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:
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:
- Do we need to worry about total spend? If so,
- Can we handle any cost challenges by focusing on price? or
- 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.
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 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:
- How are we doing?
- What is the improvement potential?
- 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.
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
- You need to ensure a solid process for tagging, subscriptions, and resource groups,
- You need to have a consistent mapping of your organizational hierarchies, and
- 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.
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!