[ARTICLE]

FinOps 201: The Best Stage To Optimize Your Apps

How To Unify Cost Optimization Strategy & Business Profitability


Executive Summary:

FinOps is an operational framework that combines efficiency and best practices to deliver financial and operational control of a company’s cloud spend. FinOps has its roots in the ways in which the rise of the cloud has complexified the relationship between DevOps teams and finance departments. FinOps approaches aim to reduce cloud overspend and unite teams in sensible financial conduct.

The main motivation of the FinOps framework is cost optimization, and the main motivation of the well-known BCG Growth-Share Matrix is business profitability. Combining the two can bring maximum efficiency to a company’s financials. Similarly, combining a FinOps framework with Cloud Optimization approaches can bring AI-powered technologies to bear on the key goals of FinOps, and further empower company goals.


What is FinOps?

FinOps – short for Financial Operations – is a financial cloud management approach. At its core, FinOps combines best practices, a culture of efficiency, and effective systems, to produce absolute financial and operational control for cloud spending. FinOps increases a company’s ability to comprehend cloud computing costs and make necessary tradeoffs.

As agile DevOps teams break down silos, increase agility, and transform digital product development, FinOps brings together business and finance professionals with new technologies and procedures to elevate the cloud’s business value.

FinOps, if implemented correctly, enables companies and organizations to make better decisions regarding the growth and scale of their cloud utilization. This leads to better control over spending, optimum resource utilization, and significantly lower cloud costs.

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How the FinOps Movement Started

The origins of the FinOps movement lie in the early 2000s, when DevOps took center stage and blew decades of established software development culture out of the water.

With the rise of DevOps, two previously siloed departments (Development and Operations) came together to function as one unit. They began developing new philosophies, uncovering best practices, utilizing new tools, and finding new ways to collaborate cohesively. Engineers and ops teams could no longer blame one other for slow servers or flawed code. They had to function together to solve issues, even if it meant retraining people in this new system of work.

Once the cloud and IaaS models came to prominence, the lines between technology, finance and procurement also started to become a problem. Infrastructure providers had to be on-demand, scalable, self-serviced, and measurable (OSSM). This meant that an engineer could essentially spend company resources to immediately scale up programs and fix performance issues without requiring approval from the finance and procurement departments. For the DevOps teams, this was wonderful. For the CFO and finance teams, it was not so wonderful.

Engineers, who worry constantly about performance issues and were once constrained by limited hardware, now had the freedom to throw money at a problem. But the CFO and finance teams were left with a financial mess.

Eventually, the realization dawned that something had to change. A balance needed to be achieved, to ensure that organizations don’t spend too many company resources, but are able guarantee performance. Different departments needed to integrate and shift into a shared accountability system.

This is when FinOps emerged. Like DevOps, it consisted of a new operating model with new frameworks and silo breakdowns. But unlike DevOps, it was an approach years in the making.

“It’s a cultural shift that I’ve watched happening in organizations around the world over the last 6-7 years,” wrote J. R. Storment of the FinOps Foundation in 2019.

“I first saw FinOps pop up in San Francisco circa 2013 at companies like Adobe and Uber, who were early scalers in AWS. Then I saw it when working in Australia in 2015 in forward-looking enterprises like Qantas and Australia Post. Then, during a two-year tour of duty in London starting in 2017, I’ve watched giant companies like BP and Sainsbury’s work diligently to develop this new culture.”

The Three Phases of the FinOps Journey

Transitioning to a FinOps culture consists of three main phases. These phases can happen simultaneously and iteratively in one company depending on the application, business unit, or team.

Inform

The first phase of the FinOps journey involves the use of people, tools, and processes to empower teams and organizations and provide the following benefits:

  • Proper allocation of cloud resources to enable accurate chargeback and showback;
  • Benchmarking as a cohort to provide organizations with key metrics for a high-performing team;
  • Effective budget plans to drive ROI while simultaneously avoiding overspend;
  • Accurate forecasting to prevent financial “surprises”, and;
  • Real-time visibility of the cloud’s on-demand and elastic nature to assist in making informed decisions.

The Inform phase is critical, because this is where your organization educates everyone involved and establishes the understanding that what you can measure, you can control.

Optimize

The next FinOps phase is to bring into service all that information and empowerment to optimize your cloud usage and footprint. Some of the steps your organization can take are:

  • Transition from on-demand capacity (which is the most expensive feature of the cloud) into Reserved Instances (RI) where possible;
  • Take advantage of Committed Use Discounts (CUD, from Google Cloud) through longer-term commitments to enforce cost controls;
  • Rightsizing and reducing waste such as orphaned resources and unused instances and storage, and;
  • Utilizing AI-powered cloud optimization tools that improve your application’s efficiency, improving app performance while reducing cloud spend.

Operate

This third phase isn’t technically the last one. Rather, it’s a reminder that this journey isn’t a one-off activity. This cultural initiative should be integrated, baked, and automated  into the daily operations, if the goal is to achieve ongoing success. Organizations who aim to build a Cloud Cost Center of Excellence should also continuously evaluate the metrics they’re tracking with the business objectives they have and the current trends in their industry. This rinse-and-repeat process needs business, financial, and operational stakeholders who embrace the culture of FinOps.

The Structure of a FinOps Team

A FinOps team is composed mainly of the executives, FinOps practitioners, DevOps, and Finance and Procurement. Each of these individuals/teams have a different role in the FinOps framework:

  • Executives
    • Includes a VP/Head of Infrastructure, Head of Cloud Center of Excellence, and a CTO or CIO.
    • Their focus is to drive accountability, build transparency, and to ensure budget efficiency.
  • FinOps Practitioners
    • Includes a FinOps Analyst, Director of Cloud Optimization, Manager of Cloud Operations or a Cost Optimisation Data Analyst.
    • These individuals will be focused on the teams’ budget allocation, and on forecasting cloud spend.
  • DevOps Team
    • Mainly composed of engineers and Ops team members (Lead Software Engineer, Principal Systems Engineer, Cloud Architect, Service Delivery Manager, Engineering Manager, and/or Director of Platform Engineering)
    • DevOps will focus on building and supporting services for the organization.
    • At this point, cost is introduced to them as a metric that should be tracked and monitored like other performance metrics. DevOps teams have to consider efficient design and use of resources, as well as identify and predict spending anomalies.
  • Finance and Procurement
    • Often include Technology Procurement Manager, Global Technology Procurement, Financial Planning and Analyst Manager, and Financial Business Advisor.
    • They will use reports provided by the FinOps team for accounting and forecasting, working closely with them to understand historic billing data  and build out more accurate cost models.
    • These forecasts and cost models will then be used to engage in rate negotiations with cloud companies and service providers.

FinOps and the BCG Growth-Share Matrix

One powerful way to leverage a FinOps framework is to combine it with the BCG Growth-Share Matrix – a model that many veterans of the business world will be familiar with.

What is the Growth-Share Matrix?

The Growth-Share Matrix was invented by the Boston Consulting Group’s (BCG) founder Bruce Henderson in 1968. It is a portfolio management framework that aids organizations in determining which product, service, or business to prioritize and focus on.

The BCG Growth-Share Matrix is a table comprising four quadrants that represent the degree of profitability of a product, service, or business:

  • the Stars;
  • the Question Marks;
  • the Cash Cows, and;
  • the Dogs (also known as Pets).

Each product/service/business is assigned to one of these categories, based on certain factors, but most especially on their capability for growth and their market share size. Executives can then decide which ones to focus on to drive more value and generate more profit.

How does the BCG Growth-Share Matrix help us refine a FinOps framework?

The main motivation of the FinOps framework is cost optimization, and the main motivation of the Growth-Share Matrix is business profitability. Combining the two can bring maximum efficiency to a company’s financials.

How the BCG Growth-Share Matrix Works

This business framework was built on the principle that market leadership = sustainable, superior returns. It reveals two fundamental elements of business that organizations need to consider before investing in a business:

  • Market attractiveness, which is driven by relative market share, and;
  • Company competitiveness, which is driven by the company’s growth rate.

The market leader eventually obtains a self-reinforcing cost advantage, which competitors find difficult to emulate. Such high growth rates tell organizations which markets have the highest growth potential, as well as the ones that don’t. The four symbols of the Matrix represent a certain combination of growth and relative market share:

The Stars

These are high-growth, high-share businesses that have considerable future potential and are very lucrative to invest in. These are the market leaders – businesses that make up a great portion of their industry and generate the most income. They need high funding, to maintain their growth rate. But if the business manages to maintain its status as a market leader when market growth slows, it becomes a Cash Cow.

Worst case scenario is when new innovations and technological advancements outplay your business, and instead of your Star becoming a Cash Cow, it becomes a Dog. This often happens in rapidly-changing markets and industries, and it can catch companies off guard.

The Question Marks

Question Marks are high growth, low share businesses that pose a strategic challenge. Depending on their chances of becoming Stars, companies either invest in or discard them. Startups and ventures often possess this designation.

With the right circumstances and the right management, a Question Mark can turn into a Star and, eventually, a Cash Cow. But sometimes, even after a large amount of investments, Question Marks still don’t develop into market leaders, and they end up as Dogs. This is why companies need careful consideration when it comes to deciding matters with Question Marks.

The Cash Cows

Cash Cows are low growth, high share businesses. They are marketplace leaders, generating more cash than they consume. The growth of Cash Cows isn’t high, but they often commonly have a lot of users already. They  act like the backbone of the company, providing revenue on almost all fronts.

Other, more “mature” markets consider these businesses to be “plain and boring”, especially because they run on a low-growth environment. But their cash generation is constant, and corporations value them a lot for it. The cash they generate also helps Stars and Question Marks transform into Cash Cows.

However, mismanagement and other negative circumstances degrade a Cash Cow into a Dog, so companies should also continue investing in Cash Cows to “milk” it passively and maintain its level of productivity.

The Dogs

The Dogs are the worst form a business can take. Dogs are low share, low growth businesses, meaning they’re in a mature and slow-growing industry and have low market shares. Often, they are cash traps that tie up company funds over long periods, drain resources due to low-to-negative cash returns, and depress a company’s return-on-assets ratio.

Dogs can still sometimes play a role in a company – for instance, one Dog may complement the products of other business units. But common marketing advice to deal with Dogs is to remove them from the company’s portfolio altogether, through divestiture or liquidation. Unless the organization finds a new strategy to reposition Dogs and lift them up from their status, they will most likely hurt the company in the long run.

Utilizing the Growth-Share Matrix

When adopting a FinOps culture, companies should simultaneously evaluate their product offering(s) using the Growth-Share Matrix with optimization strategies. While the FinOps practitioners establish the new procedures for FinOps to take hold, executives should take the time to look at their product lines and product features and thoroughly examine them. The expertise of the FinOps practitioners in benchmarking and forecasting should help them determine which product features and product offerings are on the way to becoming Cash Cows, and which ones are not.

Eventually, all products will either turn into Cash Cows (which is the best kind of product/business to apply optimization to) or Dogs. Careful evaluation on both the business side and the operational side can help companies and organizations make the right decisions.

Where Optimization Should Be Focused

Question Marks are not ideal as focus points of optimization. Yes, these kinds of products are growing. But the market isn’t really adopting Question Marks, due to their low share. With less adoption, costs are not skyrocketing. This also means that companies won’t be able to see many returns from them (yet).

Dogs are likely to be discontinued anyway – so you might as well cut losses as early as possible. Stars should definitely be optimized, but they are growing so fast that they are the hardest ones to control in a really granular way.

During the Optimize phase, it’s the Cash Cows that FinOps companies should focus on. Lots of people are already using them, and the user base will most likely be pretty steady, so there won’t be much “growth” to unsettle things. Organizations should prioritize reducing their Cash Cow’s cloud footprint and usage. This allows the Cash Cows to function more efficiently and generate more revenue for the company.

As the Operation phase rolls in, companies can start working on their Stars and Question Marks.

FinOps and Cloud Optimization

AWS autoscaling

Cash Cows are where optimization should be focused. The best way to optimize and squeeze more revenue out of these is to bring costs down. Reducing Cash Cows’ cloud footprint and usage will help companies to successfully integrate both the FinOps and the BCG Growth-Share Matrix frameworks. However, you also need to consider the performance of your Cash Cow. It’s no good cutting costs if performance suffers. You don’t want to jeopardize user experience. This is where cloud optimization comes in.

Cloud optimization can play a significant role in an effective FinOps culture. Cloud optimization is all about minimizing cloud spend, and preventing unnecessary wastage in DevOps budgets – the same motivations that gave birth to the FinOps movement in the first place.

Cloud apps are complicated. The right tweaks and changes to resource allocation and parameters can have a big impact on cost. But even a basic application can have trillions of different permutations of resource and parameter settings. And these settings change fast. With daily code releases, infrastructure features and updates, and traffic changes and user growth, no-one short of a superhuman can keep up.

Leveraging the Capabilities of Artificial Intelligence

An AI-driven cloud optimization technology will perform automation better than any human ever will. AI systems, unlike humans, do not grow tired, do not easily forget, and can take in and calculate variables at hyperspeed. Such technology is what is needed to help organizations optimize entire systems, providing improved performance with minimal costs. This allows them to stick to the overarching principles of the FinOps culture, and leaves the engineers and operations teams with more time to focus their efforts on development and innovation.

Conclusion

Adopting a FinOps framework is a lifetime commitment for a company. Sometimes, the process doesn’t go as smoothly as planned, especially for new companies who are still trying to figure out the business side of the cloud.

However, with the right guiding principles, the right mindset, the right people, and the right cloud optimization tools, any company can successfully pull off a FinOps transition, saving them millions of dollars in resources and ensuring the company’s longevity in the industry. Combining the FinOps framework with a proven and effective model like the BCG Growth-Share Matrix gives companies a way to sharpen their thinking around FinOps goals, and better position themselves for success.

 

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