Defining Terms in FinOps: Understanding Key Concepts

Financial Operations, or FinOps, is a framework for managing cloud costs and optimizing cloud spending. As organizations increasingly rely on cloud computing, the need for effective FinOps practices has grown. A range of terms and concepts have emerged to describe the key elements of FinOps. In this blog post, we will define some key terms in FinOps, enabling organizations to understand better and implement effective FinOps practices.

Refer main article FinOps Explained for other related blogs.

Cost Visibility

Cost visibility refers to the ability of organizations to gain clear insight into their cloud costs, enabling them to track and analyze their cloud spend. Cost visibility is a critical component of FinOps. It enables organizations to identify areas of inefficiency or waste, optimize their resource usage, and achieve better value from their cloud investments.

Cost Allocation

Cost allocation refers to assigning cloud costs to the appropriate business units, teams, or projects. This enables organizations to track better, manage their cloud spend and allocate costs to align with business priorities.

Chargeback

Chargeback refers to charging business units, teams, or projects for the cloud resources they consume. Chargeback enables organizations to ensure that stakeholders are accountable for their cloud spend and can help to promote better cost control and resource utilization.

Rightsizing

Rightsizing refers to matching cloud resources to the actual needs of the workload rather than overprovisioning or underprovisioning resources. By rightsizing instances, organizations can achieve better resource utilization and reduce cloud costs.

Auto-scaling

Auto-scaling refers to automatically adjusting the number of cloud resources based on changes in workload demand. By implementing auto-scaling, organizations can ensure they have the right resources to handle workload demands while minimizing costs associated with underutilized resources.

Cloud Governance

Cloud governance refers to the policies, processes, and controls organizations implement to ensure that their cloud operations align with broader governance requirements, such as security, compliance, and risk management. Cloud governance is a critical component of FinOps, as it enables organizations to ensure that their cloud investments are aligned with their overall business objectives and risk tolerance.

Cloud Optimization

Cloud optimization refers to optimizing cloud resource usage to achieve better value from cloud investments. This can include rightsizing, auto-scaling, and identifying areas of inefficiency or waste. Organizations can reduce cloud costs by optimizing cloud resource usage while improving overall performance.

Wasted usage

Wasted usage refers to an organization paying for cloud resources that need or are being used efficiently, resulting in unnecessary costs.

Oversized/undersized

Oversized/undersized in FinOps refers to cloud resources that are larger or smaller than necessary, resulting in unnecessary costs or impacted performance. Implementing rightsizing practices can help optimize resources for workload demands, leading to better cost control and performance.

Workload management

Workload management in FinOps refers to optimizing cloud resources to match workload demands. This involves implementing practices such as auto-scaling, rightsizing, and workload prioritization to ensure that cloud resources are used efficiently and effectively.

On-demand rate

The on-demand rate in FinOps refers to the price cloud service providers charge for on-demand access to cloud resources. This rate can vary based on the resource type, location, and availability, impacting overall cloud costs.

Rate reduction

Rate reduction in FinOps refers to the practice of reducing cloud costs by optimizing resource usage and negotiating lower rates with cloud service providers. This can involve rightsizing, using reserved instances, and leveraging volume discounts.

Cost avoidance

Cost avoidance in FinOps refers to avoiding unnecessary cloud costs by identifying and addressing potential cost drivers before they result in actual costs. This can involve proactively implementing resource tagging, regular cost monitoring, and forecasting to manage cloud costs.

Cost savings

Cost savings in FinOps refer to reducing cloud costs through optimizing resource usage, implementing cost-effective purchasing strategies, and identifying and eliminating wasteful spending. This can involve rightsizing, using reserved instances, and negotiating lower rates with cloud service providers.

Savings realized

Savings realized in FinOps refers to the actual cost savings achieved by implementing cost optimization practices. This can be measured by comparing actual cloud costs to budgeted costs and can be used to demonstrate the effectiveness of FinOps practices in achieving better value from cloud investments.

Savings potential

Savings potential in FinOps refers to the estimated cost savings achieved by implementing cost optimization practices. This can be determined by analyzing current cloud usage patterns, identifying areas of inefficiency or waste, and implementing practices such as rightsizing and resource optimization to achieve better value from cloud investments.

Commitment-based discounts

Commitment-based discounts in FinOps refer to discounts offered by cloud service providers to customers who commit to using a certain level of cloud resources for a specified period. These discounts can help organizations achieve significant cost savings and can be leveraged through purchasing strategies such as Reserved Instances or Savings Plans.

Commitments unused/unutilized

Commitments unused or unutilized in FinOps refer to cloud resources that have been reserved by an organization but need to be fully utilized. This can result in lost cost savings potential, as the organization may still be paying for the reserved resources even though they have yet to be fully used. To address this, organizations can implement practices such as regularly monitoring resource usage and adjusting commitments as needed.

Commitment waste

Commitment waste in FinOps refers to an organization’s commitment to purchasing a certain level of cloud resources but is not fully utilizing those resources. This can result in unnecessary costs and lost cost savings potential. To address commitment waste, organizations can regularly monitor resource usage, adjust commitments as needed, and implement practices such as rightsizing and resource optimization to improve resource utilization.

Covered usage

Covered usage in FinOps refers to the cloud resource usage covered by a specific cost-saving mechanism, such as a Reserved Instance or Savings Plan. Covered usage can help organizations achieve better cost control and cost savings by ensuring that they are fully utilizing their cost-saving mechanisms.

Coverable usage

Coverable usage in FinOps refers to the amount of cloud resource usage that a specific cost-saving mechanism, such as a Reserved Instance or Savings Plan, could cover. Identifying coverable usage can help organizations optimize their cost-saving mechanisms to achieve better value from their cloud investments.

Amortized costs

Amortized costs in FinOps refer to spreading out the upfront cost of a Reserved Instance or Savings Plan over the commitment term. This can help organizations achieve better cost control and cost savings, as the upfront cost of the commitment is spread out over time, reducing the impact on the organization’s cash flow.

Fully loaded costs

Fully loaded costs in FinOps refer to the total cost of a cloud resource, including all associated costs such as data transfer fees, storage costs, and network costs. Understanding fully loaded costs are important for organizations to accurately track and manage their cloud spend and identify areas of inefficiency or waste.