How to Expand Business Value With AWS Cloud Financial Management
- the concept, purpose, and impact of CFM;
- four key areas of Cloud Financial Management;
- most effective CFM practices to make the difference.
Table of Contents
What is Cloud Financial Management (CFM)?
Cloud Financial Management (CFM) or Cloud Cost Management, embodies cost-conscious culture for target-oriented businesses. It implies the execution of the proven AWS cost management best practices and implementation of the designed financial governance strategies to handle any inefficiencies in the way of monetizing the benefit that the cloud can introduce to an organization.
While the focus of the stakeholders within cloud cost management can be conventionally placed on optimizing the expenditure, CFM is about much more than that. It allows and encourages technological innovation and agility, as well as brings the best of the AWS approaches to your business’s benefit.
An organization can leverage the Cloud Financial Management on condition that it invests efforts and resources into setting its current financial procedures up to correspond with Amazon-approved principles of cost planning, control and transparency, which also go along with the overall enhancement in the cloud environment.
Cloud Financial Management objectives
The role of the CFM tools is to ensure that customers who opted in favor of the cloud for their workloads make the most of the AWS opportunities. In fact, Cloud Financial Management applies to attaining financial objectives for cloud migration, developing new apps in the cloud environment, or expanding the list of cloud-based services in use. More read: Application Migration to AWS Cloud: All You Need to Know Initially.
Whichever category your specific case represents, AWS cost management solutions prevent the typical issues associated with poor cost transparency and inadequate cost planning brought about by traditional static waterfall budgeting.
Establishing the budget, controlling the cost, optimizing investments and delivering business value are the objectives of the CFM. Those performed, already transform the business through a cost-conscious culture permeating every team or process. With the transparency and accountability of this approach, unanticipated cost risks wear off giving way to cost savings and more efficient allocation of resources for scaling and developments.
The impact of Cloud Financial Management
According to a research study conducted by IDG, a notorious stumbling block that interferes with competent cloud cost management is unpredicted expenses for cloud services. The unexpected items on the bills or increasing service charges have been reported to hold up the respondents’ business value. Another challenge to capitalizing on cloud-based services is ineffective cloud cost control or lack thereof, based on the responses of nearly half of the businesses surveyed.
The data from the report may seem implausible alongside the fact that cloud computing pervades each industry. While two-thirds of enterprises prefer services in the cloud, the majority of those businesses primarily addressed the promising innovational aspect of cloud technology, so the issue of cost management for the AWS cloud fell by the wayside.
Trying on traditional IT budgeting for cloud systems is futile as such environments much exceed the preceding legacy solutions in complexity. Conventional cost controlling and planning approaches are incompatible with successful cloud financial management and incomparable with AWS cloud cost management. Identifying the real cost of the cloud for your business, controlling your computing expenses and ultimately optimizing the expenditure become easier with AWS CFM services.
AWS Cloud Financial Management affects your approach to cloud-related costs promptly and profoundly in:
- establishing the business case and your cloud opportunity cost to be presented to the stakeholders.
- predicting and evaluating cloud-associated spend with a view to increasing ROI.
- designing and implementing a cloud-centered model, which fosters financial management and cloud-cost culture.
- recognizing FinOps capabilities and applying them to manage the expenditure to gain the value of the cloud services in the long-term perspective.
Four pillars of Cloud Financial Management
CFM is supposed to yield business results in the most resource-conscious and efficient way since it is a combination of approaches, practices and AWS cost management recommendations. Those can be grouped into four key areas of cloud financial management, also referred to as the pillars, which will be explained further.
- Planning and forecasting
- Measurement and accountability
- Cost optimization
- Cloud financial operations
Special tools, developed for assessing and predicting cloud computing consumption and cost, provide deeper insights into the actual and probable future computing needs and spend in order to plan on more precisely.
The idea as basic as tracking and measuring cloud consumption and expenditure directly affects accountability at each point in time, as well as among your teams. Though, it only applies to the accurately and appropriately selected practices to enhance the overall financial management through cost transparency.
This pillar is admittedly rather extensive and encompasses a few further areas, such as waste identification, cloud-native or -friendly architecture design, and general cost efficiency measures. The CFM strategies which allow those include, but are not limited to modernization, selecting the optimal to the need and spend pricing model, resource and demand management, etc.
Setting up cost management is a worthy investment with a long-term list of benefits. This holds true on condition that it is further systematically maintained on every level, including tools, practices, processes, and teams. It makes sense to develop automatic tools which will control cloud cost operations and support cost efficiency in the long run.
Planning and forecasting
It is accuracy that is the key performance indicator to consider the effectiveness of cloud consumption forecasting and cost planning. There is no need to waste resources on overprovisioning to handle unanticipated fluctuations in demand if your computing capacity and cloud cost forecast are accurate enough.
Further, you can delve into the best practices for attaining planning accuracy.
Regular cadence and variance analyses
Practical experience suggests that mere trend scrutiny is insufficient for a detailed and precise cost forecast. It had better be supplemented by a thorough trend drivers analysis in addition to creating and actively keeping up a regular cadence. It is also key to test the viability of the forecasts by comparing them to actuals in systematic variance analyses.
Systematic actioning of audit findings
Respondents to the IDG survey can be conditionally divided into two groups based on whether they action their financial reviews or audit findings, and how regularly they do so. The gap between those who methodically action their audit findings and those who action only occasionally or omit this practice altogether consists in a great difference in cost forecasting accuracy.
Centralized spend management
While it can be informative to gain an inside glance at the financial aspect of each individual team or process, what notably increases the capacity forecast and cost planning accuracy is an organization-wide standpoint in centralized management of cloud-associated costs.
Cloud training for the staff
As cloud infrastructure, and even more so cloud economics, is a complicated field for professionals trained to handle conventional legacy systems, employees ought to be trained to work with the cloud. Trained staff possess a much more factual and detailed understanding of CFM and are capable of much more accurate cost forecasts.
Measurement and accountability
Since managing finance is impossible without visibility into expenditure in the first place, constant spend monitoring is essential to cloud financial management. Cost transparency goes hand in hand with accountability, in our case, for cloud costs and capacity consumption. Accountability for the allocated resources powers the responsible units, teams, or persons to achieve both efficacy and cost-efficiency.
Enabling cost transparency
Customers do not always fully comprehend the costs they are incurred. The visuals below feature the X boxes that represent the incurred spend which is not transparent to the organization. AWS cost management, as well as APN Partner technology tools, assist in accounting for the spending by pinpointing the expenditure sources.
What we suggest, and what is also mirrored in the visuals, is developing and implementing a suitable tagging scheme across the areas of financing. With the tailored tags, customers can more effectively control the resources allocated and invested. The basic necessity in the set of tags includes at least these five:
- Cost center
What cost center(s) does it belong to?
What application or workload does it support?
Who owns it?
- Expiry date
When is it supposed to be turned off? (for the Reserved Instance purchasing model)
Automation tags are there to issue directions for pre-planned shutdown or unexpected downtime, such as in case of disaster recovery.
Best practices for achieving better cost transparency encompass:
Monitoring application cost and consumption
As stated above, regular monitoring of cost spending and computing capacity consumption directly affects cost effectiveness, increasing savings to be further redistributed to innovation.
Monitoring SLA performance
To be added to the previous item, tracking expenditures by implication enhances meeting service level agreements. Besides, monitoring and reporting SLAs strengthens the ability to reach them as opposed to scarce or no monitoring.
Allocating cloud spend to the consuming business unit/team
Founding cost accountability among the consuming units enforces a more responsible approach to cost allocation and management among the teams, and consequently, optimized expenditure.
Chargebacks, as examples of direct cost allocation, do not seem to be a practical choice in all instances. In contrast, cloud cost showbacks enable businesses to establish transparent connections between the organization units’ function, performance and spending.
The cost allocation effect on cost management surpasses increased savings and more timely meeting of service level agreements. It should rather be viewed as a catalyst in other CFM practices amplification.
Cost efficiency is in no way a goal in itself. The right balance should be stricken among the seemingly competing interests of the solutions’ scalability, performance, and IT-associated costs. And this can be achieved through the application of a well-designed cost optimization strategy. Please check our blog about cost reduction and cost optimization strategies AWS Cost Reduction Strategies to Use. Such an approach allows consideration of basic requirements from both business and technical perspectives while opting for suitable pricing models and enabling scalability which accommodates any change in demand. The incremental savings over time is the metrics that you can rely on and it can be influenced by the optimal cost optimization strategies. To read more please check our blog AWS Cost Optimization – Best Practices and Strategies.
AWS cost optimization best practices
Here are the key areas of cost optimization best practices selected by AWS, the more detailed explanation of them follows:
- Choice of pricing models
- Right-sizing instances
- Increasing elasticity
- Optimizing storage
Choice of pricing models
In many ways, the choice of the best-suiting combination of pricing model is crucial to the future development of a cloud-based workload. For this reason, the pricing model is a key part of a cost optimization strategy resulting in actual cost savings.
Taking a closer look at the requirements of the workload in question is a good thing to start with. The homework that needs to be completed includes not only the analysis of the workload’s components’ current and prospective requirements but also the available pricing options. A comparison of, let’s say, the on-demand pricing model against the pay-as-you-go for the present conditions of the system and the likely changes it may undergo is a valid choice.
AWS has drafted its full guide on the pricing models it offers to make sure you pick the right model for your cost optimization strategy.
So as to manage cloud cost, right-sizing instances prove to be an effective controlling practice. As it refers to opting for the most inexpensive cloud instances (e.g. containers) with just the right amount of computing resources (e.g. CPU, RAM, storage) to meet the functional requirements of a workload, right-sizing provides benefits in both the cost and the performance.
Right-sizing involves auditing available resources with the aim of detecting a downsizing, and thus cost saving, possibility. Suppose a certain percentage of a resource is idle, a customer may just as well opt for a smaller instance, in this way cutting the expenses yet preserving the performance level.
The proper instance can be chosen among about 60 sizes and types that AWS has to offer. To ensure the absolute best fit, AWS Solutions Architects are trained to assist organizations in picking the instance type according to their individual criteria. If you prefer automation, AWS Cost Explorer scans the prior computing resource usage history to produce tailored EC2 instance rightsizing recommendations, or, in case of underutilized instances, termination suggestions.
The first step to enhance elasticity, which entails more efficient spend, is reviewing instances: production against non-production. The latter, which could include development, testing and quality assurance, can and had better be shut down during non-working hours. This generates substantial savings in pricing models other than Reserved Instances.
Speaking of the pricing models, it has been calculated that for a non-production instance with the usage of up to 36%, on-demand pricing is more pragmatically profitable than Reserved Instances. However, with AWS Lambda, there is no need to be wary of the usage percentage or time of the day – Lambda can design a function to track those parameters and enable instance start and stop depending on the circumstances.
It is not only shutdown that can be automated, automatic scaling guarantees you get the performance you require while paying for the instances actually used for your workload. The handy feature is specifying the upper and lower bounds when provisioning the necessary resources. Automatic scaling then ensures effective performance within the set limits regardless of whether the demand plummets or soars, leaving your spending minimal.
Except for those practices, AWS has introduced Predictive Scaling for EC2. Its function collects an organization’s EC2 usage, combines it with AWS’s extensive observation data, and Machine Learning-produced expected traffic patterns to arrive at a scaling plan for autoscaled EC2 instances. The proactive scaling before anticipated demand peaks enhances a business user experience and optimizes one’s EC2 budget by preventing overprovisioning.
Many businesses tend to treat data storage as rudimentary once their cloud migration has been completed. Unattended storage in many cases can still be run for quite some time, incurring charges of up to 7% of cloud costs misspent on the unused and ignored storage volume.
In storage augmentation, there is no single silver bullet – each workload will require a certain storage scenario. Square one is assembling the performance profile for variables in order to analyze the workloads’ storage needs and review storage options available to get at a perfect match. AWS offers three categories of storage services to cover any type of storage requirement: object, block, and file storage.
Additionally, Amazon S3 presents a number of storage classes, once more, to match the particular storage needs:
- S3 Standard: general-purpose storage of frequently accessed data;
- S3 Intelligent-Tiering: data with unknown or changing access patterns;
- S3 Standard-Infrequent Access (S3 Standard-IA) and S3 One Zone-Infrequent
Access (S3 One Zone-IA): long-lived, but less frequently accessed data; and
- Amazon S3 Glacier and Amazon S3 Glacier Deep Archive: long-term archive and
Organizations can benefit from using S3IA vs S3 as much as 50% of planned costs, and reach up to 80% savings with Glacier vs S3 Standard Storage. As storage optimization is a continuous process of storage options decision-making on the basis of the current and predicted needs, it is advisable to turn to the AWS tools to make optimization more automated and properly executed.
Cloud financial operations
The selected practices in this subsection help maintain cloud financial operations as a constant, smooth and automated process with minimal staff intervention. It will, in turn, affect the accuracy of capacity and cost forecasts, cloud-associated expenditure, and SLAs-prompted performance – hereby we witness the boost to the other three pillars of Cloud Financial Management.
The overall improvement seen through the KPIs upon applying the cloud financial operations is credited to the best practices described below.
As organizations are often complex ecosystems, especially when it comes to their cloud-based infrastructure, there is always some degree of discontinuity and cost waste due to management issues of a large and complicated web of activities. Conversely, by adopting centralized governance one acquires a comprehensive many-sided outlook of the business in general, and cost management in particular.
More specifically to cloud financial operations, concentrated cloud governance correlates with more accurate cost forecasting, incremental cloud savings, and delivery to the SLAs’ performance. On the whole, despite seeming a bit of a control aid, centralized governance serves well on the levels beyond CFM to help fully realize one’s business value.
Technology and finance partnership
Though financial management yields substantial results, it is the favorable combination of technology and finance that does the trick for the pertinent matters of spend reductions, service-level agreement anticipated performance, capacity forecasting and expense planning. Apart from more effective budgeting for cloud-hosted services, documented cooperation of technological and financial business units not only augments other Cloud Financial Management best practices – it adds up to the broader business factors, like agility and user experience.
Provided by the cloud vendor, managed services help organizations in the day-to-day maintenance of their cloud-based infrastructures. The provider’s services supervise and govern the application of CFM practices, such as those recounted above, e.g. automatic capacity scaling, or cost monitoring and reporting. Successful utilization of the managed services requires cooperation between the vendor and the customer in respect of SLAs, tagging strategy, forecasting trends, budget planning and allocation, and can be recognized in the advances in the foregoing factors.
Checklist of CFM actions to increase business value
We have drawn on the finding of the CFM best-practice research and listed the most effective recommendations for general cost optimization purposes.
- Baseline budget
It is advisable that businesses estimate the budget consumption for workloads operating in the cloud or being considered for cloud migration. Should you be willing to automate, you can rely on the AWS Migration Evaluator to establish the cost baselines.
- Migration roadmap
For those at the dawn of their migration journey, cloud experts advocate putting together the necessary minimum of a migration strategy, roadmap, and funding model that document all technological and non-technological app requirements; this can be done through AWS Migration Acceleration Program.
- Competence and learning
Cloud-hosted system maintenance, especially complying with CFM or realizing cloud value, calls for a certain level of competence and awareness that only suitable cloud training can provide, examples of such could be AWS Cloud Financial Management for Builders and AWS Cloud for Finance Professionals courses.
- Concentrated management
Cloud environments are most effectively managed with centralized governance teams with a broad perspective on both the pressing issues and the overall business value delivery strategies. Such dedicated governance teams can be further aided by automation, like AWS Control Tower, AWS Service Catalog, and AWS Config.
- Cost transparency
The concentrated governance teams, mentioned above, as well as the stakeholders, had better be in the know about the cost visibility reports collected in the regular monitoring. The resources that accommodate the need for tracking and analyzing such data include AWS Cost Explorer or AWS Cost and Usage Report integrated with Amazon QuickSight.
- Observance and reporting
The systematic practice of tracking cost trends and drivers, along with auditing and identifying the actual/forecasted variance, is a reasonable means to eliminate cloud waste, allocate resources more precisely, and manage costs both on the planned and incidental levels. Trends and deviations are easily spotted and analyzed with AWS Cost Anomaly Detection or AWS Budgets’ reports and alerts.
- Responsibility and compliance
In the best-case scenario, business units are to be held accountable for the computing and cost resources allocated to them. Appropriate accounting rules help govern the distribution of liability, as do cloud features like the cost allocation tags of AWS Cost Categories and AWS Billing Conductor.
- Joined forces
The right combination of cost management approaches and tools is significant to accomplish the aimed cost-saving results. One can always resort to the most recent cloud-hosted tools to get the ball rolling. For instance, one can modernize the acquired resources by migrating to the AWS Graviton family of processors; increase transparency with AWS Trusted Advisor and AWS Compute Optimizer; implement the right-sizing recommendations with AWS Cost Explorer – virtually any gap in skill can be covered with the right AWS tools.
- Customized pricing
Workloads with varying requirements will benefit from different cloud pricing models. Aside from the most flexible and popular, yet expensive in the long run, on-demand pricing, businesses can favor excess compute capacity models, that is Amazon EC2 Spot Instances; as well as discounted commitment-based models, such as Savings Plans and Reserved Instances. One can make use of tools like AWS Auto Scaling to delegate the responsibility of managing resource elasticity and scaling.