may zero in on delivery. Of course, this doesn’t mean the team shouldn't work together. For example, feature and product teams need to meet internally or externally defined service level agreement timelines. Understanding how the organization measures this team’s success enables it to collaborate more effectively with the FinOps team.
4. Accessible, Timely Reporting
Collaboration and accountability work best when organizations have timely anomaly detection reporting. If something abnormal occurs, like a spike in network traffic in the middle of the night, organizations need data that is as close to real-time as possible. Otherwise, they may not act quickly enough to stop an upcoming breach.
Problematically, cloud providers have limitations that make this challenging. Cloud providers may not be able to offer consumption data within seconds, but organizations tracking KPIs need the information as quickly as possible.
As the organization’s FinOps program matures, they need a steady stream of data that is highly granular and accurate. Once they have this information at the ready, they can quickly create or view reports through their FinOps tool’s dashboard. This allows them to better leverage cloud data to make better decisions.
5. A Centralized Team
If individual teams continue to make decisions independently, then the organization will continue to face challenges even if everyone communicates and leverages the right data. Having a FinOps practice requires establishing a centralized FinOps team. This doesn’t mean you need to add a new headcount - you just need to create a sense of ownership among existing teams.
Engineers and developers can bring their roadmaps to the team, sharing them with finance and business leadership. This gives everyone a shared language, enabling them to communicate better. Additionally, it allows the FinOps team to set KPIs aligned with business, financial, and technology goals. These centralized teams will help facilitate cross-departmental communication, making FinOps an organizational priority.
6. Variable Cloud Costs
Despite the saying that the cloud is “pay for the resources used,” the reality is that the cloud is “pay for what the organization deployed.” Many organizations struggle with this model and end up over-provisioning and over-deploying, which leads to spending anywhere between 30% and 40% more than originally estimated.
The main issue lies with predictability. With on-premises resources, organizations felt the need to maximize how they used them because they had already paid for the entire resource. Since the cloud is different, organizations need to start thinking about how they can take advantage of these variable models.
In the same way that developers shifted their mindset to agile and DevOps, organizations need to rethink how they pay for IT infrastructures and begin optimizing deployed resources. By employing reserved instances, for example, organizations can save money by reserving a set amount of computing space during a given window. Choosing the right type of reserved instance based on your day-to-day needs is called “right-sizing.” This right-sizing process can be facilitated through automation, leading to significant cost savings.
FinOps: A Cost Management Paradigm Shift
Organizations have been managing cloud cost optimization and cost savings for years. However, FinOps and its fundamental principles focus on getting the most out of every dollar an organization spends. Instead of focusing simply on the dollars saved, organizations need to ensure that they get the most from each dollar spent.
Organizations that focus on creating and engaging a broader team can drive better results because they collaborate to understand the outcomes driving their cloud usage. By following the FinOps framework, companies can achieve better business outcomes.