Ultimate Guide to FinOps: Principles, Phases, and Technology

What is FinOps (Financial Operations)?

FinOps is a cloud financial management discipline that enables organizations to maximize the value of their cloud investments. FinOps achieves this objective by helping finance, engineering, business, and technology teams effectively collaborate on cloud cost decisions.

FinOps is first and foremost a cultural practice—a way to manage cloud costs with one set of policies and best practices, while ensuring all collaborators take ownership of their cloud usage. It facilitates collaboration between cross-functional teams to enable quicker product delivery, while obtaining cost predictability and financial control.

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Why is Cloud FinOps Important?

Managing cloud technology infrastructure requires a different approach from managing on-premises infrastructure. The traditional financial model involves buying resources and then depreciating and amortizing them over three or five years.

Organizations replacing the traditional model with FinOps can shift to focus on actual operational expenses according to by-the-minute usage. The cloud offers new dynamics, including elastic scalability and the possibility of rapidly exhausting financial resources. FinOps requires software engineers to include cost as a first-class performance indicator in their projects.

FinOps is quickly becoming an industry-wide practice. It helps organizations get the most value out of cloud investments. By streamlining infrastructure and services, organizations can rapidly develop and deploy products to the market, create new revenue streams, and generate more income.

FinOps vs. DevOps: How Do They Compare?

DevOps is a paradigm that unifies development (Dev) and operations (Ops). It involves using practices, principles, and tools that facilitate collaboration and rapid development to help deliver software at a high velocity with as few disruptions as possible.

DevOps requires a high level of automation and tools that help break down silos, facilitate collaboration, and shift security left. By shifting security left, teams can fix issues earlier in the process.

FinOps and DevOps both require teams to undergo a cultural change, usually supported by new tools. The implementation starts with breaking down silos and setting up collaboration between teams, and the outcome is improved communication and collaboration. However, this is where the similarities end.

FinOps vs. DevOps

The responsibilities associated with FinOps are different than those associated with DevOps. DevOps focuses on software development, while FinOps focuses on cost optimization and management. FinOps requires engineering and finance teams to collaborate to ensure sufficient cost visibility to drive better financial decisions.

Larger organizations typically have a dedicated FinOps individual or an entire team. Other companies distribute these responsibilities across several roles, such as infrastructure engineering, DevOps, or finance personnel like financial planning and analysis (FP&A).

The Core Principles of FinOps

The FinOps Foundation created six core principles that guide FinOps practices. The foundation re-examines and adjusts the core FinOps principles as needed.

Collaboration

FinOps requires using cost as an efficiency metric for all teams. It means achieving collaboration between interconnected finance, IT, and engineering teams. Organizations implementing FinOps need to define governance and controls for cloud costs and usage and improve practices to increase efficiency and innovation across the organization.

Visibility

Cloud environments enable organizations to pay according to actual usage. However, spikes in cloud usage can result in overhead and unexpected costs. FinOps can help organizations avoid these issues, ensuring teams consider business objectives while planning. As a result, unexpected expenses are accounted for and limited.

Organizations can use reporting tools and trending and variance analysis to inform all stakeholders about usage and expenses, tying spending directly to business value objectives. Using internal team benchmarks helps encourage teams to adhere to best practices and helps stakeholders see improvements in cloud financial management. Additionally, industry peer-level benchmarks provide a broader view of progress.

Accountability

A successful FinOps implementation enables teams to manage their own cloud usage and see whether that cost fits the planned budget. It ensures everyone has ownership and visibility into cloud spending and can adjust as needed. Team level targets ensure members are held accountable for cloud costs.

Reporting

FinOps requires teams to have access to efficient reporting tools. Real-time feedback is key to increasing business value and improving efficient behavior. Visibility of resource usage enables fast adjustments and can reduce over- or under-provisioning. Organizations can also deploy automation to drive continuous improvement across FinOps processes.

Centralization

FinOps takes a distributed approach to cloud financial operations. However, a centralized team must own, govern and control FinOps. Centralization ensures you can efficiently use reserved instances, upgrades, committed-use discounts, and volume discounts from cloud providers.

A centralized buying process ensures teams not equipped for rate negotiations do not perform this task. Additionally, a centralized team helps provide a granular allocation of costs to the responsible teams.

Optimization

FinOps enables organizations to fully leverage the on-demand cost model of the cloud rather than seeing these costs increase. It involves right-sizing instances and services to ensure all teams gain the appropriate resource level and employing reporting and analysis to drive better business decisions.

3 Phases of the FinOps Lifecycle

The FinOps lifecycle is iterative, using a similar paradigm to other agile development paradigms like DevOps. It involves continuously circling through phases to refine the FinOps cycle and drive it forward.

The FinOps Foundation defines three major FinOps lifecycle phases:

Inform

A FinOps team must have visibility into cloud utilization and costs. The first step in implementing FinOps is assessing the organization’s efforts on cloud resources and services’ allocation, benchmarks, budgeting, and forecasts. A FinOps team factors this analysis into customized pricing or purchased volume discount.

Detailed allocation information enables the FinOps team to tie cloud utilization and costs to business units. The team can then avoid unexpected costs, identify opportunities to improve, and show stakeholders the business value of the cloud.

Optimize

A FinOps team uses analysis information to optimize cloud utilization. The team employs various techniques to optimize cloud costs. They can use reserved instances or committed-usage discounts to reduce costs, evaluate a cloud environment and right-size resources accordingly, and utilize tools to automatically scale down or shut off unnecessary resources.

Operate

FinOps teams continuously track cloud operations, evaluating them against business objectives and metrics. The team monitors and works to ensure cloud utilization and performance align with business needs. Additionally, the team shares this information with the relevant stakeholders to demonstrate the cloud’s operational and financial effects on the business.

Organizations can cycle through several or all phases of the FinOps lifecycle simultaneously, according to the workload or department involved.

What Are FinOps Tools?

Organizations use various tools to support the FinOps lifecycle. FinOps tools help assess cloud consumption and understand complex billing and invoices. These tools can also correlate cloud usage and cost against projects and users, push alerts, and provide reports.

FinOps tools provide the information needed to make data-driven financial decisions and capabilities for optimizing cloud usage and costs. FinOps tools are often native to specific providers, but some third-party options exist.

FinOps tools vs. cloud cost management tools

FinOps tools and traditional cloud cost tools can serve similar purposes. However, FinOps tools are designed to serve a different audience. Cloud cost management tools offer a reporting functionality that displays the cloud resources used and their cost. Typically, a small management segment views these reports, and there are usually no actionable items.

FinOps tools are designed to serve cross-discipline teams, providing analysis and reporting tailored to engineering, finance, and other disciplines. Additionally, FinOps tools offer actionable optimizations and recommendations. These tools enable FinOps collaborators to see how the recommendations can help improve cloud spend and performance.

Related content: Read our guide to cloud cost management (coming soon)

Key Capabilities of FinOps Tools

Here are common FinOps features and functionality:

  • Granular tags—FinOps teams use tags to assign meaningful labels or buckets to various cloud resources. Tags help maintain efficient budget allocations, supporting teams in rapidly identifying and mitigating untagged items.
  • Detailed views of cloud use—each FinOps collaborator is responsible for different cloud costs and utilization aspects. FinOps tools enable teams to create custom views for each cloud service and business department.
  • Reporting—FinOps teams use reporting features to make sense of complex cloud billing data. These features help build billing dashboards for specific applications, teams, roles, and departments.
  • Performance metrics—FinOps tools offer performance reporting features, like scorecards and ratings, using aggregate metrics when reporting on efficiency. It helps FinOps collaborators to quickly identify the most spend-efficient departments or applications and locate the business units that require more guidance.
  • Budgeting—setting up cloud budgets and forecasting can be difficult due to the many resources, services, and pricing variables involved. FinOps tools enable organizations to correlate cloud services and accounts against financial reporting, ensuring stakeholders can easily follow budgets and view spending trends.
  • Cost explorers—FinOps tools often include cost explorer functionality that supports cloud usage and cost visualizations.

Related content: Read our guide to cloud cost optimization tools (coming soon)

FinOps Best Practices

Have a FinOps Foundation Before Migrating to the Cloud

Ideally, you should plan your FinOps implementation before migrating to the cloud. This strategy can help you plan future cost optimization while accounting for shadow IT and scaling, and leverage opportunities like bulk user pricing and free trials. It also gives you the time to learn the difference between on-premises financial planning and cloud financial planning.

Consider Business Value When Evaluating Costs

Cost optimization can help save money but that should not be your main goal. Successful FinOps implementation sets maximizing value as much as possible, rather than reducing costs.
The goal is to get as much as possible from your cloud investment by balancing savings with trade-offs.

Gain Visibility Over Actual Costs

Financial accountability is a core FinOps principle. It requires you to understand cloud spendings on an ongoing basis as well as upfront expenses. However, this can prove difficult for large organizations in which siloed teams do not communicate their spending granularly.

As a result, it takes time to calculate return on investment (ROI) and total cost of ownership (TCO). This is why FinOps collaborators should not only calculate current ROI and TCO, but also forecast future costs and conduct regular audits.

Make Finops a Continuous Practice

FinOps is not a one-time task the team conducts to understand and plan for before cloud migration. Successful FinOps implementations do not stop at the planning stage. Rather, FinOps involves setting clear, ongoing roles and responsibilities to keep costs under control. You can achieve this by conducting regular audits and forecasting, ensuring FinOps collaborators are involved in major software decision-making processes.

Set Roles and Responsibilities

When planning a FinOps implementation, you must set clear roles and responsibilities. It involves determining who is responsible for FinOps in the organization and whether you want to hire a dedicated professional or someone from your existing cloud or finance teams. Define their exact responsibilities and designate a role among other teams tasked with providing the FinOps role with the resources needed to perform their responsibilities.

Migrating to the cloud can free up time for existing IT teams and change their roles. These IT pros no longer need to babysit servers, fix bugs, or create wonky workarounds in on-premises software. You can allocate this newly freed-up IT personnel to keep up with FinOps practices. They can think strategically about cloud investments, track all tools used across the organization, and ensure the organization gets the most out of IT spending.

Cloud Cost Optimization with Spot by NetApp

While public cloud providers offer native tools for some cloud optimization, and even provide recommendations for potential cost reduction, they stop short of actually implementing any of those optimizations for you.

This is where Spot by NetApp’s portfolio can help. Spot not only provides comprehensive visibility into what is being spent on your cloud compute and by whom, but also:

  • Generates an average saving of 68% by showing you exactly where you can use either EC2 spot instances or reserved capacity (RIs and Savings Plans) to save costs. It lets you reliably automate workload optimization recommendations in just a few clicks.
  • Guarantee continuity for spot instances, ensuring even production and mission-critical applications can safely run on spot instances, using predictive algorithms and advanced automation to guarantee workload continuity.
  • Manage RIs and Saving Plans portfolios, providing maximum utilization and ROI with minimal risk of financial lock-in and cloud waste.
  • Maximize savings for DevOps teams running Kubernetes with proven machine learning and automation to continuously determine and deploy the most balanced and cost-effective compute resources for your container clusters.

Learn more about Cloud Optimization from Spot by NetApp