Once upon a time the IT team were akin to wizards, keepers of secret knowledge that no one else had. Every year finance allotted them a budget and off they went making stuff work. Then along came cloud computing, and its companion SaaS, and now everyone uses digital tools, and that’s a good thing, because the knowledge is unlocked and with it a whole bunch of new capability has been unleashed into the business.
As cloud computing is provided as a service, it’s also possible to see the total cost of ownership, because accompanying costs such as electricity are built into the price. Meanwhile, the labour costs spent on managing on-premises infrastructure are no longer required.
A happy ending you might think, but in reality, it is more like the start of a new beginning. This is because cloud computing brings with it a whole new set of requirements and a shift in the way IT, and the rest of the business, must manage its costs.
This is especially true in New Zealand, where we’re seeing cloud projects come out of project mode and go into business as usual. In CCL’s State of New Zealand Cloud Transformation 2023 report, which is based on research involving 476 IT decision makers across the country, 88% of businesses signalled that cloud is extremely or moderately important to their future strategy and growth. That’s an increase of 6% on last year, the first year of the report.
The move to cloud means that the CIO’s annual budget starts to become harder to predict because cloud costs can be so variable. The CCL report found that 36% of New Zealand organisations already have existing cost management practices in place. While another 30% are looking to put practices in place in the next 12 months.
A key insight from the report is that IT leaders measure success in the cloud in two ways – cost reduction and efficiency gains. Indeed, managing cloud costs is becoming such an important skillset it now has its own discipline known as FinOps, a combination of Finance and Operations. Having said that, while FinOps is becoming a distinct role in IT, cloud cost management is something that teams on both sides of the technology and finance divide need to be familiar with.
In the CCL Report, managing cloud spend was the second biggest challenge cited by 30% of respondents. This was just behind lack of resources and expertise, which was the top challenge at 31%. So, it’s unsurprising that for 28% of respondents, improving financial reporting and cost management for cloud services is on the list of priorities for the coming year.
While you might be able to deploy a bunch of operating systems on the cloud, and know what those costs are, you will need people to patch and run and manage all of those over time. You can’t assume the labour cost for running on-premises infrastructure is going to be the same when you move to the cloud. In the CCL Report, the top challenge (38%) for organisations migrating workloads to public clouds is optimising costs and performance post-migration.
Cloud provides greater flexibility, but changing the way you work will have a big impact on how people spend their time. When infrastructure was on-premise, IT resources might have spent a few days a month patching and updating, and that could have resulted in errors that took additional time to resolve. In the cloud, updates and changes still need to happen but with automation the time is less, and errors are reduced or eliminated.
This change can have a big impact on people’s time, and mature organisations will have an awareness of this and be building it into cost modelling. As this will always directly correlate to savings somewhere in the organisation, it’s even more crucial for IT to get alongside the business to understand where these savings are occurring.
The same thing applies to costs. It’s the variability of cloud that can make it harder to forecast budgets, but in the same way your electricity bill goes up in winter and down in summer, it’s possible to establish a baseline of what the costs are likely to be each month.
Added complexity occurs with hybrid cloud, where CIOs operate a mix of clouds to get the best environment for their applications. Companies who do multi-cloud financial management well will focus on the applications they are running and the outcomes they are getting for their end-users. They use schemas that enable them to measure across platforms and, as much as possible, assign costs to groups and product owners, rather than to IT infrastructure teams that might be dealing with different infrastructure in different ways.
The key is to have solid, robust reporting, so you get visibility of costs. IT teams need to be tagging things the right way, so they are feeding the business the most accurate information about where the costs are occurring, and when. It’s incredibly powerful because once you have an intimate knowledge of your costs, you can make better business decisions.
It’s also when things start to get really exciting, because it means the users at the coalface can finally see the costs they incur and make informed decisions about whether it’s a good use of money.
For example, it might be that IT go to the marketing team and explain the cost of archiving a hi-resolution marketing campaign is $1000 a month. As this cost is coming out of marketing’s budget, they can then decide if this is worth the investment. Or it could be a software product manager, managing a cloud-based mobile app, able to tune both the throughput of the platform, as well as optimise the costs of delivering the service. By having direct visibility of platform costs product owners and development teams can build leaner cost structures into the applications themselves.
FinOps shifts the organisation’s approach from annual, quarterly, and monthly financial reporting and governance to continuous reporting and governance.
- Daniel Parsons, Leaven Head of Digital Transformation
This can be extremely empowering for people if it results in them being able to make decisions about how money is spent without having to go through gateways and governance structures to get budget approvals.
It does however require significant change in system and governance processes to ensure every item of expenditure is tagged so it can be budgeted for, and then guardrails put in place so that people don’t overspend. Ideally, tools developers are using can be set up so a budget can’t be exceeded, and if so, relevant team members are immediately notified.
In an Agile sense, this is a demonstration of continuous development, and in a FinOps sense it is continuous cost control, while in a project management sense, it’s continuous governance. The biggest watch-out in this approach is if your processes are not set up correctly to detect errors or problems, as things can go off the rails very quickly.
This type of decentralisation is easiest to do in new companies set up from scratch. It’s more complex for existing organisations to make the transition because financial and governance processes take time to change. It is however becoming more important for businesses to be able to push a greater amount of decision making to frontline roles. The advent of cloud, increasing customer expectations, and the complexity of today’s operating environment, mean no one person or team can hold all the knowledge in their heads. Not even the wizards in IT.
If you’re looking to better understand and predict your cloud costs, our team is here to help you get under the hood and get on the path to continuous reporting and governance.
Daniel Parsons leads Leaven’s consulting team and champions the transformative power of technology. Leveraging his 25 years of information technology experience, Daniel collaborates closely with c-suite stakeholders to understand organisational needs and create impactful change.