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IBM ApptioIntroduction to Cloud Unit Economics
The shift to public cloud and consumption-based pricing models has transformed how IT infrastructure is purchased and managed. Gone are the days of upfront capital expenditures and long procurement cycles. Now, engineers and developers can instantly spin up resources as needed with little oversight.
This agility and flexibility has accelerated innovation and time-to-market. However, it has also led to some organizations struggling with runaway cloud costs and uncontrolled spending. Without visibility into cloud usage and costs, it’s easy to overprovision resources or leave them idle and rack up unnecessary expenses.
To maximize the value of public cloud investments, organizations need a new financial management approach tailored to this consumption-based world. This is where the discipline of FinOps comes in.
FinOps brings together technology, people and processes to manage the business side of cloud. It enables accountability for cloud spending and helps align usage to business goals. A core component of FinOps is understanding and optimizing your cloud unit economics.
Cloud unit economics refers to analyzing the costs and revenues associated with your cloud resources at a granular level. By tracking metrics like cost per transaction, cost per customer, or cost per GB processed, you can measure the efficiency and ROI of your cloud usage.
Establishing visibility into unit costs and tying them to business outcomes is key for rightsizing resources, prioritizing engineering efforts, and ensuring your public cloud investment delivers maximum value. Mastering cloud unit economics unlocks the full potential of the public cloud.
Getting Started with Cloud Unit Economics
Taking the first steps towards cloud unit economics requires following some key best practices:
Understand Your Cloud Usage and Costs
Gaining visibility into your cloud costs and consumption patterns is the critical first step. Collect billing and usage data across all of your cloud environments, including AWS, Azure, GCP, and SaaS applications. Break down costs by service, resource type, tags, and other attributes. Analyze trends over time to identify spikes and cost drivers. Make sure to involve stakeholders from engineering, finance, and leadership to review and understand spending. Having granular visibility into your cloud costs lays the foundation for calculating meaningful unit metrics tied to your business. Having granular visibility into your cloud costs and consumption is the foundation for calculating meaningful unit metrics.
Gaining visibility into your cloud usage and costs:
- Gather billing data from across your cloud environments (AWS, Azure, GCP)
- Break down costs by service, resource type, tags, etc.
- Identify trends and cost drivers over time
- Involve stakeholders from engineering, finance, and leadership to analyze spend
Establish a Tagging Strategy
A well-defined tagging strategy is essential for allocating costs and calculating unit metrics. Determine a taxonomy for tags that aligns to your business needs, such as cost centers, applications, environments, owners, etc. Tag resources consistently at creation across development, test, and production environments. Enforce tagging policies through pipelines and workflows and regularly audit compliance. Consistent tags enable you to group resources and map them to the business activities they support. Having granular visibility into your cloud costs and consumption is the foundation for calculating meaningful unit metrics.
Establishing a tag strategy:
- Determine a taxonomy for tags that aligns to your business needs, such as cost centers, applications, environments, owners, etc.
- Tag resources consistently at creation across development, test, and production environments.
- Enforce tagging policies through pipelines and workflows and regularly audit compliance.
- Regularly review and audit tags and tagging policies to ensure adherence and update as necessary.
Select Initial Unit Metrics
When getting started, it’s best to begin tracking simple unit metrics like cost per GB, cost per compute unit, or cost per resource hour. As you mature, you can add metrics tied more closely to business outcomes, such as cost per customer, cost per transaction, or cost per digital asset processed. Make sure to involve engineering teams to help identify metrics relevant to their workloads and objectives. Avoid over-optimizing on very narrowly defined metrics as this can lead to misleading conclusions. Take an iterative approach, starting small and building on your metrics over time. Take an iterative approach – start small and build on your metrics over time.
Selecting initial unit metrics:
- Start simple – cost per GB, compute unit, resource hour
- Add metrics tied to business drivers – cost per customer, transaction etc.
- Involve engineering teams to identify relevant metrics
- Avoid over-optimization on narrow metrics
Involve Key Stakeholders
Successfully adopting cloud unit economics requires involvement across your organization. Engage with engineering teams to ensure metrics resonate with their workflows and incentives. Get buy-in from finance and leadership around the value of metrics. Promote collaboration between teams and foster a culture of cloud cost mindfulness. Shared ownership and centralized guidance are key ingredients for maturing your cloud unit economics practice. Cloud unit economics requires breaking down silos and promoting shared ownership.
Involving Key Stakeholders:
- Engage engineering teams
- Get buy-in from finance and leadership
- Foster collaboration between teams
- Promote FinOps culture and mindfulness around spending
Calculating and Optimizing Key Unit Metrics
Once you have visibility into costs and defined metrics, optimizing those metrics is key to maximizing cloud value. Here are some best practices:
Choose Relevant Timeframes
- Calculate metrics using daily, weekly, or monthly timeframes to match business cycles
- Analyze trends over time, not just point-in-time values
- Set historical baselines to measure progress
Choosing timeframes that align to business cycles allows you to accurately monitor performance and identify meaningful trends.
Leverage Tagging for Allocation
- Use tags to allocate shared resource costs
- Automate tagging via policies, pipelines, and integrations
- Enrich incomplete tag data through utilization analysis
Consistent automated tagging is essential for accurately allocating shared resource costs to business activities.
Rightsize to Balance Cost and Performance
- Scale resources aligned to workload patterns
- Monitor utilization and resize instances to reduce waste
- Leverage autoscaling, serverless, and other elastic options
Optimizing resources to match workload demand is key to balancing performance needs with cost efficiency.
Monitor Prices and Contract Terms
- Track hourly on-demand prices across instances, databases, etc.
- Optimize reservation coverage and terms for steady-state workloads
- Leverage spot instances, bid advisors, and auto-scaling
Staying on top of cloud pricing models and purchase options will enable you to minimize expenses.
Promote Accountability with Showback
- Allocate costs to departments/teams based on usage
- Share unit cost metrics to drive mindfulness
- Set targets but avoid perverse incentives or unfair comparisons
Showback reporting reinforces responsible usage and cost ownership for engineering teams.
Tying Unit Economics to Business Outcomes
Connecting cloud unit metrics to overarching business goals and KPIs is crucial for demonstrating value. Here are some best practices:
Align Metrics to Business Priorities
Identify your organization’s key performance indicators around revenue, customer acquisition, market share, etc. Then, select or develop cloud unit metrics that map to those business priorities. For example, tracking “cost per customer” provides insights into customer profitability. Aligning metrics to business goals ensures cloud efficiency supports broader objectives.
Enrich with Business Context
Unit metrics on their own lack context. Adding business data like revenue per customer, sales per month, or number of transactions paints a fuller picture. This business context allows you to better evaluate the effectiveness and ROI of your unit cost metrics.
Set Goals Based on Industry Benchmarks
Leverage available benchmarks to establish baseline targets for metrics like cost per transaction or profit margin per customer. Research what peer organizations have achieved. Set realistic goals aligned to your business strategy, and adjust over time as your operations and metrics mature.
Monitor for Trends and Outliers
Continuously tracking unit metrics over time lets you spot trends, outliers, and anomalies that warrant investigation. As your business grows and evolves, your metrics should as well. Closely monitoring their behavior ensures they provide maximum value.
Quantify Impact on Profitability
Calculating the business profitability gains (or losses) driven by changes in unit costs, such as increased customer profit margin or reduced COGS, helps demonstrate ROI. Sharing these quantitative results with executives accelerates buy-in and investment in your cloud optimization efforts.
Governing Cloud Costs with FinOps
While unit economics focuses on maximizing value, governing your cloud costs is also crucial. Effective FinOps practices can help rein in spend:
FinOps Practices
- Centralize cloud cost visibility, ownership, and policies
- Allocate costs to teams/departments based on usage
- Monitor budgets, forecasts, anomalies, and optimization opportunities
- Set targets for cost efficiency improvement over time
- Empower teams to identify waste and manage their own usage
Allocating Shared Resources
- Use tagging and observability data to distribute shared resource costs
- Automate allocation rulesets within FinOps platforms
- Maintain transparency into allocation methods
Budgeting and Target Setting
- Set budgets aligned to business plans and cost improvement roadmaps
- Establish efficiency/utilization targets tailored for each department
- Enforce budgets but don’t impose fixed limits that stifle innovation
Organizational Considerations
- Secure executive buy-in and promote a culture of cost mindfulness
- Hire dedicated cloud financial management roles like FinOps engineers
- Break down silos between engineering, finance, and leadership
IBM Cloudability Empowers Businesses with Unmatched FinOps Practices
Effectively managing cloud costs is an intricate task that necessitates the use of unit economics and FinOps practices. It demands clear visibility into costs, strategic optimization of key metrics, and alignment of these metrics with business objectives. In this endeavor, the role of consistent tagging and precise allocation of shared resource costs cannot be overstated.
The practice of right-sizing resources to meet demand and vigilant price monitoring helps strike the perfect balance between cost and performance. By integrating the business context into unit metrics and setting goals in line with industry benchmarks, businesses can glean valuable insights that drive efficiency and cost-effectiveness.
FinOps practices, including cloud cost visibility and allocation, budgeting, and target setting, form the backbone of efficient cloud financial management. The engagement of dedicated roles and the cultivation of a cost-conscious culture are crucial organizational considerations that drive this efficiency.
Cloudability shines in this space by providing an effective platform that connects cloud unit metrics to business outcomes. It allows businesses to govern their cloud costs using FinOps practices, enabling them to realize significant cost efficiencies and extract greater value from their cloud investments. With Cloudability, businesses can elevate their cloud cost management strategy, fostering a culture of cost-consciousness while reaping the full benefits of their cloud investments.
FinOps: A New Approach to Cloud Financial Management
With the adoption of public cloud, procurement of IT has evolved from predictable upfront capital expenditure to variable consumption-based monthly bills. The result is engineers making daily spend decisions that affect a company’s bottom line at rapid speed while finance teams struggle to keep up with the pace and granularity of spending.
So, how can organizations keep pace and understand cloud costs? Enter FinOps!
Download this eBook to learn how FinOps can help you:
- Increase visibility into cloud costs so you can make smarter speed vs. quality vs. cost trade-offs
- Bring finance, technology, and business leadership together in cross-company collaboration to foster agility, innovation, and adaptation to change
- Enable cloud leaders to master the unit economics of cloud, improve the business value of cloud, and drive a competitive advantage
