How to navigate cloud computing cost with FinOps

Over the past five years, a seismic shift in the adoption of cloud computing has occurred. With 94% of all enterprises using some form of cloud (public, private, hybrid) at the end of 2022, this digital transformation trend will only accelerate as organizations seek to take advantage of cloud services' scalability, flexibility, and cost savings, (Hassan et al., 2022). While public cloud adoption offers many benefits to enterprises, it now requires that organizations align modern technology and economic models with their corporate business strategy. 

This strategy of careful planning, executing and keeping a watchful eye on expenditures may appear straightforward on the surface. However, it is proving to be a more significant challenge than many companies anticipated at the onset of their cloud journey. According to the 2022 Flexera research report results, 68% of companies either spent somewhat or significantly more in 2022 on their cloud costs than were originally budgeted for in the previous year (Adler, 2023).

In the case of legacy IT infrastructure with brick-and-mortar data centers and racks of compute and storage, it was relatively straightforward to create and adhere to an annual budget. Unfortunately, this predictability came with the tradeoff of slower implementation cycles, less agility to meet evolving business needs, and considerably higher infrastructure costs. Similarly, with the shift into the public cloud, legacy development practices and the speed at which services can be deployed have led to many unexpected costs. 

In the same Flexera research report, respondents reported that their public cloud spending was over budget by an average of 13 percent and expected to increase further by 29 percent in the next twelve months. (Adler, 2023). This trend emphasizes the criticality of getting a handle on forecasting and cost optimization.

The cost challenges associated with public cloud adoption can typically be broken down into one of 5 main categories:

Public cloud service providers charge for using their services based on various factors, such as the amount of storage, compute, and bandwidth used. These costs can quickly add up, especially for organizations that require large-scale computing resources or use cloud services extensively.

Organizations that need to transfer large amounts of data between their on-premise data centers and the public cloud can face high data transfer costs, which can be a significant expense.

Cloud service providers charge for data storage in the cloud, which can vary depending on the type and amount of storage used. Organizations that store large amounts of data in the cloud can face high storage costs over time.

Organizations that must comply with regulatory requirements, such as HIPAA or GDPR, may face additional data security and compliance costs in the public cloud.

There may be additional costs associated with using public cloud services that organizations may have yet to anticipate, such as support fees, maintenance costs and license fees for third-party software.

In one lens, much of the spending associated with these items can be considered the cost of doing business in the public cloud. Caution should be observed though, as it is all too easy to start amassing large amounts of unnecessary expenditures. Wasted cloud spend is a significant issue and becomes more critical to the health of a company's bottom line as cloud costs continue to rise. 

In the Flexera research article, respondents self-estimated that their organizations waste 32 percent of cloud spend. This number is likely much larger given their inability to recognize wasted spend based on their relative immaturity in the Cloud Capability Maturity Model (Zbořil & Svatá, 2022).

As companies enter Level 4 of the Cloud Capability Maturity Model and look to reduce unnecessary costs and make expenditures more predictable (Moonasar, V., & Naicker, V., 2020), they will leverage the practices established by the new discipline of Cloud FinOps. Cloud FinOps, or cloud financial operations, is a set of practices and processes to optimize cloud spending and improve cost efficiency in cloud-based environments. 

The primary purpose of Cloud FinOps is to help organizations manage the financial aspects of their cloud deployments and ensure that they are getting the most value for their investment in the cloud.

Cloud FinOps is a multidisciplinary approach involving various organizational stakeholders, including finance, operations and IT teams. The goal is to enable these teams to work together to optimize cloud spending and ensure that the organization achieves its business objectives in the most cost-effective way possible (Storment, 2021).

• Cost optimization. Cloud FinOps aims to optimize cloud spending by identifying opportunities to reduce costs and improve efficiency in cloud-based environments.

• Cost accountability. Cloud FinOps provides visibility into cloud spending across the organization, enabling finance and operations teams to track and analyze cloud spending and allocate costs to the appropriate departments.

• Cost governance. Cloud FinOps provides a framework for managing cloud costs and ensuring that cloud spending is aligned with the organization's overall business objectives.

• Continuous improvement. Cloud FinOps is an iterative process that involves ongoing analysis and optimization of cloud spending, enabling organizations to continuously improve their cloud deployments over time.

These Cloud FinOps practices and processes allow organizations to better manage the financial aspects of their cloud deployments and ensure that they are getting the most value for their investment in the cloud. In upcoming blog posts, we will explore hidden cloud costs through the lens of Cloud FinOps. 

• Development

• Resilience

• Retention

• Optimization

Our tech teams at Capital One put Cloud FinOps processes and practices in place to manage cloud costs. Specifically, we work to: 

• Understand cloud usage and cost: Through ingestion of the AWS Cost & Utilization Report, Capital One has developed tooling to provide visibility and transparency into cloud spend in a way that makes sense to our business. Used by individual engineers up through the most senior executives, Capital One provides the tooling necessary to create accountability for cloud spend down to the application and resource level.

• Track performance:  Monthly, a partnership between tech and finance refines the forecast in order to accurately predict any budget variances for problem solving. 

• Make decisions real-time: Capital One developed real-time machine learning-based anomaly detection process for cloud spend. Which have resulted in anomaly corrections prior to significant financial impact. 

• Optimize cloud rates: Capital One has implemented an always on process to manage savings plan commitments to maximize value through bulk pre-purchases.

• Optimize cloud usage: Capital One uses a set of spend efficiency metrics that allows the central team to communicate with divisions on how well they are using their cloud resources. 

• Align organizationally: The Capital One CloudX team is made up of a central tech team focused on tools and strategy; a finance team focused on reporting, accounting, forecasting and anomaly detection; and divisional champions who are knowledgeable about their business, opportunities and can influence strategy.

The transition to the public cloud offers unprecedented capabilities to the business with the ability to quickly innovate and deliver new products and services to customers. However, it comes at the risk of unexpected costs. To manage these cost challenges, enterprises must carefully plan their cloud adoption strategy, monitor their cloud usage and spending, and take advantage of cost optimization tools and services that cloud service providers offer. 

References

Adler, B. (2023, January 30). Trends in cloud computing: 2022 state of the cloud report. Flexera Blog. Retrieved February 27, 2023, from https://www.flexera.com/blog/cloud/cloud-computing-trends-2022-state-of-the-cloud-report/

Hassan, A., Bhatti, S. H., Shujaat, S., & Hwang, Y. (2022). To adopt or not to adopt? the determinants of cloud computing adoption in Information Technology Sector. Decision Analytics Journal, 5, 100138. https://doi.org/10.1016/j.dajour.2022.100138

Moonasar, V., & Naicker, V. (2020). Cloud capability maturity model: A study of South African large enterprises. SA Journal of Information Management, 22(1). https://doi.org/10.4102/sajim.v22i1.1242

Storment, J. R. (n.d.). Cloud FinOps: Collaborative, real-time cloud financial management. O'Reilly. https://www.oreilly.com/library/view/cloud-finops-2nd/9781492098348/

Zbořil, M., & Svatá, V. (2022). Cloud adoption framework. Procedia Computer Science, 207, 483–493. https://doi.org/10.1016/j.procs.2022.09.103