What is FinOps?

FinOps is an evolving cloud financial management discipline and cultural practice that aims to maximize business value from cloud investments. It involves collaboration between teams like engineering, finance, technology and business to make data-driven spending decisions.

At its core, FinOps is a cultural shift where:

• Teams take shared responsibility for cloud spend
• Engineers treat cost as an efficiency metric
• Finance and engineering teams work together
• A centralized FinOps team provides guidance and best practices

Some key characteristics of FinOps:

• It’s a portmanteau of Finance and DevOps, emphasizing collaboration between business and engineering teams.
• FinOps organizations optimize cloud costs without compromising performance or innovation.
• FinOps aims to align cloud spend with business objectives, not just minimize costs.
• It involves establishing visibility into cloud usage and costs across teams.
• Automation and reporting play an important role in FinOps practices.

The FinOps journey typically involves three phases:

1. Inform – Provide visibility into cloud usage and costs
2. Optimize – Identify opportunities for cost savings and efficiency
3. Operate – Continuously evaluate performance and improve the FinOps practice

The FinOps Foundation outlines six principles to guide FinOps practices:

1. Teams collaborate
2. Everyone takes ownership
3. A centralized team drives FinOps
4. Reports are accessible and timely
5. Decisions are driven by business value
6. Take advantage of the cloud’s variable cost model

Key stakeholders in FinOps include:

• Executives
• Business/product owners
• Engineers and operations teams
• Finance and procurement
• FinOps practitioners

How does FinOps aim to align cloud spend with business objectives?

Aligning Cloud Spend With Business Objectives Through FinOps

FinOps is a discipline that aims to align an organization’s cloud spend with its business objectives. At its core, FinOps involves:

• Collaborating across finance, IT, and business teams
• Increasing visibility into cloud usage and costs
• Optimizing cloud resources and spend
• Automating processes where possible
• Making data-driven decisions

The key goal of FinOps is to maximize the business value of an organization’s cloud investments. This means:

• Controlling cloud costs without compromising performance
• Aligning cloud spend with business priorities and KPIs
• Identifying opportunities to improve efficiency

Some ways FinOps helps align cloud spend with business objectives:

Visibility and transparency – FinOps practices provide visibility into cloud usage and costs across teams. This helps teams understand how their work impacts cloud spend and how to optimize resources to meet business goals.

Cost allocation – FinOps teams allocate cloud costs to specific business units, projects or products. This helps teams track how their cloud spend contributes to business outcomes.

Optimization strategies – FinOps identifies opportunities to optimize cloud resources through rightsizing, automation, and other strategies. This helps reduce waste and improve efficiency to meet financial targets.

Performance tracking – FinOps teams track key performance indicators (KPIs) and metrics that matter most to the business. They monitor these metrics to ensure cloud resources support business objectives.

Forecasting – Accurate forecasting of cloud spend helps organizations set appropriate budgets that align with strategic plans and financial goals.

Governance – FinOps establishes cloud policies, guidelines and guardrails to ensure cloud resources are used in a manner that supports the business.

What are some examples of key performance indicators tracked by FinOps teams?

# What KPIs Do FinOps Teams Track?

FinOps teams track a variety of key performance indicators (KPIs) in order to optimize cloud costs, gain visibility into spending, and align cloud usage with business objectives. Some of the most common KPIs tracked by FinOps teams include:

Cost per unit of work

This tracks the cost of performing a specific task or function in the cloud. It helps identify areas where costs are rising and opportunities for optimization.

Proportion of underutilized resources

This measures how much of the allocated cloud resources (compute, storage, etc.) are not actually being utilized. FinOps teams can reduce costs by reallocating or eliminating underutilized resources.

Budget variance

This compares actual cloud spend with the planned budget to identify areas where spending is above or below expectations. It helps FinOps teams stay within budget targets.

Forecasting accuracy

This assesses how accurate the organization’s cloud spend forecasts are. Improving forecasting accuracy helps avoid unexpected overspending.

Cost per department/team

This tracks cloud costs by business unit, department or team to identify which areas have the highest spend. It enables cost allocation and optimization strategies.

Vendor expenditure

This measures spending by cloud vendor to identify the most and least expensive providers. It helps FinOps teams negotiate better pricing and optimize vendor usage.

Resource usage

This tracks how efficiently allocated cloud resources are being utilized. Optimizing resource usage can reduce costs and improve performance.

Reaction time

This measures how quickly cloud services and applications respond to user requests. Improving response time enhances the user experience.

How does cost allocation help align cloud spend with business objectives?

How Does Cost Allocation Help Optimize Cloud Spend?

Cost allocation is a critical part of optimizing cloud spend. By assigning costs to specific business units, teams, or individuals, organizations gain visibility into where their cloud money is going. This insight enables them to make data-driven decisions to optimize spend.

Some of the ways cost allocation helps optimize cloud spend are:

Provides visibility. By allocating costs to cost centers, projects, products, etc., organizations gain transparency into who and what is driving cloud usage and costs. This visibility is the first step to optimizing spend.

Encourages accountability. When costs are allocated to teams and individuals, it holds them accountable for cloud resource usage and spend. This accountability can drive more cost-conscious decisions and behaviors.

Identifies opportunities. By analyzing allocated costs, organizations can identify opportunities to optimize resource usage, improve efficiency, and eliminate waste. This includes rightsizing resources, shutting down unused resources, and automating manual processes.

Reveals inefficiencies. Allocated costs can reveal inefficient practices, overprovisioned resources, and areas of higher spend. This insight helps organizations address inefficiencies and implement more cost-effective solutions.

Supports showback/chargeback. By implementing showback or chargeback models based on allocated costs, organizations can influence behavior at the team and individual level to optimize spend. Teams are motivated to use resources more responsibly when they are charged for them.

Enables forecasting. Accurate cost allocation provides the data needed to forecast cloud spend by cost center. This forecasting helps set budgets that align with organizational goals and enable optimization planning.

Drives automation. As organizations gain insights from allocated costs, they can implement automation to optimize resource usage, provision resources more efficiently, and reduce manual processes that contribute to wasteful spend.

What optimization strategies does FinOps identify to reduce cloud costs?

# Cloud Cost Optimization Strategies Identified By FinOps

FinOps identifies several strategies to optimize cloud costs:

1. Increasing visibility and transparency: FinOps practices provide visibility into cloud usage and costs across teams. This helps identify opportunities for optimization. Tools like cloud cost management and observability software are used to gain insights.
2. Rightsizing resources: FinOps teams identify overprovisioned or underutilized cloud resources that can be rightsized. This includes reducing instance types, resizing volumes, and removing unused resources.
3. Shutting down unused resources: FinOps teams identify resources that are no longer in use and shut them down. This includes unused compute instances, storage volumes, databases, etc.
4. Implementing reserved instances: FinOps teams recommend using reserved instances where it makes sense. This locks in discounted hourly rates for compute instances in exchange for a one-time upfront payment and a 1-3 year commitment.
5. Negotiating better discounts: FinOps teams negotiate better pricing and discounts with cloud vendors. This includes discounts based on usage commitments, managed service credits, and custom deals.
6. Migrating to native cloud services: FinOps teams recommend rearchitecting applications to leverage native cloud services that are more cost-effective. This includes moving from VMs to containers, serverless functions, and managed database services.
7. Automating processes: FinOps teams implement automation to optimize resource usage, provision resources more efficiently, and reduce manual processes that contribute to wasteful spend. This includes auto-scaling, auto-shutdown, and auto-right sizing.
8. Implementing cost allocation: FinOps teams allocate costs to business units, projects, and products. This provides accountability and motivates teams to optimize their cloud usage.

What governance policies does FinOps establish to control cloud spend?

Governance Policies FinOps Establishes

FinOps establishes several governance policies and guardrails to control cloud spend and optimize costs:

Provisioning policies

FinOps develops policies that govern how cloud resources are provisioned. This includes:

• Requiring approval before provisioning new resources
• Enforcing tagging standards
• Limiting the types of resources and services that can be provisioned
• Setting default configurations and limits on resources

These policies help ensure consistency and cost control when provisioning new cloud infrastructure.

Access policies

FinOps establishes policies that govern who has access to what cloud resources and services. This includes:

• Defining roles and permissions for different user groups
• Requiring approval and review of access privileges
• Rotating and revoking access when no longer needed

These policies help enforce the principle of “least privilege” and reduce the risk of wasteful spend due to unauthorized access.

Usage policies

FinOps develops policies that govern how cloud resources are used once provisioned. This includes:

• Setting limits on resource consumption and spending
• Requiring approval for requests above certain thresholds
• Enforcing standard configurations and architectures

These policies aim to optimize resource utilization, reduce waste, and control costs.

Lifecycle policies

FinOps establishes policies that govern the full lifecycle of cloud resources. This includes:

• Defining ownership and responsibilities
• Requiring regular reviews to identify unused resources
• Automating resource shutdown after a set period of inactivity
• Enforcing retirement processes for resources no longer needed

These policies help reduce costs by promptly decommissioning resources that are no longer used.

Reporting and alerting policies

FinOps develops policies around reporting, monitoring and alerting. This includes:

• Requiring regular cost and usage reports by team/project
• Setting up alerts for anomalies, thresholds exceeded and policy violations
• Defining response procedures and remediation timelines

These policies provide the visibility and feedback loops needed to control costs on an ongoing basis.

Sources

1. https://www.finops.org/introduction/what-is-finops/
2. https://www.ibm.com/topics/finops
3. https://www.finops.org/