Published: August 11, 2020
Cloud has provided the simplicity of on-demand consumption, with many operational tasks being easily outsourced to a third-party provider. However, the number of cloud services and options available to developers has grown exponentially as enterprises develop differentiated applications in order to add value to their customers and businesses. The Cloud Price Index now tracks a hefty 2,000,000 SKUs from AWS, Google, Microsoft, IBM and Alibaba, and the vast majority of these can be consumed on demand using only a credit card. A new discipline – cloud financial management (CFM) – has emerged to help with the challenge of making optimal purchasing decisions with so vast an array of product offerings.
The 451 Take
We all appreciate the need to control costs, but it's the ability of cloud to scale that lets enterprises capture new opportunities as they arise. COVID-19 has shown that the unexpected can happen, and enterprises that can move fast are better placed to weather storms and capitalize on opportunities. A balance needs to be struck between controlling costs and enabling flexibility. This is the promise of CFM. Most tools used to implement CFM practices are free, and many enterprises are already using them. Even using a single tool can make an impact. However, cost isn't the only benefit – the freedom to let employees concentrate on their jobs rather than obsess about costs, means the business has a better chance to innovate and scale. Survey data suggests that outcomes associated with CFM include increased revenue and profitability, helping to transition IT departments to be enablers of business growth, rather than just traditional cost centers.
With increasing sophistication, it's natural for enterprises to lose sight of which services they are using and how much these services cost. This isn't a bad thing, in many respects: The IT department is correctly focusing on innovating and ensuring the IT estate performs around the clock. Of course, there is a finite budget. So the problem is how do enterprises stop costs from spiraling out of control as a result of such easy access to an increasingly complex set of options, while retaining the flexibility to scale quickly to meet changing demands. Today, many enterprises are failing to do this – in a survey conducted by 451 Research for Cloudability in 2019, 58% of 300 enterprise decision-makers stated that they were regularly overspending, 38% indicated they were suffering sub-optimal service levels as a result, and one-quarter said the lack of a cost-optimization approach was impacting innovation. How are enterprises expected to make optimal decisions on purchasing with 2,000,000 product offerings?
To address this challenge, CFM (or FinOps) has emerged. CFM is a blanket term that combines tools, processes and practices in order to manage, optimize and plan future cloud costs, regardless of cloud service provider, while letting enterprises innovate and scale to take advantage of new business opportunities and deliver additional business value. The aim of CFM isn't to squeeze costs, rather to let business objectives be met without unnecessary expense. CFM tools typically include cloud services that allow enterprises to allocate and track budgets, forecast and optimize future resource requirements, implement governance and controls, and automate the use of cost-cutting pricing models such as reserved and spot instances. CFM processes and practices define how, when and by whom these tools are used to maximize effectiveness. FinOps is another term used to represent the melding of tools with business processes and the culture to enable flexibility while keeping costs low. The FinOps Foundation, established by the cofounder of Cloudability in 2019, is now being hosted by the Linux Foundation, showing the subject is being take seriously. The FinOps Foundation wants to be the open source foundation for CFM industry definitions, standards, content and methodologies – with the Linux Foundation involved, it is better-placed to gain more acceptance and buy-in from providers and industry.
Both AWS and the FinOps Foundation now offer training courses focused on cost management, with the latter offering a FinOps certification.
Cloud cost management has been around since the cloud paradigm began, and tools for managing spending are available from the hyperscalers themselves, including AWS, Google, Microsoft, Oracle and others. Third-party startups introduced tools to manage costs, of which the majority have been acquired, including CloudHealth by VMware, Cloudability by Apptio and Cloudyn by Microsoft. The likes of Turbonomic, CloudCheckr, Opsramp, Morpheus Data and others also provide cost management tools, and companies such as HPE’s Cloud Technology Partners, 2nd Watch and Cloudreach provide managed services supported by such tools. Using these tools counts as practicing a CFM strategy, but the real value of CFM comes when these tools are embedded in ongoing processes, buying decisions, development and operations so that cost-optimization is a routine part of business – a cultural shift to enable rapid scalability, but at the lowest price.
Does CFM work?
CFM sounds positive, but does it yield results? In a survey of 500 enterprise decision-makers commissioned by Amazon Web Services, we found, perhaps unsurprisingly, that CFM is delivering advantages in terms of overall cost reduction from the respondents. Interestingly, the more mature the enterprise, with regard to its cloud adoption, the greater the saving. Enterprises that have used AWS for more than five years attribute a 60% saving on costs as a direct result of implementing CFM. Contrast that with a 51% cost savings experienced by enterprises that have used AWS for two to three years.
What was surprising was how much value enterprises attributed to CFM in the form of helping to meet business objectives. Across our participants, 67% of enterprises state that CFM has helped grow revenue, and 64% of enterprises state that CFM has helped profitability.
Similar to cost savings, enterprises that are more mature in their cloud use have more to gain. Seventy-eight percent (78%) of enterprises with five years of AWS under their belts claim improvements in revenue as a result of CFM, as opposed to 55% of those with two to three years' experience. For profitability, this difference is large too: 71% vs. 62%. In fact, more mature enterprises (with regard to AWS usage) are likely to use more CFM tools, and use them more regularly. There are similar benefits with regard to risk, too.
More than cost-savings
It makes sense that financial management would drive cost savings. But why might it grow revenue and profits?
Implementing CFM means developers and operations are better able to focus on the differentiated work they perform to deliver business outcomes and value, without being overburdened with worries about spiraling costs. Developers want to develop – they want to quickly and easily take advantage of new capabilities to add value to the applications they code. They don't want to spend hours on cost-assessments or approvals. Of course, it is wise to have governance processes and policies in place, but it's a balance. CFM aids this balance by letting the business innovate, while expenditure is controlled and optimized.
As developers and operations are able to push the business forward with less bureaucracy and a focus on value, not cost, bottom-line growth is easier to achieve. But this freedom to concentrate on innovation also drives top-line revenue – the CIO can concentrate on taking new opportunities faster, without being held back by cost concerns. The enterprise that has developed quicker as a result of smoother CFM has an advantage over the enterprise that still sits around the boardroom debating how to squeeze costs. In a similar vein, the CIO that is comfortable letting the e-commerce site scale to meet demand is bound to capture revenue better than the CIO that prevents scaling due to a fear that it's not cost-efficient.
Why does the effectiveness of CFM increases with cloud maturity? This effect can be attributed to two likely factors.
As an enterprise's use of cloud increases, there is a greater incentive to save money by optimizing costs. Over time, most enterprises spend more on cloud as they build more applications and scale them to address new demands. The business case to develop people, processes and tools to optimize costs on an ongoing basis is easier when the cloud spend is large, and the potential saving is greater. Although many CFM tools are free to use, some enterprises experience costs in terms of labor or outsourcing to build formalized ongoing use of these tools, as well as continuous organizational processes.
Secondly, as enterprises and employees become more mature with CFM practices, CFM becomes business as usual. Essentially, the culture of an organization transforms to one that is more cost-aware. More tools are used over time, and are used more often as part of this culture.
It's early still for CFM and FinOps, but there are signs that they can make a meaningful difference to enterprises' finances. As cloud adoption increases, along with the portfolios of the cloud providers, effectively managing and controlling costs will become increasingly important.
wen Rogers is a Research Director of Cloud & Managed Services Transformation at 451 Research, a part of S&P Global Market Intelligence. He also leads the firm's Digital Economics Unit, and is the architect of the Cloud Price Index, 451 Research's benchmark indicator of the costs of public, private and managed clouds. Owen is head of 451 Research's Center of Excellence for Quantum Technologies.