There is unrelenting pressure to tie technology investments to results. A budget shows what will be spent, and the actuals ledger group shows what was spent. However, neither communicates the return on that investment. Every line of business has this pressure, but technology leaders responsible for cloud spend feel it acutely. Unit economics, the direct costs and revenues associated with one unit of a product or service, demonstrate this return.
Cloud bills run to thousands of lines of operational data — none of which communicate how each cloud resource impacts an organization’s business metrics. Technology leaders must show how cloud spend impacts an organization’s cloud unit economics (e.g., for a travel company, cost of cloud/mile; for healthcare, cost of cloud/patient; insurance, cost of cloud/claim). To do this effectively, leaders turn to a partnership of FinOps principles and Technology Business Management (TBM), complementary approaches that together can measure cloud unit economics to capture the impact of cloud strategies.
The urgency for cloud unit economics
Cloud solutions have driven digital transformation for several years, but the pandemic accelerated the trend. A retail company developing digital-first customer engagement had no time for incremental change in a physically distanced world. Digital-first wasn’t a choice; it was a necessity.
Today, after two years of the pandemic, cloud-first has become the new operating model of choice. What started as a defensive move is now normalized. Technology leaders are now turning to cloud as a competitive advantage — driving innovation by leveraging trusted financial insights to drive fast decision-making, optimize spend, and deliver growth. Technology leaders need unit economics to demonstrate sound cloud financial management and tie business value to their cloud strategy.
Surfacing cloud unit economics from cloud bills
The blessing of cloud solutions is the ease of deployment; the curse is that you immediately start paying for any mistakes. Without unit economics communicated inside and outside of IT, provisioning errors (e.g., selecting high-performance, expensive virtual machines for non-production workloads) stay hidden in a monthly cloud bill and may only surface in an IT Finance-only monthly business review (MBR). Even within an MBR, there can be confusion about cloud expenditure because a general ledger (GL) doesn’t identify spend by service.
A better approach is to align cloud spend to a standard taxonomy of cloud services covering AWS, Azure, and GCP. Technology leaders can use this taxonomy to tie cloud costs back to unit economics, share accountability with cloud consumers, and optimize underutilized resources. Figure 1 shows an extract from Apptio’s standard taxonomy for storage cloud services. Suppose an organization uses the standard taxonomy to identify spend changes in infrastructure services. It uses the storage service category to identify the services driving the change. A standard taxonomy frames the problem (“We are spending 20% more in backup and archive storage quarter over quarter”) and promotes action (“Let’s ensure we are only using AWS S3 Glacier for archive and not getting dinged for frequent data access”). This optimization cuts the overall cost of the cloud and the business’s unit economics.
Improved cloud unit economics depend on FinOps — and TBM
FinOps, the practice of bringing financial accountability to the variable spend model of cloud, brings a bottom-up approach to managing cloud. Organizations could cut cloud spend by not adopting new cloud solutions, but trends suggest that’s not happening. By 2025, Gartner expects the cloud market to be double the size of the non-cloud market.
FinOps best practices (e.g., automatic shutdown of resources, rightsizing, anomaly detection, and committed use discounts) deliver a quantifiable financial impact that can be seen by all stakeholders—among both technology and business leaders. These practices all help to optimize the run rate of cloud, but getting to cloud unit economics requires calculating and measuring a fully burdened cost. By taking public cloud baseline costs from FinOps and inputting them into TBM, public cloud costs can be combined with indirect costs like cloud applications, cloud services, and labor costs to develop that fully burdened cost – and then applied more effectively to measuring to topline business objectives.
Technology leaders bring FinOps and TBM together by incorporating a standard taxonomy for cloud services. FinOps gurus execute optimization tactics to manage the variable nature of cloud billing effectively. IT Finance analyzes the cloud’s impact on the organization’s core unit economics and uses the Technology Business Management (TBM) discipline to connect cloud spend to its broader technology strategy.
Unit economics are also effective key performance indicators (KPIs) for rationalization efforts. Technology and business leaders have traditionally talked past—rather than to—each other: one focused on SLAs, the other on ROI. Unit economics takes the tech out of technology conversations and focuses rationalization discussions on something tangible—the unit cost of a service. This simplification drives faster decision-making.
You are making significant investments in public cloud solutions to support digital transformation. To maximize the impact of cloud spend—and lower unit economics—adopt a standard taxonomy of cloud services to let you compare spend between different services and different providers. Download this poster to help you map AWS, Azure, and GCO services to a standard taxonomy.