Draft:Cloud FinOps

Definition

"FinOps is an operational framework and cultural practice which maximizes the business value of cloud, enables timely data-driven decision making, and creates financial accountability through collaboration between engineering, finance, and business teams."

The Origin of FinOps

Cloud FinOps is a Portmanteau of finance and DevOps. Born out of the significant changes that cloud computing brought to the finance and procurement processes of IT, the term is designed to signify the importance of teams collaborating to drive successful cloud adoption. The concepts were initially referred to as “cloud cost management” and then changed into “cloud cost optimization”. FinOps specifically focuses on bringing value from cloud services to the organization which is one of the main reasons it has become prevalent over other terms such as cloud cost optimization, which doesn’t obviously cover concepts such as cost allocation and “cloud economics”, which doesn’t call out the cultural aspects driven by collaboration. Cloud Financial Management (CFM) is still a term often used and has generally been used by Amazon Web Services (AWS), while the term is considered similar to FinOps, some argue they should not be used interchangeably.

Timeline of the rise of FinOps

• 2006 - The birth of Cloud and services such as AWS EC2 which begins the move from Capex towards Opex Pay as you go compute consumption creating a paradigm shift.
• 2008 - GCP launches adding multi-cloud complexity but also generally using very different concepts and naming conventions to AWS.
• 2010 - Microsoft Launch Azure, adding further multi-cloud complexity, they also release paper on Economics of Cloud from which the term Cloud Economics is coined.
• 20010-2017 - Rise of the second generation of cloud, more organizations start to serious incorporate cloud into their strategies.
  • Growth of cloud usage, introductions to the challenges of moving IT spend from Capex to Opex, removing financial control for the finance teams.
  • Lots of shadow IT for cloud usage, reducing control of costs and IT for the IT teams.
  • Bill shock begins to start as cloud grows over the years.
• 2012 - Large forward thinking organization who have heavily invested in the cloud start enacting what will later become known as FinOps.
• 2012-2019 - FinOps begins to come to being simultane ous across the world in different organisations.
• 2019 - FinOps Foundation Founded p.14 and Cloud FinOps first edition released
• 2020 - FinOps Foundation becomes part of Linux Foundation.
• 2022 - Cloud FinOps becomes most commonly used term

Financial Operations

It's important to distinguish Cloud FinOps from traditional financial operations (which can also be abbreviated as "finops"). While financial operations deal with the management of a company's finances, Cloud FinOps focuses specifically on the financial aspect of cloud operations, blending elements of IT, finance, and business to maximize cloud investment value.

Aim of FinOps

The FinOps Foundation gives FinOps the following definition: “FinOps is an operational framework and cultural practice which maximizes the business value of cloud, enables timely data-driven decision making, and creates financial accountability through collaboration between engineering, finance, and business teams.” - FinOps Foundation Technical Advisory Council.

While many organisations came forward with various approaches and concepts around the best way to achieve success in the financial aspects of Cloud, the most generally used is the FinOps Framework from the FinOps Foundation, most recently updated in 2024.

Framework

The most important part of the framework in reference to the Aims of FinOps are the principles.

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

While many are concerned as to why cloud vendors are entering the cloud FinOps space due to the fact it by design should reduce wastage and the costs of cloud, they see it as a way of unlocking value realization and innovation, which then drives to long term consumption of their services.

The Framework also includes: personas, phases, maturity, domains and capabilities.

Benefits, Challenges and Limitations of FinOps

Cloud Value

Understanding value from IT has long been a challenge for organizations, even prior to the adoption of cloud and is something organizations have long being trying to evaluate.

“The purpose of evaluating Information Communication Technology (ICT) is to gain an understanding of how ICT is contributing to organization performance in a given organizational context.”

Collaboration

Research suggests that Cloud has a strong potential to support and facilitate business collaboration at a low cost (---Willcocks et al., 2014). The financial challenges created around cloud have largely stemmed from a lack of collaboration and understanding between key teams impacted by the paradigm shift created by adoption. ---REF ECF

Collaboration between FinOps, finance and engineering personas (amongst others - see FinOps Foundation Framework - Personas) is one of the most important keys to success to effective FinOps, which in turn drives successful cloud value realisation and adoption. However, this collaboration is also one of the most common challenges found in FinOps. Without true executive/leadership sponsorship, FinOps is likely to be limited in its impact and alone, without collaboration, FinOps practitioners are unlikely to drive successful outcomes for the organization.

Align to business

IT has often found it challenging how it, and the investment in IT, is aligned directly to business goals. One argument is that  “IT investment is not always aligned with organizational goals, strategy, resources or capabilities”. Cloud has not so far, generally, proven to be much different, there are still major challenges in aligning cloud costs to business outcomes.

Research undertaken in 2017 which viewed academic research from 2010 onwards found that there were relatively varied motivations for an organization to move to the cloud. In terms of FinOps, it is interesting that specifically Cost effectiveness is cited as a key motivator for cloud adoption (Watson (2010) <Watson, R. V. (2010). Factors influencing the adoption of cloud computing by decision making managers. Doctoral dissertation, Capella University, USA.>). To help drive the value of cloud, it has been generally agreed that the cloud strategy must align to that of the business.  Studies show show “a very strong statistically significant correlation between Cloud Computing Adoption and Information Technology Effectiveness” however “the correlation between Cloud Computing Adoption and Strategic

Alignment was not recognized as statistically significant” ---Ref as above. It can be argued that the lack of cloud value realisation, and the 2023/2024 drive to cloud repatriation is due to the lack of successful FinOps implementation in those organizations.

<Chargeback is aligning cloud costs to the business in its cleanest form for business financial reporting>

Unit Economics specifically has been regarded as one of the answers to this long term challenge, the IT Paradox, of bringing an understanding specifically on how ICT costs deliver value to the business. Unit Economics, in short, are where cost (in this case cloud costs) are compared directly to a business metric. A simple example of this may be cost per conversions for a website. The cloud costs attributed to the website can be divided by the amount of unique visitors and the number of conversions that can be found in other data available to the organisation. This would allow an organization to understand how changes to their cloud infrastructure behind the website may have changed the amount of visitors.

Visibility

Showback

Importance of visibility - Prius effect

Challenge - Cloud Service Providers (CSP) such as Azure, AWS, and GCP have an unprecedented level of complexity in cloud computing. Each of these providers offers services, spanning across approximately 19 product categories and encompassing over 150 distinct cloud products. Each product comes with multiple workload types, unique billing formats, spot pricing options, and Reserved Instances (RIs). This intricate landscape presents a significant challenge for businesses seeking to gain central visibility, clarity, and data insights for cost-effective decision-making.

Empowering Engineers to take action

Empowering Engineers to take action has long been seen to be one of the biggest challenges in FinOps, having been one of the top challenges in the State of FinOps data since 2021.(https://data.finops.org) The reasons for this are generally considered to be around the FinOps maturity level of the organization across areas such as adoption, education, skills, tools, leadership support, organizational alignment, awareness, and prioritization. ---Ref Gamification FinOps Hackathon book, the reference is page 10

Engineering Ways of working

Cost as a non-functional requirement.

A solution that has been proven to work very well is the gamification of FinOps through conducting a FinOps Hackathon. The organic nature of a Hackathon is familiar with engineers and when given a FinOps problem statement to solve, it enabled cross functional teams to work together and present real cost saving business value adding solutions to leadership. A FinOps Hackathon educates and aligns teams to build FinOps solutions for the enterprise.