Chapter 1. What Is FinOps?
FinOps is a direct response to the stimulus of cloud. It’s not something that one person or company came up with; it’s a movement that evolved spontaneously, around the world, due to the environment created by on-demand cloud resources encountering no-longer-relevant technology management methodology. It is a cultural change and set of processes that has been—and likely will be—called other names.
In the simplest terms, FinOps brings financial accountability to the variable spend model of cloud. But that description merely hints at the outcome. The cultural change of running in cloud moves ownership of technology and financial decision making out to the edges of the organization. It flips long-held, forward-looking capacity planning methodology on its head to become rate-optimization analysis for technology that’s already been used. And it forces IT, finance, and business professionals to work together in unfamiliar ways. It’s an acceptance that the old ways of managing infrastructure aren’t just ineffective in cloud; they are irrelevant.
In this chapter, we’ll describe the core principles of FinOps, where the movement came from, and why every organization needs to embrace it for cloud success.
But first, let’s set the stage for defining FinOps with a story of an individual practitioner’s journey.
The FinOps Hero’s Journey
Today’s FinOps leader often comes out of a world of managing, planning, and accounting for IT and virtualized servers. Here’s a typical story we’ve heard over the years. It’s likely you are about to embark on a similar journey, are currently on it, or have completed parts of it already. The hero in this story is called Finn.
Things were pretty straightforward for Finn: backward-looking financial reports were done quarterly, and capacity planning meant determining the production needs of the organization to meet changing demands for its products. There weren’t a lot of surprises.
Then Finn notices an increasing number of AWS or GCP payables coming in without purchase orders attached. One of his cloud-savvy colleagues, Sarah, steps up and explains the highly variable nature of cloud and how it’s just, well, different than on-premise—and that there’s an entirely new way of managing it, as well as a new professional discipline emerging to do so.
Finn carefully considers Sarah’s words. It does sound interesting, and appealing. But then Finn remembers how well the processes he has in place for the organization’s 8,000 on-premise servers work. Cloud couldn’t be that different.
The next quarter, cloud spending doubles unexpectedly, and Finn goes back to Sarah with his tail between his legs. He commits to trying a new set of processes that look more frequently at spend and increasing his interface with the teams creating the spend.
All of a sudden the finance leader, who previously never cared about cloud spending, is pushing Finn to go back to quarterly reporting, saying the real-time approach he’s taking doesn’t fit with the company’s other processes. The technology leader is pushing back, saying she can’t consider cost and make her product delivery deadlines. Finn’s executive team is encouraging a top-down control methodology. Finn again goes back to Sarah for help, and she leads him to fellow journeyers at the FinOps Foundation. Learning from their mistakes and wins, Finn begins to lay out a plan for how to reset the company’s processes and, more ambitiously, effect cultural change.
It’s go time. Finn rolls out a new cloud spend allocation strategy, tagging guidelines, criteria for rightsizing (i.e., resizing cloud resources to better match workload requirements), and an initial rate optimization commitment to his cloud provider. There’s a path forward that seems to allow him to account for the spend and the teams to get the tech they need without friction. Cloud migration begins to soar.
Right when things seem to be going well, a new CIO comes in and says the cloud is too expensive at scale, advocating for a widespread return to the data center. It’s time for Finn’s biggest test: working with his cloud-savvy colleagues to show that cloud is more than a cost center. They must show it can enable innovation and velocity in ways that on-premise cannot, driving competitive advantage for the company. The CEO sees the bigger picture and agrees, paving the way for a cloud-first strategy.
Newly confident, Finn forges ahead, breaking down silos between teams and helping to drive real change in the organization. But he faces one last battle: cloud spend is now hitting materials levels, affecting the bottom line. The CFO steps in to stop the upward trend through any means necessary and ensure margins are not affected. Finn must move beyond the one-dimensional view of looking at cloud spend only and shift to a unit economics model that ties the spend back to business value, giving him the ammunition to show how to ensure, once and for all, that cloud spend is on the right path.
In the end, Finn realizes that this journey is just the beginning. Cloud is evolving; FinOps is evolving. Finn and Sarah will have the most influence in this new field by helping to define its best practices, something they see as a key way to give back to the community that helped them on their own journeys.
Where Did FinOps Come From?
Trailblazers like Adobe and Intuit, early scalers in public cloud, gave us our first glimpse into what would become FinOps around 2012 in San Francisco. A couple of years later, we saw forward-looking enterprises in Australia, like Qantas and Tabcorp, begin a similar practice. Then, in 2017, during J.R.’s two-year tour of duty in London, he was a firsthand witness to enterprises like BP and Sainsbury’s as they developed this new approach across their cultures. FinOps came into being slowly, all over the world, as the financial and accountability challenges of cloud presented themselves at scale in each territory.
“FinOps” is a term that has come late to the party. In the early days, companies were simply calling the practice “cloud cost management.” Later, “cloud cost optimization” began to take hold, although it didn’t speak to the allocation challenges of cloud. AWS and other cloud providers began using the phrase “cloud financial management,” a catch-all title that was eventually replaced by “FinOps.” Choosing this compound term, which purposely echoes DevOps, brings the vital cross-functional and agile aspect of the movement to the forefront.
And now FinOps is being adopted worldwide. Recently, Nike posted a director-level job role in their newly formed Cloud Business Office. Southwest Airlines formed a FinOps Business Office. And job listings for FinOps managers at big cloud enterprises like Pearson, Spotify, and Randstadt are popping up more frequently on LinkedIn. Tech unicorns like Atlassian have begun operationalizing FinOps through their team collaboration software.
At its core, FinOps is a cultural practice. It’s the most efficient way in the world for teams to manage their cloud costs, where everyone takes ownership of their cloud usage supported by a central best-practices group. Cross-functional teams work together to enable faster delivery, while at the same time gaining more financial and operational control.
No longer is a siloed procurement team identifying costs and signing off on them. Instead, a cross-functional FinOps team adopts a definitive series of procurement best practices, enabling them to pull together technology, business, and finance in order to optimize cloud vendor management, rate, and discounting.
With FinOps, each operational team (workload, service, product owner) can access the near-real-time data they need to influence their spend and help them make intelligent decisions that ultimately result in efficient cloud costs balanced against the speed/performance and quality/availability of services.
If you can’t out-experiment and beat your competitors in time to market and agility, you are sunk. … So the faster you can get those features to market and test them, the better off you’ll be. Incidentally, you also pay back the business faster for the use of capital, which means the business starts making money faster, too.
If it seems that FinOps is about saving money, then think again. FinOps is about making money. Cloud spend can drive more revenue, signal customer base growth, enable more product and feature release velocity, or even help shut down a data center.
FinOps is all about removing blockers; empowering engineering teams to deliver better features, apps, and migrations faster; and enabling a cross-functional conversation about where to invest and when. Sometimes a business will decide to tighten the belt; sometimes it’ll decide to invest more. But now teams know why they’re making those decisions.
Jason Fuller, who runs FinOps at HERE Technologies, shared a story at a FinOps Foundation meeting that illustrates the point well:
We had a team way over budget using 9 billion lambda functions a month. I can’t influence that directly. But what I can do is sit with the team and understand the quality of the algorithm that you’re writing in lambda and determine if it can be tighter.
Do we need that millisecond accuracy you’re providing? Yes. OK. The business now understands it’s that valuable.
Now we can look at the pricing model for selling the service. We can make a business decision based on how valuable we think the offering is and how much we actually think we can get for it as a product on the market.
As a result, we don’t fight about infrastructure anymore—we have a conversation about its business value.
Real-Time Reporting (The “Prius Effect”)
- Real time reporting + just-in-time processes + teams working together = FinOps
We’ll get into the second two later in the book. Right now, let’s look at the first part.
The feedback loop of real-time reporting is a powerful influence on human behavior. In our experience, you should provide engineers with feedback on the impacts of their actions as close as possible to the time those actions occur. This tends to create automatic behavioral changes for the better.
Anyone who’s driven an electric car has probably experienced the Prius Effect. When you put your foot down heavily on the pedal, the car’s display shows energy flowing out of the battery into the engine. When you lift your foot up, energy flows back into the battery. The feedback loop is obvious and instantaneous. You can see how the choice you’re making in the moment—one that in the past may have been unconscious—is impacting the amount of energy you’re using.
This real-time visual cue typically creates an immediate effect. You start to drive a bit more sensibly and step down a little less hard on the accelerator. You begin to realize you don’t need to accelerate quite so fast to get where you’re going. Or, if you’re running late, you decide that hitting the gas harder is worth the extra energy consumption. In either case, you can now make an informed decision to use the appropriate amount of energy to get where you need to go based on the environment in which you’re operating.
Ask yourself: how can we provide information that teams need to make a better decision?
Ron Cuirle, Senior Engineering Manager at Target during his talk at the 2019 Google Cloud Next event2
This real-time data-driven decision enablement is what FinOps delivers. In the data center world, engineers take individual actions that can’t easily be traced to their financial impact on the company. With cloud, it’s possible to gather that data, but simply being in cloud doesn’t automatically give you that feedback loop.
What made those teams great is that everyone trusted one another. It can be a powerful thing when that magic dynamic exists.
Teams that previously spoke different languages and kept each other at arm’s length now build frictionless relationships focused on what’s best for the business. This is FinOps in action. By setting best practices and defining a common lexicon on cloud spending, businesses enable productive trade-off conversations to happen—even when other teams are not a part of them. We will cover this common lexicon in Chapter 4.
Core Principles of FinOps
We believe having values of FinOps and ensuring all the process, tooling, and people align to FinOps core principles will help lead you to success. FinOps teams that embrace these principles will be able to establish a self-governing, cost-conscious culture within their organizations that promotes both cost accountability and business agility to better manage and optimize costs while maintaining the velocity and innovation benefits of cloud.
Accountability of usage and cost is pushed to the edge.
Individual feature and product teams are empowered to manage their own usage of cloud against their budget.
Decentralize the decision making about resource usage and optimization.
Technical teams must begin to consider cost as a new efficiency metric.
Process cost data as soon as it becomes available.
Visibility drives better cloud utilization.
Fast feedback loops result in more efficient behavior.
Consistent visibility into cloud spend is provided to all levels of the organization.
Create, monitor, and improve real-time financial forecasting and planning.
Trending and variance analysis helps explain why costs increased.
Internal team benchmarking drives best practices and celebrates wins.
Industry peer-level benchmarking assesses your company’s performance.
A centralized team drives FinOps.
Executive buy-in for FinOps and its practices and processes is required.
Rate and discount optimization is centralized.
Centrally govern and control Committed Use Discounts, Reserved Instances, and Volume/Custom Discounts with cloud providers.
Remove the need for engineers and operations teams to think about rate negotiations; then, stay focused on usage optimization.
When Should You Start FinOps?
Due to the sheer number of blogs, talks, and sales pitches that focus heavily on cost optimization, many people believe that the right time to implement FinOps should be measured by the amount of their cloud spend. And this does make sense on some levels. For example, a massive cloud spender could immediately find a lot of potential savings. However, experience has shown that a single well-managed team spending millions on the cloud might actually benefit less from FinOps than an organization with many teams that have smaller cloud deployments.
A successful FinOps practice doesn’t require sizeable cloud deployments or a multimillion-dollar cloud bill. Starting FinOps sooner will make it much easier for an organization to make more informed decisions about cloud spend, even as its operations scale. Therefore, it is essential to understand a FinOps concept we call Crawl, Walk, Run.
Although this book, and the FinOps Foundation, can guide an organization to successful practices while helping teams avoid common pitfalls, no organization can proceed directly from zero FinOps to perfectly efficient FinOps. Every organization and team must implement FinOps processes incrementally, taking the time to learn from each other as they go. Like DevOps before it, FinOps is, ultimately, a cultural shift, and the earlier it starts, the sooner an organization can achieve successful cloud cost management.
Our experience has taught us that you do FinOps from day one, but you engage more of the processes as you scale up. There are typically two times when companies implement FinOps:
The most common is when things go off the rails. In this scenario, spending hits a point where an executive forces a hard stop on cloud growth and demands that a new managing model be implemented. Despite it being the most common driver, this is not the ideal way to approach FinOps adoption. Innovation and migrations slow down—or even stop temporarily—during this executive fire drill.
The less common (and wiser) approach is taken by executives who have seen the cloud journey play out and aligns to the Crawl, Walk, Run model. The practice needs to develop at a pace that matches the company’s position in the FinOps maturity cycle. For example, a single person might be assigned to manage commitments to cloud providers. They set out to implement an initial account, label, and tagging hierarchy. From there, as the practice gets larger, each part of the process can be scaled up.
But no matter how a company arrives at the decision to implement FinOps, the first critical step is to get visibility in a near-real-time manner, so everyone can see what’s happening and catch cost overruns before they become too large. While that visibility is being achieved, the FinOps teams start educating the entire business. As cross-functional teams work together, finance people will learn more of the language of cloud, while engineers begin to grasp financial concepts.
The value of starting as early as possible on this cultural shift cannot be overstated, and the benefits of a FinOps practice can be felt and measured almost immediately.
Starting with the End in Mind: Unit Economics
One of the most important concepts in FinOps is unit economics. The idea is to measure cloud spend against a business metric (total revenue, shipments made, paid subscribers, customer orders completed, etc.). Choosing the right business metric is a complex process, one we’ll cover in Chapter 19. For now, the main thing to remember is that unit economics relies on almost every aspect of FinOps, including tagging, cost allocation, cost optimization, and FinOps operations.
The business metric is important, because it allows you to change the conversation from one that is just about dollars spent to one about efficiency and the value of cloud spend. Being able to say “It costs $X to serve customers who bring in $Y in revenue” brings a context that helps you make the decision whether $X and $Y are reasonable for the organization. Then, as services evolve or change entirely with new features, companies are able to measure the impact of these changes via these business metrics.
The result is companies that can determine the difference between good cloud spend and bad—and that trend those decisions over time. You should keep business metrics in mind throughout the book and as you implement FinOps inside an organization. As your practice matures, you will be able to implement and see the value of unit economics.
In this chapter we’ve codified the core principles and values that can guide any organization that wishes to start a FinOps practice. Those organizations can now align to what FinOps is intended to achieve and follow a series of best practices to ensure their success as they Crawl, Walk, and Run along their FinOps journeys.
FinOps is about collaboration between all teams inside an organization.
Everyone has a part to play and should become cost-aware.
The core principles of FinOps should be the foundation of all processes around cloud financial management.
Real-time reporting gauges your current spend and optimizations.
Data-driven processes are key to an organization becoming cost-efficient.
Business decisions can accelerate and match the rate of cloud resource decisions.
Now that you have an understanding of what FinOps is, let’s look at what the cloud enables inside organizations and at why you should avoid implementing processes that will hamper the good results of a successful FinOps practice.