Advancing from Beginners: Cloud Cost Management Frameworks and Practices

Here comes the killjoy” must have been the most common welcome I received during that time in my career: when I started delving into and learning about cloud cost governance, a subject nobody liked, feared by managers and CTOs, loved by the executive board to ask about but the finance team couldn’t answer or explain. Relatable? With this realistic introduction, I welcome you to the Fourth article in the “Cloud Cost” series, featuring tips and configurations for cost governance and optimization.

If you want to check the sequence of articles, join us at Cloud cost optimization: How do I do it?

More than 50% of organizations don’t have clear measures of success assigned to their cost management initiatives, say’s Gartner*. Despite overwhelming evidence that effective cost management supports enterprise performance, many organizations have yet to establish key drivers of success in strategic cost management. For this, you have some steps and choices that I will try to clarify in this article.

As I delved deeper into this area, I encountered the complexity of cloud billing, business models, asterisks, and information scattered across hundreds of places. That’s when I discovered the major frameworks: FinOps, Cloud Financial Management, and Well-Architected. And which one is best for governance? It became evident that understanding the financial aspect, specifically in the context of the cloud, was crucial for choosing among them and even for comprehending and applying them. This journey led me to learn about each of these frameworks and available tools that facilitate the excellent execution of cloud financial governance.

Today, I would like to share some of the knowledge I’ve gained to show how we can teach and engage our colleagues in this process, regardless of their field, and, as the pinnacle of quotes goes, to quote Sir Isaac Newton, “If I have seen further, it is by standing on the shoulders of giants.” These giants are cloud financial governance experts with dialect, laws, and pricing models.

We invite you to dive into this comprehensive guide on Kubernetes cost management, where you will gain valuable insights into key principles, effective strategies, essential tools, and the numerous benefits of implementing a robust cost management framework. Whether you are new to Kubernetes or seeking to optimize your existing deployment, this article will provide the knowledge and tools to navigate the complex world of managing costs in the cloud. Let’s embark on this cost-saving journey together!

Essential things you have to know

Managing costs is like playing a game of financial Jenga. You carefully stack your budget blocks, hoping to achieve those cost-saving targets. But if your cost initiatives are like wobbly blocks hastily thrown in disaster strikes! Your tower crumbles and your savings vanish faster than free samples at a grocery store. That’s why cost management is vital. It’s about strategically placing each block, setting realistic targets, and making smart moves to keep your tower steady and your savings growing. Remember, in the game of cost management, clear measures of success are your secret weapon to build a sturdy financial fortress! Just be careful not to pull out the wrong block and collapse your budget—no one wants that kind of financial chaos!

Only 43% of leaders achieve cost-saving targets in the first year of cost reduction. Even fewer (only 11%) sustain cost savings for three consecutive years, says Gartner*. The problem? Poorly designed, ad hoc cost initiatives. Our research shows that before the pandemic, most organizations used multiple success metrics, but the most popular (used by 66%) defined success in terms of achieving specific predetermined cost savings. Best-in-class organizations don’t think of cost management this way; they see it as a continuous discipline. They set realistic cost targets, avoid across-the-board cost cuts in favor of strategic divesting, and drive behavior change to support a climate of cash consciousness and smarter spending across the organization. To do this, start by defining clearly what success looks like. Identify clear targets for your cost management initiatives — savings goals or, better yet, increasing cost productivity/yield. If you have clear measures of success, you are 2.6 times more likely to be effective at cost management.

“Cost management” and “cost control” differences

You may hear terms like “cost management” and “cost control” interchangeably. While they are heavily related and equally important, a subtle distinction might be worth knowing whenever you discuss them with your teams.

Imagine managing your finances. Cost management is like creating a budget plan, estimating expenses, and ensuring you have enough funds to cover them. It involves careful planning and tracking of your spending throughout the entire process. On the other hand, cost control is like monitoring your expenses as you go along. It focuses on comparing your actual spending to the planned budget, identifying deviations, and taking corrective actions to avoid unexpected financial challenges. While cost management sets the foundation, cost control ensures that you stay on track and adjust as needed to remain within your financial limits.

By comparison, cost control mainly deals with projects during their execution phase and relies on cost management practices for success. Having planners work together to achieve proper budgeting is how cost controls work. When discussing cost controls, business owners first put down a “baseline” and then measure the variance between it and the actual cost, taking corrective action to minimize unexpected spikes.

Think of costs in terms of yield, not absolutes.

Imagine you’re in a garden and must prune your plants to ensure their healthy growth. Instead of randomly cutting branches and leaves, you strategically assess each plant’s potential and trim them accordingly. Similarly, cost management is like pruning your organization’s expenses. Instead of making blanket cuts without differentiation, focusing on increasing productivity and yield is more effective. Just like nurturing the right branches leads to more abundant blooms, optimizing costs in the areas that drive positive outcomes cultivates value and growth for your business. So, put on your gardening gloves and trim with purpose!

When organizations focus solely on predetermined cost savings as the measure of success in their cost management efforts, it can lead to counterproductive outcomes. Simply meeting the target of reducing costs without considering the affected areas can have negative consequences. Indiscriminate cuts can penalize the most efficient parts of the organization and undermine valuable sources of value, such as innovation projects. This, in turn, demotivates these important groups and puts them in a difficult position to achieve their own performance goals.

A more effective approach is to consider a unit of productivity or yield on costs. This means looking beyond just reducing costs in absolute terms and instead focusing on generating greater returns on those costs. While it may result in initially higher costs, the overall gains outweigh the expenses in the long run.

Revenue growth is like the number of customers or sales a business experience over time. It’s similar to a lemonade stand attracting more customers as word spreads about their tasty lemonade or a fruit tree producing more apples, leading to higher sales at a fruit stand. Businesses aim to expand their customer base, increase sales, and improve their offerings to grow revenue.

About Return on Invested Capital (ROIC), imagine you have a piggy bank where you invest your pocket money. Initially, you start with a small amount of money in the bank. As time passes, you continue adding more money to the bank, which grows through interest and investment returns. The key idea is that you want your piggy bank to generate more money than you initially invested. If your piggy bank consistently provides higher returns than the amount you put in, you have a high ROIC. In the business world, ROIC measures the profitability and efficiency of a company’s investments. Like a growing piggy bank, businesses strive to maximize their ROIC by making smart investments that generate higher returns than the capital invested, leading to increased profitability and financial success.

Executive leaders and their teams should develop a comprehensive, value-based perspective on different business lines to make informed decisions. This will help determine the role of each line within the organizational strategy and provide a portfolio view that enables them to avoid cutting into areas that drive positive outcomes. By taking this approach, organizations can achieve sustainable success by optimizing costs while fostering growth and innovation.

Now, how can I choose the adequate framework for my scenario?

Probably I’m repeating myself in this article. Still, organizations that adopt a consistent cost management framework across functions are better equipped to navigate budget cuts and optimize costs during times of crisis, such as the 2020 pandemic. And are better to do governance and to generate value for the companies from IT procedures and governance. This is because a shared understanding is established within the organization regarding which costs should be reduced and streamlined and which prices are vital for driving strategic goals.

By implementing a systematic and rigorous approach to cost management, these organizations can defend their budgets more effectively and showcase greater transparency to stakeholders. However, it is surprising that only 35% of surveyed organizations currently utilize such frameworks, missing out on the advantages they provide.

To be effective, a cost management framework should provide a reliable set of cost categorizations that can be consistently applied in budgeting, target setting, and cost reporting. This ensures a cohesive approach and facilitates informed decision-making throughout the organization.

That is why it is important that there is a good choice of frameworks and that everyone in the company adopts them. Thus, The teams will be able to interact under the same optics and apply good practices together. Based on this information, I’ll show you the more known frameworks and how to certify yourself. After that, you must answer the questions before deciding your use. And, of course, a comparison of these frameworks and their principal decision drivers consolidated.

Total Cost Management (TCM)

Total Cost Management (TCM) is a comprehensive approach to managing costs throughout the life cycle of a project or asset. It encompasses various disciplines and techniques to plan, estimate, control, and optimize costs effectively. The essential topics in Total Cost Management include:

Cost Estimating: Developing accurate cost estimates for the different phases of a project or asset, considering factors such as labor, materials, equipment, and overhead costs.
Cost Planning: Creating a detailed cost management plan that outlines the cost baseline, cost control procedures, and strategies for cost optimization.
Cost Control: Monitoring and controlling costs during project execution, comparing actual costs against the planned budget, identifying variations, and implementing corrective actions.
Earned Value Management (EVM): A technique for measuring project performance by integrating scope, schedule, and cost. EVM provides insights into the project’s progress and helps forecast final costs.
Risk Management: Identifying and analyzing potential risks that could impact project costs, developing mitigation strategies, and incorporating risk contingencies into the cost estimates.
Value Engineering: A systematic approach to optimizing the value of a project by analyzing its functions, materials, and processes to identify opportunities for cost reduction without sacrificing quality.

To certify yourself in Total Cost Management, you can pursue certifications offered by professional organizations such as the Association for the Advancement of Cost Engineering (AACE) International. AACE offers certifications like the Certified Cost Professional (CCP) and the Certified Estimating Professional (CEP) that validate your knowledge and expertise in cost management practices. These certifications typically require meeting experience requirements, passing an examination, and adhering to professional ethics and continuing education. Know more on the TCM official site.

Azure Cost Management and Billing

Azure Cost Management and Billing is a comprehensive solution provided by Microsoft Azure to help organizations manage and optimize their cloud costs. It enables users to monitor and control their Azure spending, track usage, analyze cost trends, and implement cost-saving measures. The essential topics in Azure Cost Management and Billing include:

Cost Tracking and Reporting: Azure Cost Management provides detailed visibility into your Azure usage and costs, allowing you to track spending by resource, service, department, or project. It offers various reports and dashboards to analyze cost trends, identify cost drivers, and make informed decisions.
Budgeting and Forecasting: With Azure Cost Management, you can set budgets and alerts to monitor spending against predefined thresholds. It helps you forecast future costs based on historical data, enabling proactive cost management and preventing unexpected overages.
Cost Optimization: Azure Cost Management offers insights and recommendations to optimize your cloud spending. It identifies idle resources, suggests rightsizing opportunities, and provides guidance on cost-effective purchasing options like Reserved Instances and Azure Hybrid Benefit.
Showback and Chargeback: Azure Cost Management enables organizations to implement show back or chargeback mechanisms, allowing them to allocate costs to departments or projects and promote accountability and transparency in cloud spending.

To certify yourself in Azure Cost Management and Billing, Microsoft offers the Azure Administrator Associate certification, which covers various aspects of Azure management, including cost management. This certification validates your skills in implementing, managing, and monitoring Azure resources, including cost-related tasks. To earn the certification, you must pass the AZ-104 exam, which tests your knowledge of Azure services, resource management, security, and cost management practices. Microsoft also provides learning resources and documentation to help you prepare for the exam and enhance your understanding. Know more about Azure Cost Management and Billing.

Cost Optimization Pillar – AWS Well-Architected Framework

The Cost Optimization pillar is one of the five pillars of the AWS Well-Architected Framework, which provides best practices for building and operating reliable, secure, efficient, and cost-effective applications on AWS. The essential topics within the Cost Optimization pillar include:

Cost-Aware Architecture: Designing applications and systems with cost in mind, considering factors such as resource utilization, scalability, and elasticity. This involves choosing the right AWS services, utilizing managed services, and optimizing resource allocation.
Right Sizing: Ensuring that resources are provisioned to match the workload demands accurately. Rightsizing involves monitoring resource utilization, identifying over-provisioned or underutilized resources, and making adjustments to optimize costs.
Matching Supply and Demand: Optimizing costs by aligning resource supply with demand. This includes leveraging AWS services like Auto Scaling, AWS Lambda, and Spot Instances to adjust resources based on workload fluctuations dynamically.
Cost-Effective Data Storage: Choosing appropriate data storage options to optimize costs. This involves considering data access patterns, durability requirements, and lifecycle management to select the most cost-effective storage solutions.
Optimizing Data Transfer: Minimizing data transfer costs by optimizing data flows between AWS services and regions. This includes using AWS Direct Connect, AWS Data Transfer Acceleration, and other techniques to reduce data transfer charges.

AWS offers the AWS Certified Solutions Architect – Associate certification to certify yourself in the AWS Well-Architected Framework. This certification validates your knowledge of architecting and deploying secure and cost-effective applications on AWS, including the principles covered within the Cost Optimization pillar. To earn the certification, you must pass the SAA-C02 exam, which tests your understanding of AWS services, architectural best practices, and cost optimization concepts. AWS provides training resources like exam guides, sample questions, and official practice exams to help you prepare for the certification exam and gain a comprehensive understanding of the Cost Optimization pillar and other aspects of the Well-Architected Framework.

Google Cloud Cost Management

Google Cloud Cost Management encompasses a set of tools, practices, and strategies to help organizations optimize and control their costs in the Google Cloud Platform (GCP) environment. The essential topics within Google Cloud Cost Management include:

Cost Visibility and Reporting: Gaining insights into your cloud costs through detailed usage reports, cost breakdowns by service, project, and resource, and forecasting future costs. This helps you understand where your costs are coming from and identify areas for optimization.
Cost Optimization Strategies: Implementing cost optimization techniques such as rightsizing virtual machine instances, leveraging sustained usage discounts, using preemptible instances, and utilizing managed services to reduce operational overhead and optimize costs.
Budgeting and Forecasting: Setting budgets and creating cost forecasts to track and control your cloud spending. This allows you to allocate resources effectively, identify cost overruns, and take corrective actions to stay within your budget.
Cost Allocation and Showback/Chargeback: Allocating costs to different departments, teams, or projects for better cost accountability and transparency. This helps organizations understand their cloud spending patterns, enabling show-back or chargeback mechanisms to communicate costs to internal stakeholders.
Cost Anomaly Detection: Identifying unusual spending patterns or unexpected cost increases through automated anomaly detection mechanisms. This allows you to investigate and address potential issues promptly.

To certify yourself in Google Cloud Cost Management, Google Cloud offers the Professional Cloud Architect certification. This certification validates your knowledge of designing, developing, and managing secure, scalable, and cost-effective solutions on the Google Cloud Platform, including cost optimization strategies and practices. To earn the certification, you must pass the Professional Cloud Architect exam, which covers various aspects of Google Cloud services, architectural best practices, security, networking, and cost management. Google Cloud provides exam guides, sample questions, and online training resources to help you prepare for the certification exam and comprehensively understand Google Cloud Cost Management and other relevant topics.

FinOps

FinOps, short for Financial Operations, is a methodology and practice that combines financial management, cloud technology, and cross-functional collaboration to optimize cloud spending. It focuses on creating a financial accountability and transparency culture within cloud services organizations. The essential topics within FinOps include:

Cost Visibility and Transparency: Gaining a clear understanding of cloud costs through detailed cost breakdowns, resource tagging, and cost allocation. This allows organizations to identify cost drivers, track spending, and allocate costs to different teams or projects.
Cost Optimization: Implementing strategies and best practices to optimize cloud spending, such as rightsizing resources, leveraging reserved instances or savings plans, automating cost management processes, and optimizing architecture for cost efficiency.
Financial Accountability: Establishing processes and governance frameworks to ensure financial accountability across teams and departments. This involves setting budgets, implementing cost controls, and fostering a culture of cost awareness and responsibility.
Collaboration and Communication: Facilitating cross-functional collaboration between finance, operations, and engineering teams to align cloud spending with business objectives. Effective communication and collaboration enable shared understanding, decision-making, and continuous improvement in cost management.
Tooling and Automation: Leveraging specialized tools and automation to streamline cost management processes, generate insights, and drive data-driven decision-making. These tools help organizations track costs in real-time, optimize resource usage, and identify cost-saving opportunities.

To certify yourself in FinOps, the FinOps Foundation offers the FinOps Certified Practitioner (FOCP) certification. This certification validates your understanding of FinOps principles, best practices, and tools. It covers cloud financial management, economics, cost optimization, governance, and collaboration. The FOCP certification exam tests your knowledge and practical application of FinOps concepts. The FinOps Foundation provides study materials, online courses, and resources to help you prepare for the certification exam and develop the necessary skills to effectively implement and manage FinOps practices.

Other frameworks

Cloud Cost Governance Framework establishes policies and processes to govern costs in cloud environments. It covers defining roles and responsibilities, implementing cost controls, setting budget limits, and creating mechanisms for monitoring and reporting.

Cloud Cost Optimization Framework: This framework specifically focuses on optimizing costs in cloud environments. It involves identifying and implementing best practices to reduce unnecessary spending, optimize resource usage, select appropriate pricing models, and leverage cloud provider benefits such as continuous usage discounts or reserved instances.

Cloud Financial Management Framework: This framework encompasses the financial management of cloud resources, including cost forecasting, budget planning, expense tracking, cost allocation by department or project, and financial reporting. It aims to provide effective financial visibility and control over cloud spending.

Cloud Cost Governance and Optimization Framework: This framework combines cost governance and cost optimization elements into a single model. It addresses defining policies and processes to control costs in cloud environments and implementing strategies to optimize spending and maximize the value of cloud investments.

Each framework may have its approach and specific focus. Still, they aim to provide guidelines and best practices to help organizations manage costs in their cloud environments efficiently and effectively. Evaluating your organization’s needs and objectives is important to choose the most suitable framework and tailor it to your specific circumstances. Let me know if you want to know more about these frameworks and their practices.

After this lot of information, how do I do to choose one?

Choosing the right cost governance framework is crucial for organizations operating in cloud environments. With the variety of frameworks available, it’s essential to compare and select the most adequate one based on your specific needs and strategic goals. Here are the principal motives for comparing and choosing the right framework:

Alignment with objectives: Each framework has its focus and approach to cost governance. By comparing frameworks, you can identify which aligns most closely with your organization’s objectives and priorities. Whether your goal is cost optimization, budget control, or resource allocation, choosing a framework that addresses your specific needs will enhance its effectiveness.
Scope and coverage: Different frameworks may have varying levels of coverage and depth in addressing cost governance aspects. By comparing them, you can assess which frameworks provide comprehensive coverage of the areas that matter most to your organization. This allows you to implement a holistic cost governance strategy encompassing all relevant cloud cost management aspects.
Scalability and adaptability: Cloud environments are dynamic, and your organization’s needs may evolve. Comparing frameworks enables you to evaluate their scalability and adaptability to accommodate future growth and changing requirements. Choosing a framework that can scale with your organization and accommodate different cloud services and platforms will ensure its long-term viability.
Practicality and ease of implementation: Each framework may have its implementation considerations and requirements. By comparing frameworks, you can assess their practicality and ease of implementation within your organization. Consider available resources, expertise, and the effort required to adopt and integrate the framework into your existing processes.
Industry recognition and best practices: Frameworks that align with recognized industry standards and best practices provide added credibility and assurance. Comparing frameworks allows you to evaluate their adherence to these standards and determine which ones have gained recognition and widespread adoption within the industry.
Continuous improvement and support: A framework that encourages continuous improvement and offers ongoing support can significantly benefit your cost governance efforts. Compare frameworks to determine if they have active communities, forums, or resources that facilitate knowledge sharing, provide updates on emerging practices, and offer support when challenges arise.
Relevance to your environment: Evaluate if the framework suits your cloud environment. Consider the cloud provider you use, the types of services and resources you utilize, and the unique characteristics of your business.
Level of detail: Verify if the framework provides detailed guidance, including specific practices, implementation examples, and performance metrics. This level of detail helps you understand how to apply the guidelines practically and measure their effectiveness.
Community support and additional resources: Consider the availability of communities and support forums related to the framework. These platforms can provide insights, experiences, and assistance. Additionally, check for additional resources such as tools, templates, or case studies that can facilitate the implementation and adoption of the framework.
Alignment with recognized standards and best practices: Assess if the framework aligns with industry-recognized standards and best practices, such as the AWS Well-Architected Framework or FinOps guidelines. Alignment with established practices enhances credibility and ensures compliance with industry standards.
Flexibility and adaptability: Determine if the framework is flexible enough to adapt to your organization’s needs. Each organization has unique requirements, and the framework should allow for adjustments or customizations to meet those needs effectively.

By considering these criteria, you can make an informed decision and select a cloud cost governance framework that best suits your organization’s requirements and aligns with your goals for cost management in the cloud. Selecting the most suitable cost governance framework establishes a solid foundation for effective cloud cost management. This ensures your organization can optimize costs, maintain budget control, and make informed decisions to drive financial efficiency in your cloud operations.

The final comparison

And finally – I hope this article is less tedious than the cost management in itself lol – let’s compare this framework based on the previous information. Fewer words, more pictures, let the data talk!

But remember: higher scores often result in more complex frameworks that require cultural and even managerial changes, making implementation challenging for those who are starting. I recommend that you choose the most relevant topics before making this decision and prioritize them accordingly.

In conclusion, understanding and implementing effective cloud cost management frameworks is crucial for organizations aiming to optimize their cloud spending, control costs, and achieve financial efficiency. We have explored various frameworks, including the Cloud Cost Governance Framework, Cloud Cost Optimization Framework, Cloud Financial Management Framework, and Cloud Cost Governance and Optimization Framework. Each framework offers unique perspectives and guidelines tailored to specific cost management aspects.

Whether you are interested in establishing cost governance policies, optimizing cloud costs, managing financial resources, or adopting a comprehensive approach, these frameworks provide valuable insights and best practices. However, this is just the beginning of your journey toward mastering cost management in the cloud.

To delve deeper into this topic, stay tuned for our upcoming article to delve into the fascinating world of cloud cost management. Join us as we explore the heroic techniques to optimize costs, unleash your organization’s potential, and unlock the true power of cloud cost management.

Excelsior!
See ya!

*Gartner Sources: https://emtemp.gcom.cloud/ngw/globalassets/en/insights/documents/driving-business-performance-with-strategic-cost-optimization-e-book.pdf