This is part 3 of our ultimate guide to FinOps blog series. In part 1 we defined FinOps, traced its evolution, identified the reasons that have given rise to it and provided an in-depth review of FinOps functions. Part 2 took a deep dive into FinOps domains and roles, reviewed the main responsibilities of those domains and identified the current organizational roles that are candidates for inclusion in FinOps teams.
In this instalment of the ultimate guide to FinOps, we will review the core principles of FinOps.
The core principles of FinOps serve as a foundation for every good FinOps practice. It is important for organizations to consider these principles when building out their FinOps practices and processes in order to ensure a robust FinOps practice.
FinOps practices built using these principles will allow the business to improve transparency and accountability for cloud costs as well as effectively manage those costs. It will also allow the organization to pivot to a unit economics model of cloud costing, enabling them to improve business agility, invest in innovation and gain a competitive advantage.
There are six of these core principles that organizations can use as a baseline to develop their FinOps practice. Below we review each one individually:
Collaboration is a key tenet of FinOps. This collaboration needs to cut across organizational domains to include engineering, finance, procurement and executives. Each of these domains need to collaborate in near real-time to ensure the FinOps process yields positive results.
Establishing seamless and robust communication channels is key to this principle. Also essential is the availability of detailed costing and efficiency reports that are relevant to the motivations of the various stakeholders.
Given these prerequisites teams can collaborate to institute an iterative process for improving efficiency, investing in innovation and driving accountability.
Viewing cloud costs as a driver of business value rather than as out-of-context isolated operating expenses, is one of the most fundamental shifts required by FinOps. For this to happen organizations need to pivot to a new model of cloud cost analysis; one which correlates cloud costs to business value.
The FinOps foundation calls this unit economics and identifies it as one of the most important concepts in FinOps. According to the FinOps foundation, a unit economics model involves assessing cloud costs against business metrics. Organizations can choose from several business metrics relevant to their business model including revenue, shipments, users, subscribers, customers, etc.
Instituting a unit economics model requires FinOps teams to decide on a list of business metrics. This needs to be a collaborative process with input from multiple organizational domains. They also need to institute FinOps processes and practices including tagging, cost allocation, chargeback and showback.
Once instituted, a unit economics model enables stakeholders and FinOps team members to have informed conversations with a common lexicon to evaluate the effectiveness of cloud costs. Whereas before engineering, finance and executives brought their own points of view and benchmarks, with FinOps common business metrics allow much more intelligent and effective discussions and decision making.
Even though FinOps advocates a centralized model for reporting cloud costs and cost allocation, the actual implementation of the processes and practices defined by the centralized FinOps team is left to the individual teams. Since the responsibility shifts left, so does the accountability for those decisions and the costs that arise as a result.
For example Individual product, infrastructure and service teams are responsible for implementing rightsizing, usage optimization and cost optimization processes. With the shift left in these decisions, accountability shifts left too, to the engineering domain. Individual teams empowered to make real-time decisions to manage cloud usage are accountable for the costs that arise as a result.
These decisions are influenced by the larger FinOps concepts of business value and unit economics, where cloud cost is not an isolated expense anymore but rather a driver of innovation and business value. For this to be effective, engineering teams will need to include cost as an efficiency metric into monitoring and observability setups.
Developing and implementing a borad based and robust reporting regime is essential to a good FinOps practice. Reports drive visibility, which is central to the core FinOps function of managing cloud costs and improving accountability.
FinOps teams should consider the motivations and reporting requirements of each organizational domain while deciding on the type and content of each report. The reports provided to each team or domain should also provide cross functional information about the agreed upon business metrics so as to provide consistent visibility and a common baseline to evaluate business value.
Once developed the reporting regime should be implemented in a way that processes data in near real-time or as soon as it becomes available. Processes should also be put in place that allow for regular and speedy feedback between the different domains and teams.
Business metrics and cost data should be augmented and analyzed to provide more in-depth reporting needed by the different domains including cost forecasting, trending and variance analysis and both internal and external benchmarking.
The FinOps framework revolves around a centralized FinOps team that is responsible for both developing FinOps practices and processes as well as implementing them.
There are a couple of reasons for preferring centralization as opposed to the prevailing decentralization theme in enterprise environments. One of these is the improved trust placed by organizational domains in an unbiased centralized team with representation from each cloud stakeholder.
A common reporting baseline applied equally by an independent FinOps team across all business units, cost drivers and teams increases trust in the integrity of data and reports. Stakeholders are more likely to accept reports generated by centralized FinOps teams rather than a team that is itself one of the cost drivers.
Fostering consensus and then implementing a unit economics model of cloud costing where cloud cost is measured against a set of business metrics is another reason for centralizing FinOps teams. With the broad representational footprint of FinOps teams, it is much easier to agree on a set of business metrics to evaluate cloud costs against. Reporting on these business metrics is in turn also easier.
Centralized teams create a repository of best practices, processes and automation which can then be implemented by multiple teams on the edge. This leads to a leaner cloud cost management effort with reduced duplication across teams.
Most cloud providers have a complex billing structure with multiple rate and usage discounts. Rather than individual teams having to navigate these discounts individually, they can be managed and negotiated centrally by a FinOps team.
The variable costing model of the cloud brings with it a number of opportunities for organizations to trim costs and improve agility. With privately hosted infrastructure organizations have to institute complex capacity planning exercises to ensure they can meet future demand.
The cloud enables real-time purchasing of capacity and unprecedented scalability, allowing organizations and IT departments to concentrate on efficiently using the resources they already have. Rather than having to make quarterly or yearly capacity purchases, organizations can purchase and release capacity in smaller time increments.
In Part 4 of the Utimate guide to cloud FinOps we review the FinOps phases.
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