As cloud costs spiral upward, enterprises turn to a thing called FinOps

Organizations waste 32% of cloud spend, up from 30% a year ago. 'More and more users are swimming in the FinOps side of the pool, even if they may not know it - or call it FinOps yet.'

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Photo: Joe McKendrick

In the first few years of cloud computing, cost savings was the driving reason for adopting the cloud. Nowadays, however, businesses are faced with spiraling cloud costs. There's even a word for the emerging process to deal with it: "FinOps."

According to Flexera's recently released 2022 State of the Cloud Report, organizations continue to waste significant cloud spending, based on survey responses from 753 global cloud decision-makers and users. 66% of executives said cloud usage is "higher than initially planned this year," They estimated that their organizations waste 32% of cloud spend, up from 30% in last year's survey. 

In addition, "spend is likely less efficient and likely even higher on average, as many organizations tend to underestimate their amount of waste," the survey's authors report. In addition, respondents said their public cloud spend was over budget by an average of 13% for the previous year. They expect their cloud spend to further increase by 29% in the next twelve months. 

Among small to medium businesses, 53% are now spending $1.2 million annually on cloud computing, up from 38%in 2021. While the survey's authors do not provide a similar composite spending figure for larger enterprises, they report that many spend $12 million or more annually on selected public cloud services -- 18% of enterprises spend this on AWS, 15% spend this on Microsoft Azure, and 7% on Google Cloud Platform.

So there is a lot of money being poured into cloud services. A lot of the monthly subscription bills are likely going to a raft of unused or underused services for which no one is really able to account. Someone in some department signed on to a cloud instance to run some tests three years ago abandoned it, and the company still keeps paying for its usage. 

Enter FinOps. This practice is intended to help organizations get maximum business value from the cloud "by helping engineering, finance, technology and business teams to collaborate on data-driven spending decisions," according to the FinOps Foundation. (Yes, there's now even an entire foundation devoted to the practice.)  In many cases, they are practicing the art of FinOps without even calling it that. Respondents are actively involved in the ongoing usage and cost management for both SaaS (69%) and public cloud IaaS and PaaS (66%). "More and more users are swimming in the FinOps side of the pool, even if they may not know it -- or call it FinOps yet," the Flexera survey's authors state.

In addition, for the sixth year in a row, "optimizing the existing use of cloud is the top initiative for all respondents, underscoring the need for FinOps teams or similar ways to improve cost savings initiatives," they also note.

While the survey doesn't explicitly ask about FinOps adoption, the authors also state that some organizations have organized FinOps teams to assist in evaluating cloud computing metrics and value. (A specific percentage is not provided.) They also observe that "for the sixth year in a row, optimizing the existing use of cloud is the top initiative among 59%, followed by migrating more workloads to the cloud (57%).

The survey's authors appear very optimistic about what the cloud can do to boost the value of technology to enterprises: "As organizations move more workloads to the cloud, they can retire the technical debt associated with maintaining and operating traditional data centers," they state. (We'll have to check back on that one, right?)

What are organizations doing to better understand and keep a lid on cloud costs? Close to two-thirds, 64%, focus on maximizing resource utilization, while 50% engage in deleting or removing unused or idle resources. This means that half of the respondents are not actively reviewing cloud services for which they pay a monthly fee. 

Another 41% look into provider discounts such as reserved instances. Another 39% are pursuing a pure FinOps approach: employing the unit economics model, considered a key component of the FinOps disciple. (Unit economics, as explained by Apptio's Andrew Midgley, is "the average revenue or costs, or the margin, directly associated with a specific unit delivered by an organization.") As illustrated at the FinOps foundation site, "for a customer-facing application, that unit might be a user or customer subscription; for an e-commerce platform, it might be a transaction; and for an airline, it might be a seat. By calculating cloud spend for total revenue, you can attach growth in cloud spending to your overall business growth. When these are in line, it makes sense that cloud spend isn't wasted. When cloud spend is growing faster than the business, there may be cause for concern."

Automation is a key tool for optimizing cloud costs, the survey shows. More than 40% of respondents are using automated policies to shut down workloads after hours and to rightsize underutilized instances. Another 33% are using automated policies to implement required tags, while 43% still perform this labor-intensive process manually. 

While at least half of IT executives recognize the value cloud is bringing to the business, the prime measure of success is still cost savings. This is likely the easiest and most demonstrable pitch to the C-level and board. Speed to market is also a highly tangible benefit and thus also ranks high as a success metric. Innovation and competitive advantage resulting from cloud flexibility are perhaps the most long-term advantages of a cloud-based enterprise but are a bit squishier in terms of metrics. The following are the top metrics for assessing progress against cloud goals identified in the survey:

  • Cost efficiency/savings: 74%
  • Delivery speed of new products/services: 68%
  • Increased speed of innovation: 48%
  • Value delivered to business units: 47%
  • Increase in competitive advantage: 47%
  • Number of workloads migrated: 45%
  • Retirement/decrease of technical debt: 37%

As is obvious from the survey, FinOps is still an emerging way of operating in the cloud that has not yet been well defined. The following are principles formulated by the FinOps Foundation to help bring clarity to the roles involved and purpose of the practice. 

Teams need to collaborate

  • Finance moves at the speed and granularity of IT
  • Engineering considers cost as a new efficiency metric
  • Continuously improve your practice to gain efficiency and innovation
  • Define governance and controls for cloud usage

Everyone takes ownership for their cloud usage

  • Empower feature and product teams to manage their own usage of cloud against their budget
  • Gain visibility into cloud spend at all levels
  • Track team-level targets to drive accountability

A centralized team drives FinOps

  • Centrally govern and control Committed Use Discounts, Reserved Instances, and Volume/Custom Discounts with Cloud Providers
  • Centralized discount buying process removes rate negotiations from engineering team consideration
  • Granular allocation of all costs, direct or shared, to the teams and cost centers responsible for them

Reports should be accessible and timely

  • Fast feedback loops result in more efficient behavior
  • Visibility helps determine if resources are under- or over-provisioned
  • Automation of resources drives continuous improvement

Decisions are driven by business value of cloud

  • Trending and variance analysis helps to understand why costs increased
  • Internal team benchmarking drives best practices and celebrates wins
  • Industry peer-level benchmarking determines how your company is performing

Take advantage of the variable cost model of the cloud

  • Rightsizing instances and services help drive appropriate resourcing levels
  • Comparing pricing between services and resource types drives better decisions
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