Establish a cloud financial management “flywheel” to continuously improve cost transparency, control, forecasting, and optimization

Customers are looking to establish effective cloud financial management (CFM) practices to continuously improve cost transparency, control, forecasting, and optimization. Organizations need to master this capability to maximize their value from AWS as illustrated in a 451 Research Analyst report.

Key challenges

At an organizational level, customers typically face challenges such as: lack of a centralized CFM program, inconsistent cloud architecture practices, lack of metrics, varying level of cloud expertise, and lack of incentives.

Establish a dedicated Cloud Financial Management Office (CFMO)

The first step in creating an effective CFM program is to setup a dedicated organization with a mission aligned to your cloud objectives.  The CFMO should be formally established by defining its mission, key objectives, and expected outcomes in alignment with key IT and business leaders. The CFMO is most commonly established as a dedicated discipline within a Cloud Business Office (CBO) or a Cloud Center of Excellence (CCoE). Read more about CCoE from this whitepaper “Building a CCOE to transform the entire enterprise” and relevant blogs.

The figure below shows a typical CBO along with its key functions:

Figure 1. Cloud Business Office Capabilities

The CFMO’s primary set of responsibilities are: maintaining cost visibility, driving optimization, and invoice management. Additionally, they are responsible for analyzing cloud finances, defining and tracking KPIs, and integrating cloud finances with overall IT related spend.

To affect these disciplines within the broader organization, customers must not neglect Organizational Change Management (OCM). This capability is responsible for changing the organizational mindset through: training, updating processes such as release management and architecture reviews, and getting alignment of key executives in finance and IT.

As a result, CFMO’s natural key stakeholders are: Application Teams (or Lines of Business), Finance, Architecture, Operations, and Management.

Figure 2. Cloud Financial Management Office (CFMO)

The CFMO is a module that can be easily inserted depending on the overarching cloud management strategy. While most common is to insert the unit within a CBO and/or CCoE, a CFMO can operate as a standalone Community of Practice (CoP). CFMOs are usually formed as a CoP when there is a highly decentralized cloud governance model.

Establish a formal engagement model

The CFMO needs to establish a formal engagement model with key stakeholder organizations and its associated leaders. Early in the Software Development Lifecycle (SDLC), the CFMO engages with the architecture organization to ensure cost efficiency is a key pillar assessed during the design phase of application development. For Application Teams, the CFMO ensures cost optimization initiatives are included as part of change release planning. This helps to ensure cost efficiency is continually evaluated even after a workload reaches production status. To assist with planning and funding cloud initiatives, the CFMO partners with the finance organization to plan, forecast, allocate, and report on cloud spend.

Establish key roles and responsibilities

The CFMO leader is responsible for centralized curation and ownership of CFM initiatives, including: tagging strategy, account strategy, CFM training, KPI dashboards, reporting, etc. They serve as a single point of contact for CFM and are responsible for establishing engagement models with key stakeholders, including: business, application, and architecture teams. The CFMO leader needs to be an executive with strong influence in business and IT leadership across the organization. There may be one or more analysts/engineers reporting to the CFMO leader, depending on size of the organization. Subordinates are responsible for designing and implementing different initiatives according to the roadmap established by the CFMO leader and key stakeholders. A high functioning CFMO team consists of individuals with a mix of technical (to drive optimization) and financial backgrounds (to drive reporting).

Establish metrics

The goal of metrics is to drive value and efficiency. They also align cross-organizational behavior and are key to setting targets through data driven decisions. Ideally, metrics should be easy to gather, understand, and collect consistently over time. While there is a universe of metrics to choose from, customers typically have chosen “potential savings as a percentage (%) of cloud spend” and/or unit metrics. These metrics are easy to understand, collect, and display based on well-defined ownership. Business units and IT teams can then target these metrics for reduction. To affect changes within the cloud spend portfolio, key metrics such as these need to be owned by a business leader or IT leader and discussed on a quarterly and annual basis.

Establish tools, automation, and cost visibility

One of the key challenges our customers face is providing role based observability of costs and KPIs across the organization. Customers can leverage tools such as AWS Cost Explorer, AWS Cloud Intelligence Dashboards (CID), or third party tools to provide visibility and reporting. The combination of tagging and account strategies best allow the enablement of these tools to provide the appropriate level of visibility and reporting in a native fashion. Customers need to focus initially on automation initiatives related to visibility and cost reporting. Doing so will further accelerate and enable OCM activities for CFM.

Establish incentives

When initiating cost optimization efforts, a key challenge is ensuring developers and engineers are properly incentivized to deliver cost optimization in conjunction with their primary responsibilities of delivering value through increased functions and capabilities. To incentivize “hands-on” technologists, the CFMO should ensure inclusion of cost optimization tasks or stories as part of release planning. This ensures technical staff have dedicated time to implement cost optimization recommendations. In addition, cost optimization initiatives and training could be made part of annual goals for developers and engineers.  Conversely, at management level, business units and IT leaders are held accountable based on KPIs established by CFMO through their reporting capabilities.

Establish consultative architecture support and training

Customers are tasked with ensuring architectures are cost optimized at design time. Some customers incur needless costs as they try to chase efficiencies only after workloads have been promoted to production. For example, if an application opted to deploy EC2 instances when serverless options were viable, it will drive a permanent increase in the baseline operating costs for the application until cost efficiency options are configured. To avoid this, mature customers have updated internal architecture governance processes to include cost as a factor in approval processes. In addition, since cloud skills and experience may be uneven across the organization, the CFMO needs to deliver education and training regarding cost optimization tailored to the respective roles within the organization.

Establish a roadmap

The CFMO needs to mature its capabilities over time just as the broader organization needs to mature their capabilities within the cloud. Typically, customers have used a twelve- or eighteen-month roadmap to drive key CFM initiatives. Examples of key initiatives include: formally integrating CFM stories in sprint planning, establishing a formal cost efficiency focused training program, updating architecture review processes to include CFM standards, and developing business demand based KPIs to predict associated cloud costs.