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September 20, 2022

FinOps KPIs: 6 Metrics for Cloud Cost Management

Learn about key FinOps KPIs that your business can use to add transparency to its cloud strategy.

Businesses are continuing to invest heavily in cloud computing, with spending on public cloud services projected to reach $494.7 billion in 2022, a 20.4 percent increase from last year. But as businesses pump more and more resources into cloud computing, many are still struggling with poor visibility into where their money is going. And while cloud providers often promise savings, the truth is that cloud migrations can be very expensive. In many cases, companies wind up spending more on cloud services than they use to spend on legacy computing infrastructure. 

To overcome this, a growing number of businesses are embracing cloud financial operations (FinOps) strategies to streamline cloud cost management and make informed cloud spending decisions. Keep reading to learn all about FinOps cloud cost management and some key FinOps KPIs that your business can use to add greater transparency to its cloud strategy.

Cloud cost management, or FinOps, is a financial optimization strategy that brings together finance, cloud financial management teams, and engineering teams to maximize cloud value and financial savings

What Is Cloud Cost Management?

Cloud cost management, or FinOps, is a financial optimization strategy that brings together finance, cloud financial management teams, and engineering teams to maximize cloud value and financial savings. 

When you boil it down, there isn’t a single way to handle cloud cost management in FinOps. After all, every business is different. However, many companies choose to build cloud cost management strategies around the three-stage FinOps model, which we’ll examine in this section.

1. Inform

The first step is to gather as much information as you can about your current IT environment. Conducting a thorough IT evaluation allows you to discover areas of improvement, prioritize action items, and benchmark progress. 

During this stage, you’ll want to make an effort to understand all your computing costs, including cloud and on-premises infrastructure. It’s also a good idea to determine the total cost of ownership (TCO) and overall business value and to outline your specific cloud computing goals. This is important because some cloud services are more expensive in terms of output comparison but are also managed and reduce management overhead.

Essential to this phase is segmenting cloud spend inline with how your company segments IT budget. Sometimes this is based on application, sometimes cost center, sometimes team - this is a conversation between your IT team and your Finance team.

Before moving to the next step, you should have a clear understanding of how your current cloud spend aligns with your business's needs and objectives. 

2. Optimize 

After you conduct a thorough cloud assessment, you can move to the next step of cost optimization. The main point of cost optimization is to identify and eliminate wasteful cloud spend. By completing this stage, your business can build a leaner and more efficient cloud environment that's capable of supporting your workloads and scaling. 

When going through cloud cost optimization, it’s a good idea to implement cost governance mechanisms with real-time metrics if you're not already using them. This eliminates guesswork and allows you to make data-driven cost management decisions.

Cloud costs are fundamentally informed by two levers: rate and usage. These are therefore the two levers for optimization. Rate optimization involves using cloud provider discount mechanisms to pay a lower rate either through long term commitments (e.g. AWS Savings Plans and Reserved Instances), using resources at “cheaper” times (e.g. AWS Spot Instances), and negotiating enterprise discounts. Usage optimization involves actually identifying and eliminating waste either by rightsizing resources or changing your architecture to reduce costs. 

3. Operate 

Cloud financial management is not a one time effort. It’s an ongoing process.

It’s important to realize that analyzing and optimizing for cloud cost management only gets you so far. Oftentimes, businesses go through planning and optimization but fail to properly execute cloud cost management. And as a result, they fail to achieve true, sustained cloud cost efficiency. For this reason, it’s critical to complete the last stage of the process, which involves implementing cloud cost management operations mechanisms. In other words, you should have an automation system in place that continuously monitors cloud usage, makes the appropriate owners aware of their infrastructure footprint in real time, and identifies opportunities for cost savings.

How Can Cloud Cost Management Help a Company?

As businesses increase their cloud usage, tracking expenses becomes increasingly important. Here are some of the top ways that cloud cost management can help an organization thrive in the cloud. 

Cost uncertainty remains a top challenge when budgeting for the cloud

Streamline budgeting and forecasting

Cost uncertainty remains a top challenge when budgeting for the cloud. But with a comprehensive cloud cost management strategy in place, your business creates data-driven cloud forecasts and budgets. This makes it that much easier to see what the future might look like.

Understand the root cause of costs

Cloud usage can spike unexpectedly, leading to high operating costs. But with deep visibility into your cloud environment, you can more easily discover the root cause of spikes and take appropriate action if necessary. Without full visibility into your cloud environment, spikes could occur without detection, leading to mystery charges and higher bills.

Measure cloud ROI

Tracking ROI is a challenge in the cloud.  A cost management strategy helps teams understand how cloud environments are performing and identify opportunities to generate stronger returns, accelerating ROI.  Unit metrics in particular are the foundation for understanding cloud ROI and forecasting infrastructure costs into the future. Without the right cloud cost management system in place, it can be impossible to understand where ROI from the cloud is consistent and where waste is minimized.

Reduce cloud sprawl

Cloud sprawl occurs when teams deploy too many cloud services without understanding the financial impact. A cloud cost management strategy helps teams deploy with greater care and avoid over proliferation. 

Top Metrics for Cloud Cost Management

At the end of the day, there are many metrics that your organization can use for cloud cost management. Here are a few to consider.

1. Time between cost incursion and discovery

Some organizations look at cloud costs on a quarterly or monthly basis, which means if wasteful anomalous changes happen it can be weeks or months before these changes are addressed. Without proper tools, it can be difficult to identify root causes and make adjustments. As a best practice, try to minimize the time between incursion and discovery, and strive for real-time or near-real-time reporting.

2. Usage on weekdays vs. weekends

It’s important to understand when your cloud environments are most active so you can identify usage patterns and anomalies. For example, if your servers are rarely active on the weekend and you suddenly experience a large traffic spike on a Saturday, this type of event will most likely require an immediate investigation. 

3. Forecasted vs. total bill 

Cloud bills often wind up being much higher than their initial forecasts due to variations in usage and workloads. As such, you should always try and compare the difference between the forecast and your total bill and investigate the main contributing factors. Tracking this KPI over time can also uncover seasonal trends that impact cloud usage and help you budget more effectively.

4. Average price per hour of compute

In order to compare cloud computing costs with different providers, you need to be aware of what you're paying for each hour of compute. Once you have a baseline understanding of what you're paying, you can talk to different providers and ask for better rates.

5. Idle instances

Cloud providers typically charge instances by time usage. So when instances become idle or run at less than capacity, this leads to higher charges. Tracking instance usage is an easy way to cut back on costs and avoid wasteful spending.

One of the biggest mistakes that companies make in the cloud is failing to tag their resources

6. Untagged resources 

One of the biggest mistakes that companies make in the cloud is failing to tag their resources. When this happens, they remain in use for long periods of time and drive up cloud computing costs without proper attribution. It’s critical to create a tagging strategy to minimize the total percentage of untagged instances so that you can reduce waste and lower your bill.

Make cloud costs a first class metric for your engineering organization.
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