Despite the success many organizations have had with cloud computing, one persistent challenge is cost management.
“The cloud is a double-edged sword,” says Ragu Rajaram, EY Global Cloud Consulting Leader. “It gives you flexibility to scale on demand, but if it’s not configured right, the cost consequences can make you bleed.” The State of FinOps Report 2022 found that monthly cloud bills can vary by more than 30% from month to month.
Cost management challenges will only get worse as organizations move more of their IT stack to the cloud. According to Foundry’s 2023 Cloud Computing Survey, 65% of respondents are defaulting to cloud-based services when upgrading or purchasing new technologies, and 57% have accelerated cloud adoption over the past 12 months. More than one-third of respondents cite cost control as a major impediment to cloud deployment, and 33% cite cost as a key reason for repatriating cloud applications or services back to on-premises infrastructure.
The crux of the issue is that traditional CapEx-based procurement practices don’t translate well to the cloud world, where operating expenses accrue in real time according to usage and often change on the fly.
“In the cloud, every tech stack decision is a buying decision,” says Rajaram. In other words, engineers or technologists who are deploying cloud services to address technical issues are having a significant influence on a company’s costs.
Adopting a FinOps approach
Organizations struggling to rationalize cloud spending should consider adopting financial operations, or FinOps, to better manage cloud infrastructure and costs. Rajaram recommends three key steps for establishing a FinOps practice that can make the right trade-offs among the cost, speed, and quality of cloud services:
Shift the culture: More than just data and budgeting, FinOps is about creating a culture of accountability, where product, finance, business, and technology groups collaborate as a centralized team to make real-time decisions on cloud spend. “FinOps needs to become second nature for these parts of the organization to ensure efficient use of cloud resources,” Rajaram explains. “The right tools and methods that reinforce the culture and collaboration help you increase business value to drive efficiency while aligning costs to business needs.”
Establish the guardrails: To promote good decision making in real time, organizations must establish a strong governance foundation to provide visibility, monitoring, and reporting to optimize costs. Putting the right controls in place will provide a complete picture of projected spend, create processes for resource tagging and chargebacks, and allow for consolidation of cloud services by identifying and removing rarely used or redundant products. Aggregating data across cloud platforms, bolstered by an artificial intelligence (AI) tool that runs optimization algorithms and real-time execution with intelligence showbacks, creates maximum hands-free savings outcomes.
Apply cloud unit economics: It’s important to apply unit economic principles to the development and delivery of cloud-based software. Unit economics, which calculates the difference between marginal cost specific to the development of cloud-based solutions and marginal revenue, can help unlock the business value of cloud spend. Determining the breakeven point allows organizations to adjust spending levels accordingly to maximize profits. “Cloud unit economics is an essential concept as organizations mature from computing cost per unit of consumption to computing cost per unit of demand,” Rajaram says. “It’s an effective way to make data-driven business decisions regarding cloud investments.”
Adopting FinOps practices to manage cloud investments is complex, but it’s crucial for IT and business leaders trying to rein in runaway cloud costs. FinOps is the best way to show the true value of cloud from an ROI perspective, by drawing a more direct line between cloud investments and your company’s short-term profitability and long-term growth.
The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.
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