Cost Modeling in the Cloud

In the previous chapter, we looked extensively at the FinOps processes and how we can implement these in an organization. We also looked at how costs are generated in the various cloud platforms by evaluating the provisioning of resources. Now we have to make sure that costs are allocated in the right way and that they are booked at the right level in the organization.

In this chapter, we will learn how to develop and implement a cost model that allows us to identify cloud costs (showback) and allocate (chargeback) costs to the budgets of teams or units. Before we do that, we must understand the principle of cost coverage, the types of costs in the cloud, and how rates are set by providers.

In this chapter, we’re going to cover the following topics:

• Evaluating the types of cloud costs
• Building a cost model
• Working principles of showback and chargeback

Evaluating the types of cloud costs

Before we get to define a cost model, we must understand what types of costs we will be faced with in the cloud. It’s important to have teams understand how costs are being allocated and to have a centralized, controlled, and consistent cost allocation strategy.

Cost coverage

A typical cloud deployment model is pay-as-you-go (PAYG) and that’s OK when the usage of the cloud is limited. Most enterprises will have larger landscapes in the cloud, including critical systems for their business. The company would want to have the guarantee that workloads will always be available, and that capacity is always available. For this, there is the principle of reserving capacity. Reserving capacity—or pre-committing—will bring companies benefits. The first benefit is that they’re sure that capacity is reserved for them and thus available for a longer, contracted period.

The other benefit is that they can have discounts...

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In the previous chapter we discussed the principles of cloud financial management or FinOps. Now we know how we can provision workloads and track costs of these workloads, it’s time to take the next step and professionalize our FinOps practice. We will learn to mature cloud financial management by studying various maturity models.

This chapter is about the transformation to managed FinOps in our organization, by setting up a FinOps team that has a major task in the adoption of the FinOps principles. Adoption starts with awareness. Hence, we will learn how to integrate FinOps principles in a cost aware design process, making developers and engineers aware of the fact that every decision they take and every resource they implement has a financial consequence. That’s OK, as long as the implemented solutions add to business value. That’s the key theme of FinOps.

In this chapter, we're going to cover...

Setting up a FinOps team

For starters: FinOps is not about saving money in cloud, but about making money with cloud. Hence, it’s tightly integrated into business planning and the forthcoming architecture. FinOps has proven to be a must to stay in control with the entrance of cloud and DevOps. The challenge is evident: where engineers used to order physical equipment and had to go through a financial approval process to get that equipment delivered to a data center, now they can get that virtual equipment with a click of a button. However, although the equipment is virtual and basically just a piece of code deploying a resource in the cloud, it still costs money. The main difference is that companies shift from CAPEX to OPEX.

CAPEX – capital expenditure – concerns upfront investments; for example, in buying physical machines or software licenses. These are often one-off investments, of which the value is depreciated over an economic life cycle. OPEX – operational...

Using Maturity Models for FinOps

In Chapter 3, Starting the Multi-Cloud Journey we discussed the generic maturity model as guidelines for an assessment, defining how mature an organization is and what its ambition is. We used the Capability Maturity Model (CMM) as an example. It’s shown once more in the following diagram.

Figure 11.1 – The Capability Maturity Model (CMM)

We can plot this model on cloud financial operations too. The principles are the same, where on the initial level processes are poorly controlled and outcomes – in financial terms this would refer to costs - are highly unpredictable. Level 5 is the highest level where organizations can focus on improvements since projects and management are well defined, processes are under control and costs are predictable and measurable.

Let’s look at another maturity model that will help in establishing financial management. This model is inspired by an originally developed model by Gartner.

Figure 11...

Introducing cost aware design

This book and even this specific chapter, started with the observation that implementing cloud solutions must add value to the business. It’s the most important principle to keep in mind when we’re discussing financial operations. FinOps is not about cutting costs, but about adding value using cloud technology. But inevitably, we will have to deal with costs. Cloud simply doesn’t come for free.

Hence, we need to know what the costs are when we design for cloud. Next, we need to identify risks, since these will also inflict costs when risks materialize. These can be direct costs, but also costs that help us mitigating the risks. Lasty, we must define the expected benefits when we design and implement a solution. Costs, risks, and benefits will facilitate the calculation of the Total Cost of Ownership (TCO) and the Return on Investment (ROI), as shown in the diagram.

Figure 11.3 – Enterprise TCO/ROI model

The benefits are all about...

Transformation to managed FinOps in multi-cloud

In terms of maturity, we have reached the level of understanding financial management in cloud and how we can set up cost aware design process. But our challenge is multi-cloud. We will likely have to deal with more than one cloud platform, what makes cloud financial management even more complicated. Still, we can use the FinOps principles to get to managed multi-cloud financial operations.

The FinOps Foundation provides a comprehensive model for managed operations, using three stages: inform, optimize, and operate. We will recognize this from the model that we showed in Figure 11.2.

This is a continuous cycle and part of the entire cloud operations. In multi-cloud this implies that this cycle must be fulfilled for every cloud platform that we are utilizing. In multi-cloud we need a single pane of glass, covering all the platforms in our landscape.

First, let’s explore the three phases in the cycle:

• Inform: this phase is about visibility...