September 13, 2022 · 5 min read
Inflation has persisted at 40-year-highs for several months, and consumers are reducing spending as a result. Businesses aren't only suffering from weakened consumer demand, however. They're also finding it more difficult and costly to produce goods as inflation heats up.
In fact, while consumers are facing 8-9% inflation, businesses are grappling with far higher rates. According to the latest data from an Amalgam Insights report, IaaS (infrastructure-as-a-service) and PaaS (platform-as-a-service) expenses have increased almost 50% per year globally since 2019.
From chip shortages to an extremely tight job market, there are several factors driving up production costs. Businesses need to find ways to increase efficiency and reduce expenses in order to protect their bottom lines. This is where FinOps comes in.
FinOps, a term coined at the Cloud Economic Summit, is an investment-minded approach to financial management in the cloud age. This is in contrast to the old sunk cost mindset, which views IT spending as a necessary evil. With cloud costs soaring, the FinOps approach is more important than ever.
There are several ways to practice FinOps in order to reduce cloud costs. One is through RI (reserved instances). RIs are long-term contracts that are significantly cheaper than spot pricing. My company, Usage.AI, offers an RI marketplace that solves the lock-in issues with traditional RIs.
Beyond cost-savings, however, the FinOps approach can also help businesses increase the speed of innovation, deliver greater value to business units, and decrease technical debt. As a result, businesses that adopt a FinOps mindset will be better equipped to compete in today's economy.
In the traditional model, IT was often seen as a hindrance to innovation. However, in the FinOps model, IT is seen as an enabler of innovation. By constantly monitoring and optimizing spend, enterprises can free up resources that can be reinvested into research and development.
This is especially true for enterprises that are able to take advantage of cloud-native technologies. The cloud provides developers with access to powerful tools that can help them accelerate the innovation process. For example, developers can now use AI and machine learning services from major providers like Amazon, Google, and Microsoft to build smarter applications.
These services were once only available to large organizations with the resources to invest in them. However, by making them available on the cloud, they’re now accessible to any organization that wants to use them. As a result, we’re seeing a surge in innovation as more and more organizations are able to quickly adopt new technologies.
Another major benefit of FinOps is its ability to help enterprises deliver more value to business units. In the traditional model, IT was often siloed from other parts of the organization and more easily seen as a cost center. However, in the FinOps model, IT is integrated into the business and viewed as a key driver of value creation.
By aligning IT spending with business objectives, enterprises are able to ensure that each dollar spent on IT delivers maximum value back to the business. This not only helps businesses save money, but also allows them to invest money in areas that will have the biggest impact on their bottom line. As a result, those who embrace FinOps are able to deliver more value to their shareholders and customers alike.
Finally, one of the less obvious benefits of FinOps is its ability to help organizations retire or decrease technical debt. The traditional model led many organizations to take on massive amounts of technical debt, resulting in bloated systems that were costly to maintain and difficult (if not impossible) to upgrade without incurring even more debt.
The magnitude of this problem is difficult to overstate. CIOs surveyed by McKinsey estimated that tech debt amounts to 20 to 40 percent of the value of their entire technology estate before depreciation. And 60 percent of those CIOs felt their organization’s tech debt had risen over the past three years.
If left unchecked, this technical debt can have a stranglehold on an organization, preventing it from being agile and innovative. In fact, Stripe estimates technical debt alone has a $3 trillion impact on global GDP.
This is a problem that needs to be addressed urgently. Developers need to be given the time and resources necessary to pay down the debt so that it doesn’t continue to compound and escalate out of control.
Organizations also need to take a hard look at their systems and processes and determine where they can make changes to reduce the amount of technical debt they’re taking on in the first place. This will require rethinking how work gets done and making some tough decisions about what is truly essential and what can be let go.
It won’t be easy, but addressing technical debt is critical if we want to avoid stifling innovation and crippling our organizations in the long run.
In the FinOps model, IT is seen as a strategic asset that needs to be continuously optimized. Consequently, organizations are motivated to invest in technical capabilities that will provide long-term value, rather than simply taking on more debt. In addition, the automation and monitoring capabilities of FinOps can help organizations detect and fix problems before they become expensive, meaning that they are less likely to incur new debt in the first place.
While businesses may turn to FinOps to fight inflation in the near term, the benefits of the FinOps approach extend far beyond cost savings. In fact, businesses that embrace FinOps will be better positioned to compete in today’s economy, regardless of what happens with inflation.
Those who are able to increase the speed of innovation, deliver more value to business units, and decrease technical debt will be the ones who come out on top. So if you’re looking for a way to give your business a competitive edge, FinOps is a great place to start.
Frederik is a content marketing consultant with experience across startup, mid-market, and enterprise companies, helping them to develop and execute long-term content strategies.