How to Master FinOps and Optimize Your Cloud Costs (2024)

FinOps is a set of best practices that helps organizations align their cloud spending with their business goals. FinOps enables teams to collaborate, make data-driven decisions, and take ownership of their cloud usage. FinOps also helps organizations leverage the variable cost model of the cloud and take advantage of its flexibility and scalability.

In this article, I will give you an overview of FinOps and explain how it works. I will also cover the following topics:

• The "Iron Triangle" of Cost Management: Quality, Cost, and Time
• The FinOps Framework: A cloud-agnostic approach that can be applied to AWS, GCP, and Azure
• The Six Key Principles of FinOps: Collaboration, Business Value, Ownership, Transparency, Centralization, and Variability
• The Benefits and Challenges

I will also share some insights from a recent McKinsey report on the pitfalls to avoid when implementing FinOps, and introduce you to the FOCUS Foundation, a new initiative that aims to improve cloud cost transparency across different providers.

What is FinOps?

According to the FinOps Foundation, 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 is a portmanteau of "Finance" and "DevOps", stressing the communication and collaboration between business and engineering teams. Other names for the practice include "Cloud Financial Management", "Cloud Financial Engineering", "Cloud Cost Management", "Cloud Optimization", or "Cloud Financial Optimization".

FinOps is not about saving money per se, but about getting the most value out of cloud to drive efficient growth. Cloud spend can drive more revenue, signal customer base growth, enable more product and feature release velocity, or even help shut down a data center. FinOps is all about removing blockers; empowering engineering teams to deliver better features, apps, and migrations faster; and enabling a cross-functional conversation about where to invest and when.

The "Iron Triangle" of Cost Management

One of the key concepts in FinOps is the "Iron Triangle" of cost management, which illustrates the trade-offs between quality, cost, and time in cloud services. Quality refers to the performance, reliability, security, and availability of the cloud service. Cost refers to the amount of money spent on the cloud service. Time refers to the speed of delivery, deployment, and scaling of the cloud service.

The Iron Triangle implies that improving one aspect of the cloud service will affect the other two aspects. For example, increasing quality may increase cost or decrease time. Decreasing cost may decrease quality or increase time. Increasing time may increase quality or decrease cost.

The goal of FinOps is to balance these three aspects according to the business value of the cloud service. For example, a mission-critical application may require high quality and low time, but can tolerate high cost. A non-essential application may require low cost and low time, but can tolerate low quality.

The FinOps Framework

The FinOps Foundation has developed a framework that outlines the key processes, capabilities, and domains involved in implementing FinOps. The framework is cloud-agnostic and can be applied to any provider such as AWS, GCP, or Azure. The framework consists of three phases: Inform, Optimize, and Operate.

• Inform: This phase involves collecting data on cloud usage and costs across different dimensions such as teams, projects, applications, resources, regions, and tags. This data is then analyzed and reported to provide visibility and accountability of cloud costs to the relevant stakeholders. The Inform phase also involves setting budgets, forecasts, and alerts to monitor and control cloud spending.
• Optimize: This phase involves identifying and implementing opportunities to reduce or avoid cloud costs without compromising quality or time. This may include rightsizing resources, selecting the optimal pricing models, eliminating waste, applying discounts or credits, and negotiating contracts. The Optimize phase also involves aligning cloud costs with business value by allocating costs to the appropriate business units, products, or customers.
• Operate: This phase involves integrating FinOps into the daily operations and workflows of the engineering and business teams. This may include automating cost optimization actions, embedding cost feedback loops, enforcing cost policies and governance, and incentivizing cost efficiency behaviors. The Operate phase also involves continuously measuring and improving the FinOps practice by defining and tracking key performance indicators (KPIs) and metrics.

The Six Key Principles of FinOps

The FinOps Foundation has also defined six key principles that guide the FinOps practice.

These are:

1. Teams need to collaborate: Finance, technology, product, and business teams work together in near real time as the cloud operates on a per-resource, per-second basis. Teams work together to continuously improve for efficiency and innovation.
2. Decisions are driven by business value of cloud: Unit economic and value-based metrics demonstrate business impact better than aggregate spend. Make conscious trade-off decisions among cost, quality, and speed. Think of cloud as a driver of innovation.
3. Everyone takes ownership for their cloud usage: Accountability of usage and cost is pushed to the edge, with engineers taking ownership of costs from architecture design to ongoing operations. Individual feature and product teams are empowered to manage their own usage of cloud against their budget. Decentralize the decision making around cost-effective architecture, resource usage, and optimization.
4. FinOps data should be accessible and timely: Process and share cost data as soon as it becomes available. Real-time visibility autonomously drives better cloud utilization. Fast feedback loops result in more efficient behavior. Consistent visibility into cloud spend is provided to all levels of the organization. Create, monitor, and improve real-time financial forecasting and planning.
5. A centralized team drives FinOps: The central team encourages, evangelizes, and enables best practices in a shared accountability model, much like security, which has a central team yet everyone remains responsible for their portion. Executive buy-in for FinOps and its practices and processes is required. Rate, commitment, and discount optimization are centralized to take advantage of economies of scale.
6. Take advantage of the variable cost model of the cloud: The variable cost model of the cloud should be viewed as an opportunity to deliver more value, not as a risk. Embrace just-in-time prediction, planning, and purchasing of capacity.

The Benefits and Challenges of FinOps

FinOps can bring many benefits to organizations that adopt it. Some of the benefits are:

• Reduced or avoided cloud costs: FinOps can help organizations save up to 30% or more on their cloud bills by optimizing their cloud usage and costs.
• Increased business agility: FinOps can help organizations accelerate their innovation and delivery cycles by enabling faster provisioning, scaling, and experimentation of cloud services.
• Improved customer satisfaction: FinOps can help organizations improve the quality and performance of their cloud services by ensuring they meet the expectations and needs of their customers.
• Enhanced competitive advantage: FinOps can help organizations gain an edge over their competitors by maximizing the value of their cloud investments and aligning them with their business strategy.

However, FinOps also comes with some challenges that need to be addressed. Some of the challenges are:

• Cultural change: FinOps requires a shift in mindset and behavior from traditional IT or finance models to a more collaborative and data-driven approach.
• Skill gap: FinOps requires a combination of technical, financial, and business skills that may not be readily available or developed in many organizations.
• Complexity: FinOps involves managing a large amount of data from multiple sources, systems, tools, and providers that may not be easily integrated or standardized.
• Trade-offs: FinOps involves making trade-offs between quality, cost, and time that may not be easy or clear to evaluate or communicate.

How to Avoid the Pitfalls of FinOps

A recent McKinsey report highlighted some of the common pitfalls that organizations face when implementing FinOps. The report identified four main pitfalls:

• Executives get involved too late in the game until cloud spend is more than $100 million a year
• Tactical activities are prioritized over higher-impact strategic initiatives
• FinOps teams often lack crucial skill sets
• Companies have a limited understanding of cloud unit economics

The report also suggested some best practices to overcome these pitfalls. Some of the best practices are:

• Engage executives early on in the cloud journey and establish clear governance and accountability for cloud spending
• Focus on strategic initiatives that can deliver significant value such as optimizing architecture design, pricing models, contracts, and discounts
• Build a cross-functional FinOps team that has a mix of technical, financial, and business skills and can collaborate effectively
• Develop a deep understanding of cloud unit economics and how they relate to the business value and outcomes of cloud services

The FOCUS Foundation: A New Specification for Cloud Cost Transparency

One of the challenges of FinOps is to compare and contrast the costs and benefits of different cloud providers and services. Each provider has its own pricing models, billing formats, and cost management tools that may not be compatible or comparable with others.

To address this challenge, a new initiative called the FOCUS Foundation was launched in October 2023. The FOCUS Foundation stands for "Framework for Open Cost and Usage Specification" and aims to create a common standard for cloud cost transparency across different providers.

The FOCUS Foundation is led by a group of industry experts from Microsoft Azure, AWS, Google Cloud, IBM Cloud, Oracle Cloud, and VMware. The foundation has developed a specification that defines a common format for cloud cost and usage data that can be used by any provider or tool. The specification also includes a set of best practices and guidelines for cloud cost management.

The FOCUS Foundation hopes that by creating a common standard for cloud cost transparency, it will enable organizations to:

• Compare and optimize cloud costs across different providers and services
• Simplify and automate cloud cost reporting and analysis
• Enhance cloud cost governance and compliance
• Increase cloud cost awareness and accountability
• Accelerate cloud adoption and innovation

Conclusion

FinOps is a discipline of optimizing cloud cost and usage for cloud-based businesses. FinOps enables teams to collaborate, make data-driven decisions, and take ownership of their cloud usage. FinOps also helps organizations leverage the variable cost model of the cloud and take advantage of its flexibility and scalability.

FinOps involves balancing the trade-offs between quality, cost, and time in cloud services according to the business value. FinOps follows a framework that consists of three phases: Inform, Optimize, and Operate. FinOps is guided by six key principles: Collaboration, Business Value, Ownership, Transparency, Centralization, and Variability.

FinOps can bring many benefits to organizations that adopt it, such as reduced or avoided cloud costs, increased business agility, improved customer satisfaction, and enhanced competitive advantage. However, FinOps also comes with some challenges that need to be addressed, such as cultural change, skill gap, complexity, and trade-offs.

To avoid the pitfalls of FinOps, organizations should engage executives early on in the cloud journey, focus on strategic initiatives that can deliver significant value, build a cross-functional FinOps team that has a mix of technical, financial, and business skills, and develop a deep understanding of cloud unit economics.

To improve cloud cost transparency across different providers, organizations should also consider adopting the FOCUS Foundation specification, which defines a common format for cloud cost and usage data that can be used by any provider or tool.

If you want to learn more about FinOps and how to master it, I recommend you check out the following resources:

I hope you found this article useful and informative. If you have any questions or feedback, please feel free to leave a comment below or contact me directly. Thank you for reading!