Introduction: Why Should CFOs Care about Cloud Spend?
According to O-Reilly more than 90% of organizations use the cloud and per Gartner 85% of organizations will be cloud-first by 2025. All of that cloud usage adds up – with Business Wire projecting that the global cloud computing market will reach US$1.3B by 2028. Clearly, the cloud is not just an IT issue; it’s a financial issue that directly impacts the bottom line.
Organizations rely on the cloud because it enables them to quickly adjust resources to meet market demands which is crucial to remain competitive. But that flexibility can make budgeting, forecasting, and cost allocation difficult. Cost overruns can occur leading to bill shock or even throwing financial planning off course. To avoid ‘bill shock’ and maximize the value organizations get from their cloud spend, many organizations are turning to the FinOps framework for a more structured approach to cloud and SaaS financial management.
What is FinOps?
FinOps, short for Financial Operations, is an operational framework and cultural practice to bring financial accountability and transparency to cloud and SaaS spending in order to maximize their business value. In the past, most IT spending involved upfront capital expenditure and predictable operational costs but cloud and SaaS spending are inherently variable. FinOps enables timely, data-driven decision-making, and financial accountability through collaboration between engineering, finance, and business teams. Essentially, FinOps turns cloud cost management into a team sport, ensuring everyone is responsible for optimizing cloud spend.
FinOps employs a range of strategies and methodologies, including:
- Cost Allocation: Assigning cloud costs to specific departments, projects, or business units to ensure accountability and enable better budgeting and forecasting.
- Usage Monitoring: Continuously tracking cloud and SaaS usage metrics to identify trends, anomalies, or inefficiencies to allow for proactive cost management.
- Rate Optimization: Regularly reviewing and renegotiating cloud service and SaaS contracts to secure the best possible rates.
- Resource Optimization: Identifying and eliminating underused or idle resources or software.
- Governance and Compliance: Ensuring that cloud and SaaS usage complies with contractual obligations, organizational policies, and external regulations to avoid financial penalties.
- Automated Workflows: Implementing automated processes for common tasks to reduce manual errors and make more efficient use of resources.
- Financial Modeling: Creating detailed financial models to predict future cloud and SaaS spending based on historical data and projected growth.
- Stakeholder Communication: Establishing clear communication channels between finance, IT, and business teams to enable informed and aligned decisions.
By employing these strategies, FinOps provides a comprehensive framework for managing cloud and SaaS costs that goes beyond cost-cutting to deliver true financial efficiency.
Implementing FinOps
If managing cloud and SaaS spend is a challenge for your organization, you are not alone. The good news is organizations of all sizes can establish and train a cross-functional Cloud Cost Center of Excellence (CCOE) to serve as a FinOps team. This CCOE will act as a central hub for cloud and SaaS cost management, ensuring that the organization maximizes the value it derives from cloud investments while minimizing unnecessary expenses.
Step 1: Assemble a Cross-Functional Team
FinOps requires a collaborative effort from finance, IT, and business units. Include knowledgeable stakeholders from these various departments but keep the team at a manageable number to enable effective communication and collaboration. Since this team will be responsible for implementing and managing your FinOps strategy ensure they are aligned, committed, and empowered.
Step 2: Gather the Data
To set goals and implement changes you must understand your current SaaS and cloud spending patterns. This involves collecting data on your existing cloud services and SaaS applications as well as their costs and usage metrics. Tools like a SaaS management platform and a cloud cost management platform are invaluable in this effort and in ongoing maintenance of a FinOps program.
Step 3: Define Objectives and KPIs
Partner with other leaders, particularly IT, to define objectives for what your FinOps strategy should achieve. The goals will vary by organization, but should be specific – such as reducing cloud or SaaS costs by a certain percentage or improving resource utilization by a certain percentage. In addition to these objectives, define KPIs to measure progress along the way.
Step 4: Establish and Communicate Governance Policies
Develop governance policies that lay out the guidelines for cloud and SaaS within your organization. Ensure these policies align with your compliance requirements and financial objectives. Communicate these policies clearly and regularly to all stakeholders.
Step 5: Implement Cost Allocation and Tagging
Establish a cost allocation system that assigns cloud costs to specific departments, projects, or business units. Make it easier to track and manage costs by using tags to categorize cloud or SaaS resources.
Step 6: Monitor, Analyze, and Iterate
FinOps is a continuous process. Regular data reviews, compliance checks, and strategy adjustments are necessary for success. Use tools like SaaS management and cloud management platforms for real-time analytics and dashboards that track your usage and spending. Review the data regularly to identify trends and identify opportunities for improvement. Conduct periodic audits to ensure compliance with governance policies and industry regulations.
By following these steps any organization can implement a successful FinOps strategy that aligns with business objectives and financial goals – maximizing value rather than simply cutting costs. But remember, FinOps is a journey not a destination. Success requires the right combination of tooling, automation, and internal processes along with ongoing commitment and collaboration from all stakeholders.
Key Metrics CFOs Should Monitor
CFOs need to focus on specific metrics for insights into cloud and SaaS spending. Monitor these metrics to guide financial your financial decisions:
- Cloud Cost per Employee – This is a useful benchmark to measure the efficiency of your cloud spending relative to the size of your workforce. Sudden spikes could indicate issues that require attention.
- Unit Cost – The cost of cloud resources per unit of a relevant business metric shows how efficiently you’re using cloud resources to generate business value. Examples include cloud cost per transaction or customer.
- Cost Over Time – Monitor daily, weekly, or monthly cloud costs for insights into spending patterns and trends. This can help you see spikes or changes that need investigation.
- Cost by Service or Software – Itemizing costs by specific cloud instances or services or by SaaS providers enables you to identify the most costly services and evaluate whether there is a better value for your business.
- Cost by Department or Project – Understand which parts of your organization are driving cloud costs by allocating costs to specific departments or projects. Use this metric as one way to determine whether project or department costs are in line with their strategic priority.
- Return on Investment (ROI) – No one has to tell a CFO to focus on ROI. However, it is widely accepted that cloud itself has had a positive ROI for business. So instead of calculating ROI for cloud spend overall, break it down and calculate the ROI of specific cloud services, software, or projects. This gives you metrics you can use. You aren’t going to stop spending on the cloud – but you can assess financial viability and long-term value of specific vendors and projects.
Monitoring your cloud costs, including SaaS, through these various lenses gives you a more comprehensive picture enabling better informed financial decisions on one of your organization’s largest and most important areas of spend.
Conclusion: FinOps – The CFO’s Path to Cloud Success
Cloud computing and SaaS are undeniably vital for modern businesses, but they also represent a significant and often unpredictable expense. Partnering with IT and other business stakeholders to implement FinOps promises greater control, efficiency, and ultimately, a healthier bottom line. FinOps provides CFOs with the tools and strategies to navigate financial risks and support their organization in using the cloud intelligently and profitably. By following the steps listed above, CFOs can do their part to establish a FinOps practice that not only meets their organizations’ current needs but also provides a scalable framework to accommodate future growth and ensure their cloud investments continue to deliver value in the long run.
