The race to implement FinOps as a new cloud management model
introductions
With the average annual growth rate (CAGR) of major cloud providers exceeding 15%, public cloud adoption continues at an astonishing rate.
While core IT costs are expected to be reduced during implementation, the main goal is to create exceptional value and innovation.
McKinsey Digital estimates that this value generated by the cloud will exceed $1 trillion in 2030. Despite these numbers, however, more than 80% of CIOs admitted that cloud migration has not yet met their expected goals, and it is estimated that more than 30% of cloud spending is inefficient or wasted.
As a result, securing $1 trillion in revenue from the cloud has proven to be a frustrating challenge for many businesses. One of the main reasons for this challenge is that financial operating models are still stuck in outdated processes, mindsets, and technologies.
Redefining cloud metrics
While it's natural for companies that have migrated to the cloud to adopt a traditional CapEx type approach, many companies quickly realize that traditional IT financial controls don't work operationally or accurately when it comes to handling the cloud's fluid service dynamics.
The following table summarizes common challenges in cloud finance governance when compared to traditional processes.
All of these traditional processes have their own approach in the cloud, but the approach must be more agile, and a new model is needed accordingly. Fortunately, the FinOps Foundation has developed a set of processes and KPIs to help model a business's success. It provides a foundation for organizational management and optimization that can be deployed and operated to best support modern infrastructure.
Distribution of financial responsibilities
FinOps is an operational framework and cultural change that brings technology, finance, and business together to achieve organizational transparency and shared responsibility for cloud cost management. FinOps requires a change in cultural and personal mindset where financial responsibility is distributed across the edge (team). These changes mean that making sure cloud services are consumed in the most cost-effective way is everyone's responsibility.
The average data center server uses less than 50% of CPU and memory capacity, generating significant unused capital. Using a basic approach to scaling public cloud infrastructure can result in large amounts of over-provisioned capacity and waste, which can account for 30% of excessive cloud spending. Given the dynamic nature of cloud infrastructure, it's important for enterprises to optimize resources and enable dynamic provisioning to support workload growth. This should only be done by a team that deeply understands the subtle differences between project growth and workload.
To address these challenges, enterprises are building cloud FinOps capabilities to not only establish effective cost visibility and control, but also accelerate knowledge dissemination to teams to optimize these expenses at the edge so as not to adversely affect performance in accordance with broad guidance from central management.
Start your journey by deploying FinOps KPIs
There's no single set of metrics that fits all businesses perfectly. This is because each organization, environment, and team is at its own stage of maturity with unique requirements. However, modeling the top 10 or 20 KPIs listed in Finop's Foundation is a firm commitment to define expectations and get a firm initial understanding of costs.
Once you've measured monthly usage across all clouds, made sure all resources have been described (tag completeness), and set an initial budget, you'll begin to take advantage of drifting costs. While learning through new analytics and controls, the team naturally initiates requests and communicates when there are issues, which allows FinOps practitioners to refine and adjust models. You can go a step further and empower teams to work automatically by integrating into messaging systems like Slack, Gchat, or Teams.
Here are the top 10 FinOps KPIs recommended for starting a FinOps practice.
Cloud costs: The total cost of cloud services
- Explanation: This is the total amount spent on cloud services across all vendors. This is critical to understanding overall cloud spending and forms the basis for many other metrics.
- comment: Depending on data sync, reseller, or other complexity, this may be more difficult than expected.
Cost per unit: Cost for business metrics
- Explanation: This metric helps link cloud spending to business outcomes. It helps you understand whether cloud costs scale efficiently as your business grows. Examples include LLM cost per query or cost per customer acquisition.
- comment : A deep understanding of transaction pipelines and integration with business systems is required.
Cost allocation accuracy: The percentage of costs correctly allocated to the team/project
- Explanation: Measure how accurately cloud costs are attributed to a specific team, project, or department. A high ratio ensures accountability and helps teams make informed decisions about resource use. It works with “tag completeness”
- comment: The keyword here is a tag. No other tool or parameter can provide granular control and attributes for teams and workloads.
Resource utilization: The percentage of provisioned resources actually used
- Explanation: It shows that the provisioned resources are being used efficiently. Low utilization may indicate excessive provisioning, while consistently high utilization suggests that additional or greater resources and/or platform optimization are needed.
- comment: This is a basic KPI. It works with Rightsizing and Idle resource reporting.
Resource Reserved Instance Coverage: The percentage of compute time applied by the Reserved Instance
- Explanation: RIs can offer significant discounts on existing workloads. This KPI shows what percentage of computing time is processed by RI to help identify further savings opportunities.
- comment: Commitments are generally the first and easiest way to cut costs right away, but they often mask underlying optimization problems. This KPI checks whether you're taking advantage of these RI savings.
Savings plan coverage: The percentage of computing expenditure applied by the savings plan
- Explanation: Similar to an RI guarantee, it measures how much computing costs are covered through a savings plan that provides a discount if you commit to use it for 1 to 3 years.
- comment: Similar to RI
Cost difference: The difference between estimated cloud spend and actual cloud spend
- Explanation: Compare actual expenses to estimated expenses. Large or frequent differences may indicate unexpected spikes in usage or inefficiency, which should be investigated.
- comment: It's part of due diligence to set a budget and identify trends.
Cost optimization ratio: The percentage of cost reduction recommendations implemented
- Explanation: This tracks how many cost-saving recommendations you've successfully implemented. It helps measure the effectiveness of FinOps practices.
- comment: An operational KPI that helps track ongoing optimization KPIs and team responsiveness.
Tag compliance: Percentage of resources that are properly tagged for cost allocation
- Explanation: Tag integrity and tag hygiene are critical for accurate cost allocation and reporting. This KPI shows what percentage of resources are correctly tagged according to the organization's policies.
- comment: It is a basic KPI that is key to establishing resource tracking and cost attribution.
Unit economics: cloud costs as a percentage of revenue or gross margin
- Explanation: This correlates cloud costs to revenue or gross margin. This helps ensure that cloud costs remain proportional as the business grows and does not erode profitability.
- comment: This is a high-level KPI useful for determining virtual “COGS.”
The FinOps journey continues
As FinOps practices mature and adopt more sophisticated tools and KPIs, they will utilize established channels and processes to implement advanced technologies such as proper scaling, anomaly detection, and governance. This approach provides teams with a distributed way to monitor and manage the metrics that FinOps teams track.
Partner with OpsNow to begin your FinOps journey and optimize your cloud costs. We adhere to the principles of FinOpsFoundation and promote FinOps awareness and standardization across the organization by implementing strategies and KPIs.
Visit us Get started with OpsNow or schedule a live demo.
