What are unit costs in FinOps?
FinOps (financial operations) is a solution for controlling operational costs in a cloud environment. FinOps’ major purpose is to assist cross-functional teams inside an organization in maintaining financial accountability for the cloud services they utilize.
Unit costing is an incredibly precise FinOps technique for planning purposes in the context of budgeting and forecasting, greatly supplementing the desired motivation of cost reduction.
Billing dashboards are available from all of the major cloud providers, including Amazon Web Services (AWS), Microsoft Azure, and Google Cloud Platform. They provide you with a rundown of the services you utilize, allowing you to evaluate the total cost of your cloud usage. Unfortunately, these billing dashboards tend to simply give high-level information. In some cases, an overview of total cloud spending might be valuable, but the quantity of information it can give is limited. You need to go down to the unit prices if you want to understand where your cloud expenditure is going and what it’s doing (or not).
Ways of measuring unit costs
Unit costing is sometimes more difficult to quantify due to the nature of cloud computing. Shared resources, such as databases and containerized workloads, in particular, can make determining unit costs difficult. The degree to which each organization and each individual workload adapt themselves to unit costs may also vary greatly. Regardless, there are ways to help you gain visibility and insights by utilizing the following methodologies.
Maturity Assessment Analysis
Crawl: Compare the amount of money spent on the cloud for a certain application to the overall income generated by that application or service (e.g., cloud spend is 9 percent of revenue)
Walk: Connect a product’s or service’s outputs to a corresponding unit of activity (e.g., each API call charges $0.01).
Run: Calculate the cost of a revenue-generating activity (e.g., each transaction costs $0.05).
These forms of measurement provide you with a statistical based unit focused view, that can help make key decisions and provide insights into unnecessary expenditure. Conducting a maturity assessment by measuring the effectiveness rate of your FinOps Domains and Capabilities is a great way to get started.
Functional Uses
Business/Product: Make judgments on what improvements can be made to the application based on the business value it provides leveraging unit cost.
Finance/FinOps: Be able to assess whether spending is rising due to waste or company growth, and whether cost differences are positive or negative.
Engineering/Ops: Separate increases in usage from increases in rate to identify the best design adjustments to make, and possibly even switch to a more premium service when related income grows.
Executive role: Focus on increasing the bottom line rather than determining how efficient the staff is. Understand how cloud decisions influence margins and subsequently, profitability.
Tagging and Collaboration
System logs, as well as reports that describe expenditure breakdowns, usage indicators, and performance statistics, are your source data for computing unit costs. These may then be broken down into their constituent parts and re-consolidated into applicable units like cost per user, cost per transaction, or cost per source of income if they’re used correctly.
The challenge is to make sure that all of the relevant reports are tagged in such a manner that they relate back to a deployment item, either directly or through a chain. For example, each tag might be linked to a component of a deployment item, and these components could then be linked back to the deployment item and used to determine unit prices.
When using more than one cloud environment, you will need to become familiar with the tagging rules in each one so you can implement a single tagging system that works across all of them. It must also allow you to calculate the unit cost of any given project, product, or service, even if that deployment item works across multiple clouds and therefore multiple pricing models.
By effectively attaching prices to deployment items (and their components), both finance and technical personnel receive the same information presented in a fashion that makes sense to both parties, facilitating meaningful analysis and debate from both financial and technical perspectives.
Another well-established practice is to follow along the 6 FinOps Principles that provide organizations with an alignment of financial sustainability and team accountability.
Benefits and Impact
Accuracy – The estimates’ precision and consistency are significantly greater when compared to overview analysis. Cost estimates are based on multiplying units by the price, and are thus firmly anchored in reality.
Insight – When estimates for unit costs to manufacture a unit of product or service output are developed, a basic issue is usually always raised: Why is the anticipated number of units necessary at the current level? Almost usually, the query is followed by the inevitable follow-up: Could the number of units be reduced?
Forecast Profits – Because it gives a straightforward, detailed picture of your company’s profitability on a per-unit basis, understanding unit costing may help you predict how successful your organization is (or when it is likely to attain profitability).
Optimization Possibilities – Understanding unit pricing may also assist determine if a product is expensive or undervalued, offering data to imply whether it is overpriced or undervalued. Such data may assist an organization in identifying effective product optimization tactics as well as deciding if marketing costs like creating an explainer video are worthwhile.
Another upcoming concept, Augmented FinOps automates financial governance, budgeting, and cost optimization through AI and ML practices.
Conclusion
Unit costs can assist businesses in improving their product and service mix, giving additional granularity in per-unit financial forecasts, and facilitate showback and chargeback modelling. Even more important, unit costing is the first step toward activity-based management, which is a vital step toward achieving long-term, successful company outputs and outperforming rivals.
