To stay competitive in a digital world, businesses invest huge sums in cloud services. How can they ensure they spend their money wisely?
It’s a growing question for business leaders, for obvious reasons. According to market intelligence firm IDC, spending on public cloud services in Europe alone will hit $148bn (about £122bn) in 2023, reaching a staggering $258bn by 2026. As this spending rises, so do concerns over its effectiveness.
To address such concerns, many business leaders are turning to FinOps. This management practice encourages collaboration between finance, technology and business operations to manage an organisation’s cloud-computing infrastructure and costs.
It could be the key to optimising cloud expenditure, according to IDC. If the firm’s numbers are anything to go by, 2023 may be a pivotal year for FinOps, as increasing macroeconomic pressures and the push towards cost-effectiveness drive investments in the cloud.
As it stands, well over 60% of businesses globally have already adopted a FinOps approach. About 15% of these adopters are mature in their FinOps adoption.
The FinOps roadmap
Flexera’s 2022 State of the Cloud Report found that organisations on average wasted more than 30% of their cloud spend. This waste could stem from underutilised resources like low CPU usage, unused or forgotten resources like inactive projects or failure to shut resources properly, failure to delete unnecessary machines or over-provisioning resources, among other factors.
FinOps looks like a promising solution.
For a start, it provides tools for users to monitor such factors, an easy way to save money. “But FinOps is more than that,” says Edwin-Alexander Kuss, director of global sales at Hystax, a provider of FinOps and multi-cloud cost management software.
Organisations that get FinOps right look beyond cost-cutting, focusing instead on realising the full value of cloud services. “This mindset is what is crucial to an effective FinOps strategy and critical to its success,” says Archana Venkatraman, research director, CloudOps, at IDC Europe.
Take Grammarly, an AI-powered writing assistant that suggests improvements for written communication. The company experienced rapid growth from 2021 to 2022, but also saw its cloud spend increasing at a similar pace. It turned to FinOps. “The adoption of FinOps was not solely about cost reduction; it was also about realising the value the cloud offers and making everyone more accountable,” says Scott Meyer, staff engineer at Grammarly.
To get companies started, industry body The FinOps Foundation has devised a roadmap that lays out three phases of adoption: inform, optimise and operate.
The first phase, inform, gives engineers greater visibility over an organisation’s cloud operations, providing them with a fuller picture of where waste is occurring. In the optimise phase, teams use that information to make informed decisions about cost optimisation – they can see what’s essential and what’s not and can provide finance with forecasts and budgets.
For instance, engineers will be able to demonstrate reduction in the monthly spend achieved by making modifications to their code, retiring old services, or recommissioning other services. These wins not only improve the company’s financial performance, but also elevate the recognition given to engineers.
Finally, firms are left with more efficient, cost-effective cloud operations, where waste can be quickly spotted and eliminated.
“Following this roadmap, we have made significant progress in our FinOps journey since starting in 2022. We are now starting to have conversations around the opportunity costs, which is a big step for us,” says Meyer.
Building a FinOps strategy
Adopting the FinOps approach does not require a complete overhaul of the existing IT setup. Companies can either set up their own FinOps team or collaborate with a vendor.
The first phase, which enables greater visibility, is almost entirely internal. It is only at the optimise and operate stages where tools for observability, visualisation and AI and ML are needed to provide insights into how cloud is being used.
No matter the approach, businesses must bear in mind that all large cloud service providers have multiple tools for cost optimisation, which may add complexity to the process. It’s preferable to have a strategy that uses a single, customised tool, providing observability across the entire cloud environment. “This is a long-term process that will take time to achieve,” cautions Venkatraman.
Grammarly is between the optimise and operate phase and has already started to see the benefits from FinOps. The company has noticed an improvement in its unit economics with a decrease in cost-per-user and economies of scale. It has gained better control over its budget and forecast, along with better planning to determine the best option for its needs.
This allowed Grammarly to negotiate more effectively with cloud vendors as it reviewed its enterprise discount programme (EDP), which provides discounted services based on volume or consumption commitment. “The cloud costs are variable per hour, per second. If we can reduce that by a little and still demonstrate user growth, it will be reflected in an improvement of gross margins,” says Meyer.
Two major challenges
Adopting FinOps can pose challenges.
For example, to realise the full value, it is imperative that optimisation occurs at a large scale and is not focused on one business resource. This gives businesses the potential to yield savings of 30% to 40%.
The focus is currently limited to optimising the infrastructure or commodity aspect of the cloud: storage and compute instances, for example. But Venkatraman notes that “commodity resources are just the starting point. It does play a big part but companies should not stop there. In order to enjoy the full benefit of FinOps companies would need to take a holistic view of this approach which should include Software as a service (SaaS).”
Mindset is the other big challenge for FinOps adoption. Historically, engineers haven’t been involved in decision-making over costs, so face a cultural shift to understand the costs associated with their work, including the impact of changes on the cloud per user.
However, as engineers become more involved in cost optimisation, they can make informed trade-off decisions themselves. “To get the engineers to prioritise these new optimisation efforts could take three to six months,” says Meyer.
Businesses need proper collaboration and planning to be successful in the cloud. It is a fragile asset and if it isn’t used properly, the value will not be realised. Implementing FinOps allows companies to adopt cloud solutions in a secure and transparent way, bringing about a cost-effective cloud experience.
“There is far more awareness of FinOps now, and it is easier to have conversations with customers, which was difficult a couple of years back,” notes Kuss.
Start small, but start somewhere
Kuss and Venkatraman believe the key to FinOps success is not the size of a company, industry or budgets spent on cloud services. Basic implementation of FinOps principles like visibility, control, collaboration and cost optimisation will help make the most of spending and improve governance.
This disciplined and efficient use of resources also encourages innovations within companies. IDC predicts that by 2023, 40% of organisations in Europe are expected to establish a dedicated FinOps practice that enhances the transparency and efficiency of their IT budgets. “This will free up 15% of their cloud spend, allowing them to reinvest that back in the newer capabilities in the cloud, thus fuelling innovation,” says Venkatraman.
Industry experts suggest starting small. To begin, businesses should form a dedicated FinOps team consisting of members from IT, finance and other executives. This will include establishing a FinOps process that defines the responsibilities of each team member.
An effective strategy will outline clear goals to understand potential cost savings, both in the short and long term. At a later stage, businesses might consider FinOps certifications and upskilling whole cloud teams.
Experts recommend that businesses start by utilising the available tools in the market, which can help identify cost-optimisation opportunities and provide transparency. Engaging the engineering teams also helps reduce friction and ultimately improves cost optimisation.
Rather than waiting for the shock of a steep cloud bill, FinOps is a proactive approach to optimising cloud spending. It’s a way to address spiking cloud costs, but it also helps organisations realise the full potential of their cloud strategy, saving time and money and maximising resource utilisation.