Many companies embraced the cloud for its agility and scalability, along with the promise of significant cost savings. While the cloud delivers on flexibility, managing costs effectively can be a challenge. In this article, we explore the reasons behind rising cloud expenses and introduce FinOps – a framework for optimizing cloud spending and maximizing business value.
The Disappearing Dream of Cloud Cost Savings
While companies can quickly spin up new resources and applications in the cloud, a recent KPMG survey revealed that 66% of businesses haven’t achieved lower IT costs through cloud adoption. The culprit? In most cases, a lack of adaptation to managing cloud resources differently from traditional IT environments.
Here’s why cloud costs can spiral out of control:
- Decentralised Consumption: Unlike on-premises data centres, cloud consumption is spread across various departments, making it harder for IT to maintain tight control.
- Shadow IT: Business users can easily provision cloud services without proper oversight, leading to unnecessary spending.
- Complex Billing Structures: Understanding cloud costs can be challenging due to intricate billing models and often using multiple cloud providers.
The Result? Excess Spending and Limited Visibility
The rush to the cloud has resulted in many organisations struggling to balance its benefits with the need for cost control. They grapple with:
- Inefficient Cloud Management: Traditional financial management processes struggle to account for the variable nature of cloud spending.
- Misaligned KPIs and Reporting: Metrics don’t focus on relevant outcomes, and reports use language not understood by all stakeholders.
- Lack of Collaboration: Finance and IT teams often operate in silos, hindering cooperative planning and cost-saving recommendations.
According to a recent report by IBM, organisations waste about 32% of their spending on cloud services. In the current tight economic conditions, this represents a significant opportunity for most organisations.
From Cable-Cutting to Streaming Overload
The situation can be likened to families who ditch cable for cost savings, only to end up subscribed to numerous streaming services, negating the initial benefit.
Why Traditional IT Cost Management Doesn’t Work in the Cloud
Cloud costs differ fundamentally from traditional IT expenses. Here are some key distinctions:
- Accounting Treatment: Cloud costs are operational expenses, not capital expenditures, requiring different budgeting approaches.
- Cost Allocation: Cloud costs rely on account/subscription structures and tagging policies, not the legacy CMDB system.
- Provisioning: The ease of provisioning in the cloud can bypass formal requisition processes, leading to unchecked spending.
- Scalability: Cloud platforms don’t require long-term planning for future needs, unlike on-premises systems where extra capacity is often built in.
- Budgeting: Cloud budgeting involves collaboration between IT and business sponsors, not relying solely on historical trends.
- Value Management: Value delivery becomes distributed, not centralised.
- Indirect Costs: Indirect costs in the cloud tend to rise with increased volume.
These differences necessitate a shift in mindset for both finance and IT teams to embrace the variable, on-demand nature of cloud expenses. Collaboration on cloud budgeting and planning becomes crucial.
Introducing FinOps: Optimising Cloud Spend for Business Value
FinOps, a blend of “finance” and “DevOps,” offers a new approach to managing cloud costs. It promotes cross-functional collaboration between IT, finance, and business units to optimise spend and business value.
FinOps prioritises transparency, cost accountability, and data-driven decision-making. While the cloud may not always reduce overall IT costs, FinOps empowers organisations to gain greater control over their cloud spending and achieve better outcomes from those investments.
The Benefits of a FinOps Approach:
- Improved Cost Predictability: Identify and track metrics that optimise cloud resource utilisation. Utilise financial modelling and cloud provider tools for better cost prediction and baselines.
- Optimised Total Cost of Ownership: Design efficient cloud architecture, right-size resources, leverage reserved instances, and utilise favourable pricing models to improve cost rates and maximise return on investment.
- Increased Ownership and Accountability: Foster a culture of cost awareness by tracking and reporting usage and cost data to hold users accountable.
- Enhanced Governance: Establish clear policies for provisioning cloud resources.
- Improved Monitoring and Reporting: Develop data collection pipelines, automate controls and reports, and leverage machine learning and human analysis to identify spending anomalies and optimization opportunities.
How can we help you navigate your FinOps journey?
In working and speaking with clients we have developed an approach and identified the right technology partners to help you solve your cloud cost conundrum. We look at all aspects of cloud resource management and waste reduction, including:
- Cloud Strategy Planning: Identify the most suitable cloud environment and platform for your needs.
- Measurement and Reporting: Track usage and costs, analyse results to identify improvement opportunities.
- Cloud Environment Optimisation: Implement insights to optimise your cloud environment for better performance and reduced costs. KPMG’s Expertise in Cloud Financial Management
We’d welcome the opportunity to discuss your cloud journey and challenges and to share some more of our expertise and experiences.
