Core Principles and Phases of Cloud FinOps
Core Principles and Phases of Cloud FinOps
Core Principles of Cloud FinOps
- Ownership
- Everyone takes ownership of their cloud usage.
- Collaboration
- Teams needs to collaborate, and a centralized team drives FinOps
- Decisions
- Decisions are driven by the business value of cloud.
- Cost Model
- Take advantage of the variable cost model of the cloud.
- Reports
- FinOps reports should be accessible and timely.
Phases of FinOps
- Inform
- Get visibility and create shared accountability by showing teams what they are spending and why.
- Optimize
- Empower the teams to identify and measure efficiency optimizations, then make goals and strategies based on those opportunities.
- Operate
- Define and execute processes aligned with the goals of Technology, Finance and business.
Metrics
- Unit Economics: Idea is to measure cloud spend againsta business metric (total revenue, shipments made, paid subscribers, customer orders completed, etc), which in practice is complete to achieve.
Important Terms in Cloud FinOps
Cost Allocation- Splitting up a cloud bill and associating the costs to each cost center.
Wasted Usage- Resource usage that isn’t actively used by an organization.
RightSizing- Act of changing the size of provisioned resources to one that better matches needs.
On-Demand Rate- The normal or base rate paid for a cloud resource.
Rate Reduction- Using Reserved Instances (RIs), Committed Use Discounts (CUDs), or commercial agreeements between an organisation and a cloud service provider in order to receive a lower rate for the used resources.
Cost Avoidance- By reducing resource usage, either by removing a resource altogether or by rightsizing it, you can avoid paying for resources that would have incurred a charge.
Cost Savings- By reducing the rate you pay for resources, you generate savings.
Saving Potential- When looking at your cloud bill forecasts, you can predict the amount of saving using your existing commitments and commercial agreements.
Savings realized- By reducing the rate you page for resources, you generate savings.
Reservations/Commitments- By precommitting to a cloud service provider a set amount of resource usage using RIs or CUDs, you receive a reduction in the rate normally paid for those resources.
Reservations Unused/Unutilized- For every hour you have committed to a resource usage that you dont use, thatreservation goes unused, or unutilized. Another terms for this is reservation capacity.
Reservation Waste- Having a reservation with some amount of underutilization isnt an issue as longs as the discount you’re receiving is larger than the cost of the unused reservation.
Covered Usage- When a resource charge is discounted by a reservation, you call it covered.
Coverable Usage- Not all usage in the cloud is coverable with a reservation.
Unblended Rates- Some resources are charged in decreasing rates the more you use them
Blended Rates- Some cloud service providers offer a blended rate in their billing data. This blended rate standardizes the rate you page ofr the same type of resource by evenly distributing the charges to each resource.
Amortization- Costs that happended during a previous accounting period related to the current period based on the accumulated benefit during this period.
Amortized Costs- Some cloud resources and reservation come with an upfront fee.
Fully Loaded Costs- Fully loaded costs are amortized, reflect the actual discounted rates a company is paying for cloud resources, equitably factor in shared costs, and are mapped to the business’s organizational structure.
Matching Principle- Expenses should be recorded in the preiod in which the values was received, not neccessarily during the period the cloud provider invoiced then or when payment was made.
Capex vs OpeX- Capital expenditures are major purchases that a company makes, which are used over the long term.
- Operating expenses, on the other hand, are the day-to-day expenses that a company incurs to keep its business running.
Cost of Capital/WACC- Cost of Capiltal refers to the cost to an enterprise to deploy their money toward an investment.
COGS- Cost of goods sold measures how many dollars of outlay it takes to generate revenue in a specific period.
Net Present Value(NPV)- In a cloud business case, the net present value of all the cash flows of a no-upfront RI might be compared to the current cash value of the all-upfront RI for determining which is better for the business.
- It is most important for a finops team to determine the present value of future benefits when using reservations.
Unit Economics- It is the comparison between the total cloud cost that is required to produce a give unit of value to the organization.
Showback- It is to identify all the charges on a cloud billing and then to associate them with the specific cost center that should pay for them.
CSP- Cloud Solution Provider such as AWS, Azure or GCP.
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