Have you started hearing the word FinOps often? Or trying to wrap your head around how to manage your growing cloud costs? Without adding another time-consuming task to your team or removing the flexibility and agility of cloud in your organization?

This article gives you an overview of the why and how of FinOps so you can plan your FinOps activities and get started. In the bottom you’ll find the most important advice we’ll leave you with. Completely unintentionally… – you need to scroll through the whole blogpost to see it.

Why do you need FinOps?

The reason why you need to do FinOps is that you can save 50% of your bill through structured financial governance compared to an ungoverned cloud environment.

The savings come from 3 different sources:

  1. Buying services as cheaply as possible and leverage all discount options
  2. Only pay for what you need
  3. Use the most cost-efficient services that fits your needs

FinOps is like cost management when you build a house

Just as when you are building a house – when you buy your materials, you want to buy the materials as cheaply as possible, and you might research where you can get them at discount. Second, you need to manage the quantity and make sure you do not buy more than needed so you later have to return them. Third, you look at the overall architecture and make sure you avoid using unnecessary expensive building blocks.

The new way to do financial management

Cloud calls for a new way to do financial management. The new thing is that we buy IT as a service and not large hardware and software investments. This gives flexibility and agility – but how do you ensure sound financial governance without creating a bureaucratic overhead sacrificing flexibility and agility – and adding a huge job on your scarce cloud resources?

 
Below we will go through the 4 steps of FinOps:
The FinOps journey - The 4 steps of FinOps
The FinOps journey - The 4 steps of FinOps

Visibility – know your costs

Create awareness of cloud costs by looking at your bill every month.

Visibility is the preliminary step to get your FinOps efforts going. If you’re not doing any FinOps initiatives yet, just taking the step of looking at your bill every month will put you in the mindset to start asking the right questions such as:

How much did we grow since last year?

What areas are driving the increase in costs?

Are we using everything we are paying for?

You need to know these things and track the development over time to avoid being blindsided by rising cloud costs. For example, a 5% increase one month may not seem like a lot, but if it continues for 6 or 12 months it’s completely different numbers.

Price optimizations – Buying services as cheaply as possible

Avoid overpaying for your services and leverage all discount options. This will save you 20-25%.

You can optimize price in many ways, but fundamentally it boils down to optimizing price, by working through the cloud service catalog, price, and discount models.

You might know the 3 essential ways to optimize on price – reservations /commitments, Azure Hybrid Benefit, and shared resources. But what makes price optimizations complex is the myriad of options there is within each of these, all affected by complex details, the state of your environment and the fact that Microsoft keeps changing the options for price optimizations. It’s not a difficult task – it’s just really time consuming and you need to ask yourself:

Does it make sense for you and your team to trawl through your whole cloud environment as well as your portal? Or would it be easier to get someone else to do it?

A tool is a great idea to do this as it is an optimal task for technology. With a tool your team doesn’t have to spend unnecessary time doing it.

While there is a tool side to price optimizations, i.e., using the organization tools in your portal, the main reason for not getting price optimizations done is uncertainty. What if our environment changes? What if I will move to a different service shortly? What if…?

The solution is investing in both tool and training. The tool makes you able to find the needle in the haystack and training gives you the necessary expertise to remove uncertainty and act on the recommendations from the tool.

Read more about price optimizations:

3 ways to get the most Azure for your money – and how to get it done!

3 indicators of a cost-efficient cloud

The 4 things you want to know as a CIO about cloud costs

Quantity management – only pay for what you need

Avoid paying for something you don’t use. This will save you another 20-25%.

In this step you need to get the different business owners involved in making decisions about shutting down services (lifecycle management), shutting services on/off, and buying the right capacity services (rightsizing).

To get the business units committed you need showback / chargeback to gain an overview, of which department is using what. Also, adding chargeback, incentivizes the different departments to take ownership and manage their cloud costs in a more structured way if they know they will gain the economic benefit of their own efforts.

Showback / chargeback is a moving target. In the beginning, the distribution of costs between departments can be relatively simple by just taking your cloud bill and split it between the different business owners. But with time more decisions need to be made e.g., how do you know which department is using what? how will you distribute hidden costs? and how do you distribute shared costs (shared Azure infrastructure, the FinOps team, and much more) and resources (containers, micro services etc.)?

Getting started you need to work with tags – and we strongly recommend adding virtual tagging to reduce administration. Consider using an external FinOps partner to get going in just a few weeks and avoid the common pitfalls that will make it time consuming to maintain.

Cost architecture – Use the most cost-efficient services that fits your needs

Avoid using unnecessary expensive services/ building blocks. This will save you another 10-15%.

Cost architecture is most likely the last step in the FinOps journey. Surely your team has done some research on this, but cost architecture is an ongoing activity – just like the other FinOps activities.

The reason for needing to do this ongoing is that the cloud has in-build challenges e.g., that the price for one service never drops. Consequently, you need to change server if you want a cheaper compute option.

What you specifically should focus on in your organization varies, but we see over and over again that SQL-servers, VMs, evergreening, IaaS vs. PaaS and Data Analytics are topics where an annual cost architecture review will greatly pay off.

“How do you ensure sound financial governance without creating a bureaucratic overhead sacrificing flexibility and agility? and adding a huge job on your scarce cloud resources? “

 

If you do these 4 things your bill will be halved compared to if you do not do any FinOps initiatives.

You might have taken some steps already or have not started yet. The most important to do right now is that you get started – 50% off your cloud bill amounts to a lot of money that could be used on other priorities.

The most important piece of advice we will leave you with

Starting from scratch and building your FinOps efforts is complex when FinOps is not your primary assignment. The good news is that your needs will look the same as other organizations, making FinOps an ideal external assignment. That way, you avoid a slow implementation process which only result in paying Microsoft or the other cloud providers more than necessary. With a FinOps partner you get a guide that asks the right questions, and helps you overcome the complexity by learning the simple principles of FinOps.

Our most important piece of advice is therefore to engage with an independent FinOps advisor, that can provide you with both tool and training.

Ready to move on? Have the FinOps journey infographic at hand so you know what to do when, or book a 30-minute inspiration meeting with us.

Get the FinOps journey Infographic

… have the FinOps journey at hand all the time so you know what to do when.

The FinOps Journey -guide to financial governance of cloud costs

Download The FinOps Journey Infographic

 

Full overview of the different steps

Full overview of The FinOps Journey

… have the FinOps Journey at hand all the time so you know what to do when.

The implementation of a FinOps team will ensure that all FinOps efforts are aligned within your organization and drive your FinOps agenda from awareness to action.

If your company is using public cloud, you are probably well aware that there is a lot to manage – and as your cloud usage increases so does the assignments with managing cloud costs. Most C25 companies counter this increase by implementing a dedicated FinOps team to manage cloud costs. The FinOps team will be the link that assures the company is streamlined on their FinOps efforts.

The key take away’s of the FinOps journey

The FinOps journey makes it evident that the more money you spend on cloud the more effort you need to put into managing your cloud costs.

It shows what FinOps initiatives you should focus on depending on the size of your monthly cloud spend. It works as steps, and each time you go one step up you add on to the already existing assignments. The FinOps journey differs from company to company depending on the specifics of your organization, but for many the FinOps journey will look like the illustration above.

 
The key take-away from the FinOps journey in terms of building a FinOps team is how vital this team is for the organization, and the urgency for implementing this team the more you spend on cloud. As almost every company using cloud will inevitably start to see their spend increase as more and more data is moved to the cloud, it is only a matter of time before your company needs a dedicated FinOps team to take charge of all FinOps efforts to ensure a smooth FinOps journey for your company.

The central role of the FinOps team

The FinOps team is the glue that holds the FinOps initiatives together. They have an all-embracing role in helping the different departments with the aspects of FinOps that cannot be centralized i.e. helping management with reporting, business with quantity management, procurement with negotiation input, finance with reconciliation and chargeback and IT with cost architecture.

Added up it is a lot of tasks, yet it is simple if it is all centralized in the FinOps team.

When it comes to implementing a FinOps team some companies designate people that are already within the company and give them the resources to gather knowledge of the FinOps discipline either through self-learning or an external FinOps partner while other companies decide to recruit a whole new set of people.

The tasks that a FinOps team should be able to take charge of is invoice control, price optimization, quantity management, negotiation input, chargeback, management reporting, forecasting etc. Some of the tasks will be centralized in the FinOps team while others will be in cooperation with the rest of the organization. Which tasks is handled where also varies from organization to organization.

Download "The necessary roles for a FinOps team"

Checklist for the roles: 

Background and experience

Overall responsibility

Job tasks

3 roles that are necessary for the FinOps team

In our work helping customers with cloud cost management, we’ve helped our fair share of companies build their FinOps team as they along their FinOps journey realize the importance of a central FinOps team in the organization to connect all FinOps efforts and help the different departments with what cannot be centralized. 

The 3 roles we always see as an essential part of a FinOps team is one FinOps Business Manager, one or more Technical FinOps Manager(s) and a FinOps Project Manager who is needed  as there are several projects with a need for financial management.

FinOps Business Partner / FinOps Business Manager:
FinOps Business Partner for the FinOps Team

This will be the person with the overall responsibility for the FinOps practice and the FinOps team.

The role requires a broad range of skills, i.e., discussing IT cost models with the business (who is not familiar with IT cost models), as well as being able to challenge IT/DevOps when they push back referring to “this will put operations at risk…”. The position offers a lot of interaction with the internal customers and requires business acumen and financial management capabilities.

The success of the FinOps efforts will come down to this person’s ability to drive the agenda from awareness to action both centrally, and with each project or customer stakeholder.

Technical FinOps Manager:

The technical FinOps manager is the “boots on the ground” of the FinOps team. Responsible for either directly, or with internal or external collaborators, implementing the agreed optimizations.

This role involves keeping the environment free of wasted resources through a continuous effort. It requires attention to detail and interest in keeping up to date on the constantly changing cost saving models. The position requires technical experience and offers a new career path learning the skills required to manage IT costs in a service model.

The technical FinOps Manager is the first to notice any cost changes, including observing the effects of implemented initiatives.

FinOps Project Manager:
FinOps Project Manager for the FinOps Team

This role is required to ensure a structured and planned process for implementing FinOps as a governance framework so that it is well documented, with the necessary technology support, and broadly accepted within the organization – all the way from the top and down.

In smaller organizations with small, non-business critical budgets this role may be filled by the FinOps Manager, but in all larger organizations with million EURO budgets this is a full-time project for months.

Implementing the FinOps team

You now have the 3 roles necessary for a well-functioning FinOps team. A FinOps team will bring you in control of you cloud spend and ensure that your cloud spend is not suddenly going up the roof due to unforeseen changes – with a FinOps team that risk is covered as they monitor your cloud environment daily as well as streamlining FinOps efforts in the whole organization making every department aware of the organization’s focus on FinOps initiatives.

Want to discuss the benefits of a FinOps team for your organization with a FinOps partner? Book an inspiration meeting with us here.

Download "The necessary roles for a FinOps team"

Checklist for the roles: 

Background and experience

Overall responsibility

Job tasks

At Kostner, we have done countless cloud cost management workshops, and it is beyond doubt that those companies who understand and embrace the differences between managing a cloud budget and an on-prem budget are most successful.

We have taken all that experience and boiled it down to four actionable tips to help you succeed with your cloud budget.

Tip #1: Budget for growth

Cloud costs are only going one way in all the companies we are working with – up!!

Many trends are driving increased costs:

  • New digitalization initiatives on how to serve and interact with customers
  • New projects to automate existing routines and drive down employee costs
  • Price increases

Particularly the latter is a powerful trend, ie. Microsoft just announced that Office 365 will be 20-25% more expensive in 2022 for most bundles.

With these powerful forces a new approach to budgeting is required, so you avoid getting the blame for the growth in costs and any later budget overruns.

Tip #2: Get the framework right

As one of our client’s CIO mentioned in a workshop:

It is more about getting the right framework than getting the right number.

 What he refers to is that you need to understand who can take what responsibilities in a new mode of cost management often referred to as FinOps.

In the cloud world referring to the fundamental equation is often useful:

cost-efficient cloud Spend management

The equation highlights the framework for managing cloud costs

  • Buy at the right price, ie.
    • Optimize means buying the services as cheaply as possible leveraging all pricing and discount options available
    • Architect means that you build with the services that gives you the lowest price. 
  • The business should be accountable for managing quantity – but needs support to do so, ie.
    • Inform them about the costs they are consuming through chargeback or showback

Manage the costs, ie. with a quarterly review of all main cost items.

Make sure that you are not assuming an accountability you cannot control. However, make sure that you can explain the main principles for who should be accountable for what and how to get there.

Tip #3: Price optimization is your “license-to-play”

Keeping the budgets used to be my “license-to-play” in the on-premises world.

In cloud, getting price optimization right – and being able to document it – is the new “license-to-play”.

Torben Kjær, Group CIO, Aller

Centralizing price optimization is about buying what you already buy as cheaply as possible. This could be using reserved instances and AHB licensing options in Azure or ensuring that your employees have the right M365/O365 license to what they use.

Centralizing price optimization is the first and most important thing to get right for several reasons:

  • There is a lot to save
  • You can centralize it because you can make changes without affecting the business
  • You can document cost-efficiency and benchmark yourself

Understanding price optimization allows you to build a new measure of your contribution to cost management – not only focus on budget.

As another client’s CIO mentioned as a great benefit of documenting cost-efficiency is that “it changes the discussion from how much we are spending to what we should use our budget for”.

Tip #4: Chargeback – the business needs an incentive to manage costs

With business driving more and more IT costs between budgeting cycles – how do you deal with that?

We see all larger organizations moving towards chargeback so that the unit driving the costs are also charged the costs. They should see increased efficiency elsewhere in their own cost base, or improved results ultimately driving top line growth.

Implementing chargeback gives the business owner a clear incentive to cut down costs and engage in managing quantity – as described in the framework above.

However, be aware that chargeback will drive some extra tasks in your organization. You will need a process for tagging cost items to organizational units, frequent reporting to create transparency, and support to help the business owner make necessary decisions.

Getting chargeback right requires the participation of IT and Finance as a minimum – or a dedicated FinOps person or team.

Want more information for successfully budgeting your cloud costs?

Now that you have gotten these tips and are ready to budget your cloud costs it would be interesting to see how other companies are saving on cloud. Kostner Quarterly Insights is a report that provides you with benchmark data on public cloud (Azure, AWS) usage. Get your benchmark for Q3 2021 here.

Download Kostner Quarterly Insights for Q4

Download the report to get data on public cloud (Azure, AWS) usage: 

… and our comments on “How to use the data”.

Kostner Quarterly Insights Q4

Managing Azure and AWS costs do not have a strategic or even tactical flavour to it.

At first glance!

In this blogpost we will take a closer look at what you should include in a cloud cost dashboard if you as a CIO (or someone reporting on cloud costs to leadership) want to be able to answer the question:

 

Do we need to spend more time managing our cloud costs?

Why bother? We are on budget!

… and our priorities are to move our digitalization projects forward and ensure stable and secure operations.

Having worked with customers ranging from smaller SaaS-companies to large enterprises we see insightful CIOs and IT leaders refer to three unwanted effects they want to avoid:

  1. Making wrong business decisions due to flawed understanding of costs
  2. Wasting time on internal cost decisions
  3. Getting started with cost optimizations too late

Making wrong business decisions is maybe the most critical one. 

You might decide on the wrong scope of migrations for your existing infrastructure slowing down your digitalization journey. 

You might see earning erosions because the pricing structure towards your end customers do not consider that pricing structures and cost levels are so different in cloud compared to on-premises.

Or you might be spending valuable time in leadership meetings discussing if you cloud costs are too high when you really should be spending your time on top-line focused digitalization initiatives.

These issues would all impact the digitalization agenda negatively.

The last point on getting started with cost optimizations too late have two sides to it: Firstly, it is annoying to overpay for your cloud services, and secondly, you don’t want someone else to take up the agenda of price optimizations – this is your domain.

In this context we will take a closer look at four questions you would like to know the answer to.

How is our total cloud spend developing?

This question is really straightforward. Take your monthly cost and see how it is developing.

Surely, you are on top of this, yet you might recognize that your team spends too much time manipulating data and explaining the following issues:

  • Firstly, make sure you do not report on actual costs but amortized costs. By this, we mean that if you buy a reservation upfront, have a prepaid monetary commit, or another type of payment option where you pay for the service in chunks, then you will see your costs jumping up and down.
  • Secondly, remember that there might be costs associated with software licenses outside your cloud bill, i.e., when you use on-premises licenses. This means that you might see a drop in costs where it is not transparent that a different account holds the charge.

Also, you may want to report on a normalized cost, i.e., taking the number of days in a month into account. Otherwise, you will tend to see a cost reduction of about 10% from January to February.

All the numbers are available in your cloud portal. You can read a recent blog post on how to get data for your FinOps.

What is a reasonable forecast for our cloud costs?

Forecasting is trickier. Most companies are on a journey to use the cloud more and more, but at what pace? And how much do the historic numbers say about future growth?

Our recommendation would be to use at least the following two – mathematically simple – scenarios to give a range for where the cost can end up for the current financial year:

Scenario 1: We will be keeping the current monthly spend stable, i.e., forecasting the same monthly spend for the rest of the budget year as the last month reported.

Scenario 2: We will continue growing (or reducing) our spending with the same average rate as the last six months.

Why take scenario one into consideration when you expect increasing costs? The main reason is that almost all companies can continue expanding their use of the cloud without adding costs for a shorter period when the cost becomes a matter of priority. In a recent blog post, we outlined the three most important ways to save in Azure, and the principles apply to a large degree also for AWS.

Hence, if you are faced with budget issues, you just might be able to get on or close to the lower cost scenario.

What are the main cost drivers of our cloud costs?

Your quarterly report should give a quick overview of which areas to monitor – and where to ask questions. You could have lists highlighting:

  • “What”: Total cost split on services (Compute, storage, databases, containers, PaaS, AI/ML, etc.)
  • “Who”: Top five spenders (i.e., cost centers or projects)
  • “Who is growing”: Top five growing spenders

Getting this reporting level right requires a bit more from your side. Your team should use subscriptions (Azure) or accounts (AWS) in a way that supports your reporting structure as well as applying an appropriate tagging structure for more advanced reporting.

It may sound like a daunting task, but we recommend you start early and talk to your team, cloud partner, or cloud cost partner about the few vital things you should get right from the start – then it becomes second nature.

Can we save material amounts on our cloud costs?

Did you ever have to discuss with your leadership colleagues why costs are higher than anticipated?

The blessing – and curse – of cloud is agility. Projects and departments can easily add resources, but it makes it challenging to manage costs.

Hence, it is a great help for many CIOs to answer with affirmation any questions on higher than anticipated costs. Is this because we consume more (typically the responsibility of the business), or because we overpay for the services we buy.

Some helpful reports would be:

  • Cost efficiency index (like the energy rating on your refrigerator, house, etc.)
  • Realized savings (how much did your cloud team already save)
  • Additional savings potential leveraging pricing and discount models

Getting data for this section of your dashboard is more complicated. The data are not available in your portal, so you need access to a tool directly or from a partner. 

However, it is a powerful way to demonstrate your contribution to the cloud journey – and even more so when you can show continuous improvement over time.

External benchmark: How do our prices compare to others?

If you are struggling to understand your savings potential as mentioned above there is another way you could get valuable insights.

Compare the unit price you pay with what others are paying for the main categories of cloud services, ie. virtual machines, storage, databases etc.

External benchmarks like these have their virtues and pitfalls.

We use it with our customers in context with other measure to identify areas worth taking a closer look at. Are we leveraging the cheaper storage options? Are premium versions necessary? And a range of other architectural choises that may or may not have been done on purpose.

If you have downloaded your billing data (see below) you can calculate your total spending on a category, and how much of ie. storage you are consuming to get to a unit price (ie. cost per GB per month).

In the most recent version of Kostner’s Quarterly Insight we provide you with unit costs for the main categories our customers are buying. Download below.

How do I build a Cloud Cost Dashboard?

Most of the data is in your cloud portal. The free tools also include some graphs and tables that will answer some variants of the questions above.

However, you cannot get a trustworthy number for additional savings. There are free tools in your cloud portal providing an incomplete (and sometimes misleading) list of possible savings, but let us just put it this way: it is not the best built-out feature of your cloud portal.

Talk to your cloud team to see what questions they already know the answer to for a start.

Many tools and providers of cloud cost management and FinOps related services can make your life a lot easier. 

It need not be very expensive or time-consuming to get started on a standardized periodic report – you may want to check our pricing page to get a feel for the price levels. However, prices and price models do vary substantially between providers.

Download Kostner Quarterly Insights

Download the report to get data on public cloud (Azure, AWS) usage: 

… and our comments on “How to use the data”.

If you are like most leaders, you and your team are busy delivering the digitalization strategy. For you, Cloud Cost management is a necessity but not a priority. So, how do you avoid suddenly having to defend the total spending on your cloud projects?

This blog post will give you three key indicators of cost efficiency when managing your Azure and AWS costs. If you get solid confirmation on all three, you have less to worry about.

What does a “cost-efficient cloud” mean?

Before we get started, let us agree on what we mean by “cost-efficient cloud”. The fundamental equation for your total spending in the cloud is:

cost-efficient cloud Spend management

So, when we talk cost-efficiency we refer to buying your services at the right price, i.e., that the price is as low as possible.

In contrast, reducing (or keeping down) the quantity you buy is what we would call cost-effectiveness.

And although both parameters are essential to keep your total spending down, we will focus entirely on cost-efficiency in this post. This will bring you tangible benefits, as you can read in a recent Gartner Research – and in the quote below.

“Focusing on efficient use of cloud services brings immediate and tangible financial benefits. Unfortunately, most organizations are unprepared to profit from this savings opportunity, and they’re likely to overspend.”
(Gartner Group, 2020)

Indicator 1: Are you on top of regular cloud cost reporting?

If you can’t measure it, you can’t improve it. 

(Peter Drucker)

By running a cost-efficient cloud, you will benefit from following how your total cost is developing over time, what you are spending on and who.

And, if you have this standardized reporting in place, you probably have assigned clear responsibilities for monitoring and optimizing costs.

But, sometimes you may hear that you cannot get the correct data from your cloud portal. So, while the tools are not fantastic, and the data will require an effort to prepare for a meaningful management report, you should know that lack of data is not the root cause of the problem.

If you have a more profound interest in reporting, we recommend reading “The four things you want to know as a CIO about your cloud costs

Indicator 2: Do you have a schedule for optimizing your cloud costs?

What gets scheduled gets done 

(Michael Hyatt)

Your cloud environment is dynamic, and the pricing and discount models are dynamic. 

Hence, keeping cost-efficiency in your cloud is an ongoing practice – not a one-time project.

The minimum frequency we recommend is quarterly reviews of your entire environment, likely supplemented with other, more frequent activities. 

And, if you are interested, we have another blog post on the crucial elements in the quarterly tune-up, which tells more about what you need in place to ensure cost-efficiency in your cloud through quarterly optimisations.

Regardless, you might want to be on the lookout for typical warning signs for not sticking to the schedule, i.e.

  • Other priorities came up
  • It will slow us down
  • We must wait until our environment is stable
  • Let’s finish our overall cost management strategy first
  • We need to finalize our negotiations with the cloud provider

While at first glance many of these explanations are understandable and even intuitively correct, they can and should be challenged. Most of our customers have been surprised with the flexibility on some of the ways to save – which is precisely why you should not postpone your cost-saving initiatives.

Remember, only Amazon and Microsoft benefit from deferring your cost optimization.

Download this paper to learn

Cost-Efficient cloud management

Indicator 3: Do you track the critical KPIs for cloud cost efficiency?

Although you may not be interested in the details of cost-efficiency, someone in your organization must be monitoring the essential KPIs related to the most important ways of saving money on the cloud.

Reservations are the single most mechanism for cost savings, and you should have a robust measure for performance on this activity. Another frequently used term for this is “Reservation coverage,” i.e., the percentage of your current, reservable resources which are covered by a reservation.

In Azure, bringing your own licenses (AHB) is a must. Savings are substantial, and you should know how large a share of licenses are covered.

But, knowing the number itself is not the key here. The key is that if you do not track the number, you do not know if you have identified all significant savings.

So, having analyzed hundreds of millions of cloud spend, we know that almost all companies are not making enough reservations and are struggling to optimize their use of licenses.

How can I measure my cloud cost efficiency?

While it is great to have some indicators of cost-efficiency, you might be looking for a way to measure it.

And two of the most relevant types of measures are: an overall cost-efficiency indicator (a bit like an energy rating) and unit costs of select primitives.

But, the most common definition of cost-efficiency is calculated like this:

Cost-Efficient cloud management

When it comes to IaaS / PaaS primitives we suggest the following unit costs:

  • Virtual Machines: Cost per vCore / month
  • Storage: Cost per Gb / month
  • SQL: Cost per vCore / month

And if you have a robust way of measuring this, you don’t have to worry more about cost-efficiency – you will be well ahead of the pack.

The three questions leaders care about when discussing cloud costs

If you can’t measure it, you can’t manage it. Hence, reporting on costs is always the first step in cloud cost management.

The challenge is that when you are working with the leadership team, their focus is on managing strategy and growth. Cost management is a necessary evil.

Your success depends on the leadership team having to spend as little time as possible on the budget, and they are looking to get an affirmative answer to these questions:

  1. Are we in control of our total spend? 
  2. If no, can you solve the problem in the FinOps (or cloud) team?
  3. If no, (deep sigh) do we need to involve other parts of the organization? And how?

The first “yes” will let them lean back and refocus on growing and developing the business. So what does that mean for what you should include in your management reporting?

What is the core of cloud cost reporting?

Your colleagues have these common elements in their cloud cost dashboard:

  • The total spending over time and compared to the budget.
  • Top 5 spenders 
  • Top 5 growth areas 
  • Top 5 savings

The total spending is the main graph to understand if spend is in control. The top 5 spenders and top 5 growth areas are looking for any signs of cost areas that may drive future costs. The top 5 savings are to see if we have made significant savings somewhere that are hiding a general increase in spending – and make sure to highlight your contributions in driving down costs.

You must be prepared for additional questions on any deviations, particularly if you experience any budget issues or your organization is under general cost pressure.

Warning

Generally, our recommendation is not to provide more detailed reporting or drill-down functionality for the leadership team. Focus on the high-level dashboard, discussing the numbers and demonstrating your knowledge and ability to find solutions.

The One Question You Must be Able to Answer.

You will eventually run into a budget problem, and the leadership team will look at you and ask question number 2, “Can you solve the problem for us?”.

Going back to the fundamental equation of cloud costs: Total spend = Price * Quantity, you are left with two options to reduce total cost. Either you can reduce the unit prices you pay, or you can reduce the quantity. (see also our recent blog post on how to take control of your cloud costs).

The responsibility for unit prices typically is with you as a FinOps professional. Hence you must be able to credibly answer if you and the team can solve the problem by applying Azure price optimization techniques. If there is untapped potential in price optimization, this is the fastest route.

But if you and the team can’t solve the problem, then what?

Warning

We strongly recommend that you have a firm grip on how to demonstrate that you are in control of prices – you don’t want to get the blame for cost overruns.

Decision time – Increase budgets or work with the business?

When you go into the budget review meeting, you already know that the meeting will require the leadership team to make one of two decisions:

  • Do we increase the budget (or allow an overrun), at least for a while? or
  • Do we go to the biggest spenders and work with them to reduce their consumption?

If the decision is the latter, get explicit support from the leadership at the meeting, and agree that they communicate it clearly to all stakeholders.

So much on the process, the next question you should consider is what could derail the discussions?

Warning

For the meeting and decision process to go as smoothly as possible, you should know which projects or departments you recommend doing a consumption review.

Some pitfalls in cloud cost reporting you are likely aware of

Firstly, let us reiterate how powerful it is to document that you control price optimization. Without this documentation, it is only too easy to point at you to find the solution. (sign-up to get a notification at the bottom of this article – we will be addressing this topic in a separate post)

Besides that, the most common issue in cost discussions is the numbers. To mention a few

  • Disagreement with Finance about what the cloud spend is in a given month.
    There can be many valid reasons for that, i.e., prepaid reservations, derived costs for licensing etc.
  • Discussions about spend changes even when the consumed quantity is the same. The reason can be that a reservation has run out or has moved to another resource. As billing is per hour, February can seem 10% smaller than January, even if there has been no change in the environment.
  • Dissatisfaction with the size of non-allocated costs. “Why didn’t WE benefit from reservations”
  • Concern about derived costs. If you bring your own license (i.e., Azure Hybrid Benefits), the license cost will not appear in your billing – only the lower price for the resource.

We will leave these questions for now and return to them in a later blog post on showback and chargeback.

Warning

These pitfalls may appear technical – and they are. However, they lead to genuine discussions about the validity of the numbers. Hence, getting to the right solution will become more challenging and reduce your credibility and impact.

How to get started?

By now, you might have a lot of ideas about what you want to do, what tools to implement, etc. But in the early phases of a cloud journey, where budget is not yet seen as a significant issue, getting funding for cost management tools is not always easy.

We recommend that you start by reporting the monthly cost in a normalized form compared to the normalized budget. It will create awareness about any increase in spending, free from month-length noise, and you can discuss some of the challenges in getting accurate reporting in place.

There are free tools in all cloud portals to help you get started, although these tools do not offer normalized costs. You can read more about the Azure tools in one of our recent blog posts, which links to Azure for additional detail. Read more about AWS Billing and Cost Management on the AWS site.

You will likely soon experience that the monthly reporting becomes a time-consuming effort, and you want a better solution. Then what?

Use Power BI or similar tools to report on cloud costs.

Even though you only present high-level data to the leadership team, you need a firm grip on the underlying data. Otherwise, you cannot answer the leadership team’s questions or present the business with relevant data on what areas they need to reduce consumption.

You must ensure that all internal reporting is consistent from top to bottom, and you only do that if you have one consolidated data source.

You can use the same Power BI tool to:

  • Produce Management Reporting
  • Investigate variances
  • Make custom reports
  • Create chargeback files for your ERP-system
  • Produce showback reports with drill down to your internal customers
  • And much, much more

The data you need is your cloud detailed billing data (read how to get data for your finops), your hierarchies for reporting, and any derived costs you want to include. We recommend you review options for third-party tools – it is not entirely trivial to build something like this yourself.

Want additional resources on cloud cost management?

Over the coming weeks, we will be issuing a handful of blog posts going into more detail about FinOps core disciplines, roles and responsibilities, and how to create a roadmap for your FinOps journey.

If you want an alert when a new post is out, leave us your name and e-mail below. You can also join our free live webinars or book a meeting if you want to discuss your specific issues with one of our experts.

All the best on your FinOps Journey.

Does AWS really save money?

Not automatically. 

AWS is not just one thing. It is many, many services. Whether you save money or spend more depends on what and how you use these services. 

  • Are you moving Virtual Machines (VMs) and NVMe disk storage from a well-run on-premises environment to AWS EC2? You will spend more. A lot more.
  • Are you architecting an environment to benefit from cloud-native services that scale with demand and turn off entirely when not needed? You can save a lot.

In both instances, savings are rarely the goal – instead, our customers are looking for benefits like increased developer efficiency, shorter time to market, etc. 

In other words, you might not save money, but you may make more – if your business can use these cloud benefits to drive more business.

What is AWS savings plan?

There are two different kinds of savings plans: 

  • Compute, which covers EC2 instances, AWS Fargate, and AWS lambda usage regardless of instance family, size, AWS region, operating system, etc. There are 88,480 different EC2 instance types at the time of writing, 44 AWS Fargate resources, and 80 AWS Lambda covered by a compute savings plan. 
  • The other kind is the EC2 Instance savings plan, which gives a slightly higher discount for specific families of instances but has far less flexibility. 

We recommend the Compute savings plan. You maintain cost control and reasonable flexibility.

How do AWS savings plans work?

It’s complicated. 

In short, a compute savings plan is a commitment to spend a certain dollar amount per hour on compute resources – both AWS EC2 instances, AWS Lambda, and AWS Fargate.

If you don’t use up the entire amount that hour, it is lost. If you use more than you have committed, you pay the Pay-As-You-Go rates. 

When it comes to prioritizing which services should benefit, AWS automatically applies the committed amount to the resources with the highest discount percentage first – within the account with the savings plan.

Once it has covered every computing resource in the account, it spreads it to other accounts, again with the highest discount first. 

Therefore, a savings plan should live in a separate account with nothing else in it – that way, it will always cover the tenant’s (or management account’s) use with the highest discount rates first.

Why is AWS so expensive?

A combination of several explanations:

  • Firstly, it is value-based pricing, not commodity pricing. If you are coming from on-premises hardware where vendors compete with virtually identical and interchangeable servers, you’re used to cost-plus pricing. With value-based pricing, vendors price according to the value you perceive to get from the solution. This price will almost always be significantly higher. 
  • Secondly, your switching costs are high, so you are less likely to leave, even as prices stay high. If you have built your solution using AWS exclusive services, where can you feasibly go? Even Kubernetes workloads are implemented slightly differently from cloud vendor to cloud vendor.
  • Thirdly, because competition hasn’t really materialized yet. Yes, there are other cloud vendors like Google Cloud Platform, Microsoft Azure, and Oracle Cloud Infrastructure, but, right now they are all just fighting to keep up with demand from customers – not yet fighting for customers. Many more companies and development teams are looking to put workloads in the cloud than people who can help them do it. We do not expect to see fierce price competition any time soon – and it will continue to be limited by the high switching costs.

All that to say, AWS is priced the way it is because they can, and they are a for-profit company.

Any other Questions?

If you have other questions about AWS and how to control your costs, please ask them below or continue reading our blog post on “How to take control of your Cloud Costs“.

What is your “one number”?

Hi, I am Kim Schroder, and I will be sharing with you my thoughts on how to take a pragmatic yet firm approach to manage your IT costs in this series of blogposts on FinOps or Cloud Financial Management. Whether you work in IT, Finance, or Procurement, I hope you will get a few new perspectives that will benefit your current job and your career.

24 years ago, as a newly appointed head of IT Nordics in Arthur Andersen, I met with the European CFO, and in many ways, that meeting shaped my career in Andersen. He advised me to focus on one number: cost per employee for delivering IT services. 

Why was this clever? Because it created a precise measure of contribution to the business (even if I was helped by constantly dropping prices on IT, also known as Moore’s law). Having this KPI gave me the recognition and platform to participate in more strategic projects with a stronger voice – and with the CFO’s support, I ended as European CIO.

Fast forward twenty years. Taking control of costs is still a robust platform for your career – but make sure you adapt your understanding to a world where cloud and services are how you buy technology. And find out “what is your one number”?

Why do cloud costs easily end up as a blame game?

The short answer is “because we get unpleasant surprises”, i.e., our cloud costs exceed our budget. A budget overrun leads to a discussion of why, and rarely everybody agrees to an answer. If you are accountable for the cloud budget, cost discussions are time-consuming and not the most robust platform for your career.

A great starting point for understanding cloud costs and for building a management structure around it is to start with the fundamental equation:

cost-efficient cloud Spend management

For decades, businesses have been roughly doubling their use of IT every couple of years. Due to falling prices spend has been stable as a percentage of revenue, and consequently not much of a battleground. 

In the cloud, to benefit from Moore’s law requires a constant effort which you can read about in our recent blog. Even the best efforts are not driving down prices at the same speed as in the good old days, and for most companies, the prices are relatively constant.

Moving from falling prices to constant prices is changing how the total spend is developing over time – from a stable cost to exponential growth. No wonder, cloud costs run over budget and end up as a blame game. But how should you navigate this?

Three Core Disciplines in FinOps

As simple as it is, the fundamental equation holds the key to three core disciplines in FinOps:

  • Spend, the primary responsibility of leadership, hence the need for “Management Reporting”,
  • Price, can be optimized through clever provisioning and use of pricing models, hence the need for “Price Optimization”,
  • Quantity, can only be managed by those “owning” the resource, hence the need for “ShowBack”

If you are engaged in FinOps, here are some thoughts on what to consider for each area.

Management Reporting (on Spend)

Leadership has their eyes on growing and developing the business, usually with a strategy containing the word digitalization somewhere in the title.

Yet, nothing slows down any digitalization project faster than cost overruns. Therefore, FinOps must ensure that leadership get the necessary information to answer the following questions:

  1. Do we need to worry about total spend? If so, 
  2. Can we handle any cost challenges by focusing on price? or
  3. Do we need to involve the business in managing quantity?

The leadership team should get only enough information to make an informed decision on these questions and support the needed prioritization throughout the organization.

We will dive further into management reporting in a later blogpost on this topic and illustrate how you can answer questions on current spend, trends, and who are spending how much.

Warning

For now, we will leave you with the advice, that if control of your cloud costs is important for your career, implement a standardized, simple management reporting to ensure that leadership understands your quest and makes necessary decisions to support you.

Price Optimization

Price Optimization is at the heart of FinOps. There are substantial savings to be made, it can be done without involving the business, and the responsibility is always very close to the FinOps team. The FinOps team must be able to answer the following questions:

  1. How are we doing?
  2. What is the improvement potential?
  3. How do we do it?

You know you are in control, when you have a standardized process and can easily tell how your prices are developing over time (are you benefitting from Moore’s law), how much you have saved already, and how you compare against other businesses (external benchmark). Also, you need to know how much more you can save on prices through reservations, shared resources, and licensing, and how to get it done.

In larger organizations, an additional layer of complexity is added where you might have procurement involved in negotiating a cloud vendor agreement. Before engaging in any negotiations or performing an annual true-up you need to understand how far down in cost you expect to come if you drive down prices and quantity.

Price Optimization is an orphan in many organizations – because it frequently sits with people who are really focused on building and operating an environment not cost optimizing it.

Warning

Hence, getting to own price optimization could be a great career move, a lot of power will reside in this function, and your direct contribution to the business is very tangible and measurable.

Showback (Managing Quantity)

Managing quantity is the second factor of the equation. This is trickier, because now we are engaging in a dialogue with the business on what and how much they are consuming – and more importantly if it can be reduced. The facts to support the dialogue is “Showback”.

While the cloud providers claim that showback is easy this is not what the practitioners experience. To highlight a few of the challenges

  1. You need to ensure a solid process for tagging, subscriptions, and resource groups,
  2. You need to have a consistent mapping of your organizational hierarchies, and
  3. You need a way to report to the business and facilitate their decision-making.

And then we have not touched on items without a price in the detailed billing, the need to allocate licensing costs, and much more.

While it is indeed important to get facts straight for the show back, never forget that the job is to support decision-making. 

Warning

Hence, make sure you do not overfocus on getting the last decimal on the showback right. Rather, build trust by helping the business in managing risk and uncertainty, i.e., by explaining reversibility of a wrong decision.

What is your “one number”?

Going back to our original question you want to be held accountable for “one number” where you have a reasonable influence and where external factors do not set you up for failure.

Hence, in the world of FinOps, neither spend, nor quantity is the measure for success you want. Rather, you want your effort to be measured on your ability to get the best prices possible. This could be:

  • Total value of savings (vs. list prices)
  • Annual price reduction on the main categories (compute, storage, and databases)
  • External cost benchmark 

Of course, you still want and need to deliver management reporting and showback, but your platform for building credibility is on price optimization.

A Framework for FinOps

Over the coming weeks we will be issuing a handful of blogposts going into more detail of each of the three core disciplines. Additionally, you can read about roles and responsibilities, and how to create a roadmap for your FinOps journey in the final two blogposts.

If you want an alert when a new post is out, simply leave us your name and e-mail below.

All the best on your FinOps Journey!