Is FinOps the plug we need for the current cloud spend black hole?

Summary

With 30 percent of cloud spend typically wasted today, a renewed focus on cost and returns should be a priority for those holding the purse strings to unleash the full promise of the value potential cloud offers. Kearney and BinaryCore are working with organizations to identify tangible cost optimization opportunities with a best-fit FinOps framework that fully optimizes the use of cloud services, minimizes cloud computing costs, and mitigates the associated financial risks.

An opportunity to realize substantial value

As cloud services become ever more flexible, scalable, and elastic, surpassing the agility and customer responsiveness of more traditional IT systems, organizations across industries are investing more than ever in cloud-based systems and services. In 2023, global cloud spend reached $600 billion, according to Gartner, which also forecasts that more than 50 percent of enterprise IT spending in key market segments will shift to the cloud by 2025.

But the financial dynamics of the cloud are very different than those associated with traditional data centers. The cloud is based on a fundamentally different consumption model. In particular, consumption is decentralized—engineers siloed from finance are empowered to commit the company to spend. The flexibility of the cloud also implies consumption is variable and scalable, which means it can be unpredictable. By providing instant access to a variety of resources, the cloud can facilitate innovation. But it can also lead to overprovisioning.

Furthermore, the cloud can be complex, partly because there is more than one cloud and partly because cloud-based systems need to work in tandem with in-house systems. Some 90 percent of organizations use multiple clouds, while almost three-quarters of enterprise respondents in a survey by Flexera indicated that they have deployed a hybrid cloud configuration.

Given this complexity, it is unsurprising to find that many companies struggle to manage and control cloud costs and end up burning through cash. By some measures, 30 percent of cloud spend is wasted, while a 2021 survey by Pepperdata found that one-third of businesses have cloud budget overruns of up to 40 percent, and one in 12 companies exceed this number.

One challenge is that the traditional cost management tools provided by cloud service providers typically only support their respective cloud. At the same time, in a multi-cloud environment, inconsistent pricing structures and propositions across service providers mean it can be hard to get a full overview of cloud spend to assess whether resources are being used efficiently. In a 2023 survey by Flexera, 82 percent of IT leaders considered managing cloud spend to be their top challenge.

Why organizations aren’t on top of cloud spending

The high levels of waste in cloud spending are largely due to lack of transparency and accountability, along with inadequate cost optimization. In the absence of transparency and accountability, opportunities to lower costs will go unidentified or be overlooked. These opportunities can vary from right sizing and enhanced life cycle management to rate renegotiation and cost pooling.

The ongoing growth in cloud infrastructure and the number of projects/teams employing this infrastructure can make cost transparency difficult to achieve—cost tracking becomes increasingly intricate, particularly for companies that make extensive use of SaaS (software-as-a-service) offerings. In the absence of clear cost insights, it can be difficult to determine unit costs and associate specific cloud resources with business value, compromising effective decision-making. In this kind of scenario, pinpointing overspending or wasted resources becomes a formidable task.

This opacity can be compounded by a lack of accountability as many organizations fail to establish clear ownership or responsibility for individual cloud resources, leading to unchecked or unplanned spending. Fragmented communication between IT, finance, and operational teams often results in misaligned budgeting and unplanned cloud expenses.

At the same time, the ease of provisioning in cloud environments can lead to "shadow IT," where teams or individuals bypass official channels, resulting in hidden costs. An absence of automated cost controls and alerts frequently results in budget overruns.

FinOps as a guide to cloud cost optimization

An effective way to optimize cloud spending and maximize business value is to apply FinOps, a cloud financial management framework designed to foster collaboration between finance, business, and IT. An evolving cloud financial management discipline and cultural practice, FinOps enables engineering, finance, and business teams to collectively make data-driven spending decisions.

In a survey by CloudBolt, 71 percent of the respondents said their investments in FinOps increased in 2023. That reflects growing evidence of the effectiveness of FinOps

Some organizations have achieved 10 percent cost savings simply by rightsizing instances.[1]
Skyscanner achieved a 40 percent reduction in cloud spend in just six months through real-time cloud monitoring.[2]
Carhartt achieved a 45 percent improvement in the efficiency of its cloud environment, while ensuring workload performance.

[1] Deochake, Saurabh, Cloud Cost Optimization: A Comprehensive Review of Strategies and Case Studies, 2023
[2] Cloud Zero Skyscanner Case Study.

A FinOps framework—what it looks like and how it works

Underpinning an effective FinOps framework are several core principles, together with a maturity model—a structured assessment of the organization’s current capabilities, which is used to establish priorities and continuously improve financial operations in the cloud.

Core principles of FinOps

Teams need to collaborate.
Everyone takes ownership for their cloud usage.
A centralised team drives FinOps.
Reports should be accessible and timely.
Decisions are driven by the business value of cloud.
Take advantage of the variable cost model of the cloud.

The FinOps framework used by Kearney & BinaryCore defines 18 specialized capabilities that are required to effectively implement FinOps. These capabilities can be mapped across six interconnected domains to provide a broad overview of the functional activities necessary for successful FinOps implementation (see figure 1). The maturity assessment determines which domains an organization will need to pursue.

The 18 FinOps capabilities, which each focus on specific aspects of cloud cost management and optimization, encompass a range of tasks and processes designed to support the entire life cycle of a FinOps practice. They serve as building blocks to facilitate cost-conscious behavior, knowledge sharing, financial accountability, and the achievement of business objectives, while increasing organizational maturity in the management of cloud finances.

To help teams understand the different roles required to implement FinOps, the framework also identifies key personas. These personas pinpoint the diverse needs, responsibilities, and motivations of stakeholders, enabling them to tailor cost optimization strategies and communication approaches to effectively control and optimize cloud expenses.

Finally, the framework identifies the tools, technologies, and phases required for a successful FinOps implementation. The phases represent the evolutionary stages an organization goes through to adopt and optimize FinOps.

Focus initially on cost optimization

While FinOps help address multiple business problems, most organizations begin by using the framework to optimize costs. For this goal, the following six capabilities are essential:

Resource utilization and efficiency
Data ingestion and normalization
Data analysis and showback
Management of shared cost
Budget management
Workload management and automation

How Kearney helps clients implement FinOps

In an initial four-week engagement with a client, Kearney & BinaryCore perform an assessment (step 1), identify gaps (step 2), and develop an action plan (step 3) for cloud cost optimization. During the assessment, we identify the relevant FinOps stakeholders and subject matter experts, including their adjacent personas, based on the project's requirements and goals. The aim is to ensure that all key individuals and expertise necessary for the successful execution of the FinOps project are recognized and involved.

We then conduct focused interviews with key stakeholders to gather information about their roles and the data they contribute to the assessment. This data is then recorded and retained for the baseline analysis, which serves as the starting point for evaluating FinOps maturity and financial operations. Key stakeholders play a crucial role in setting target scores and are instrumental in gaining approval, buy-in, and involvement to ensure the success of FinOps projects.

Kearney & BinaryCore use five FinOps lenses to help identify the current operational state and aid in establishing targets. In addition to offering a multifaceted approach to evaluating an organization's FinOps maturity, the lenses provide diverse perspectives on various aspects of cloud financial management. The top half of figure 2 shows the five lenses being applied to the key capabilities for cost optimization. The bottom half shows the improvements (by lens) that need to be made to the workload management and automation capability as an example.

We then identify the levers the client can use to bring about the necessary improvements. To improve workload management and automation, for example, key levers include:

Tagging, combined with automation, which supports the aggregation, management, and organization of resources
Alerts and monitoring, which can be used to set limits to control capacity utilization and budgets

In summary, we recommend clients begin by using our FinOps framework (described in this article) to address the domains with the highest impact on cost savings. That will generate significant value and encourage organizational buy-in. With that foundation in place, clients can build the comprehensive FinOps capabilities the organization needs to keep cloud infrastructure costs under control, while fully benefitting from the “cloud revolution.” The ultimate goal is to build a capable FinOps operating model that can support the business by offering reliable, cost-efficient, and sustainable cloud infrastructure.