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Increased uncertainty means we are more likely to evaluate alternative AI chatbots and LLMs.
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What recent turmoil?

How FinOps Can Optimize Cloud Costs and Drive Innovation

Cost optimization in the cloud is far more challenging than many organizations first expect. And as cloud usage bills balloon, the costs begin to undermine the benefits of migrating there in the first place.
Jun 22nd, 2022 10:00am by
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Larry Cusick

Two mainstays drive most application migration and modernization initiatives.

First, organizations are moving workloads to the cloud as an innovation catalyst. Achieving their strategic goals requires the speed, agility, reliability, and advanced technical capabilities available to them in a hyperscale cloud.

Second, they’re intent on ensuring the return on investment (ROI) through cost optimization, which is different from the abstract “cost savings” that was part of many early cloud pitches. It’s a recognition that attaining ambitious strategic goals depends on ruthless attention to the bottom line.

The cloud enables the capabilities described above not just by making them available at the click of a button but via a finance and business model far more palatable to CFOs and boards than if the company were to build everything in their own data centers — including the data centers themselves.

Therein lies a fundamental problem — and one of the major application modernization trends we’re seeing in 2022: Cost optimization in the cloud is far more challenging than many organizations first expect. And as cloud usage bills balloon, the costs begin to undermine the benefits of migrating there in the first place.

Identifying cost savings in the cloud isn’t really the problem. Doing so isn’t easy, per se, but there are various ways to go about it — such as changing a storage type, instance type, or retention policy, among many possibilities. 

Implementing those cost savings is the real issue. Companies know where and how to optimize utilization and spending but struggle for various reasons to make the changes needed to realize these gains. This challenge is why we’re seeing the growth of FinOps in 2022. FinOps is the culture and practice of creating visibility and accountability to manage cloud spend throughout an organization.

FinOps responds to two significant problems that hinder cloud cost optimization measures.

The first is conflicting incentives. The IT team or a consultant or managed services provider may identify opportunities for saving money in a company’s cloud bill, but that same IT team — the ones typically responsible for the “keyboard work” needed to implement the changes — may not truly own the application in question.

Moreover, the business unit or team that does own the application may not, in fact, have any financial accountability for the infrastructure that powers that app. They don’t have any skin in the game and are often reluctant to approve changes especially if the app is meeting their performance goals.

Second, many organizations migrate to the cloud only to realize they lack dependable visibility into how they are allocating costs in their new environment. A CFO or even CIO with a multimillion-dollar cloud spend may have very little visibility into who in their organization is spending that money — much less why they’re spending that money.

These are significant issues that can spiral into runaway cloud bills — and ultimately suffocate the business value that the cloud was supposed to unlock in the first place.

Enter FinOps: FinOps is to dollars what DevOps is to code. It is essentially about driving awareness of cloud spending throughout a business, from the C suite to a junior developer. In doing so, FinOps makes possible the kinds of cost optimizations required to attain the cloud’s transformative potential.

In this way, FinOps is becoming a vital trend in application modernization because you cannot have innovation without cost optimization.

Just as DevOps fosters values like shared responsibility and visibility (without playing the blame game) to sustainably increase development velocity, systems reliability, and other priorities, the FinOps framework brings a similar approach to cloud resource utilization. DevOps is ultimately concerned with that first mainstay cloud goal I described above: Achieving speed, agility, reliability, etc. FinOps focuses on the second mainstay: Cost optimization.

In this way, FinOps is becoming a vital trend in application modernization because you cannot have innovation without cost optimization. (If you think otherwise, invite your CFO to lunch and see how she feels about it.)

FinOps engenders cost optimization in various ways, but there are two key facets I’ll highlight here. The first is that FinOps culture and practices typically entail implementing “showbacks,” a system that clarifies who is using (read: spending) what in the cloud.

Showbacks take some time to set up — it involves things like resource labeling and tagging and creating a reporting structure, for example — but it’s well worth it. They form the foundation of shared visibility into resource utilization and spending.

With showbacks in place, you can see who is spending what and optimize accordingly. For example, you might discover a business unit that uses a high percentage of overall spend for a relatively low percentage of revenue. There might be a good reason for that, but you may have uncovered an opportunity to reduce spending if not.

Chargebacks are the second phase, in which application owners, teams, and business units — virtually any org structure can work here — become directly responsible (via their budget) for their cloud spending. With showbacks and chargebacks, you have visibility. You can also reduce or eliminate misaligned incentives since there is more granular control and responsibility for spending down to the engineering level if desired.

It can even create healthy competition among cross-functional teams or the broader organization — who can decrease their spending the most, who has the best spend-to-income ratio, etc. At 2nd Watch, we use an “innovation score” model to assess cloud spending in a client’s organization, for example, that factors costs into the overall score.

FinOps enables everyone to speak the same language, not just about cloud but about cloud spending. 

It’s worth noting that the showbacks and chargebacks aren’t new concepts at all. Yet we’re seeing growing interest in them in the industry — and a corresponding increase of tangible goals attached to implementing them, such as “implementation of showbacks and chargebacks by Q1 2023.”

This is a reflection of the FinOps movement — and the fundamental necessity of optimizing cloud costs.

You don’t have to call it FinOps, but you do have to address how you allocate and use your resources in the cloud. All of the cloud’s good stuff — the outsized benefits and business value it creates — depend on it.

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