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Optimizing cloud costs with spend segmentation and chargeback

Originally published on June 25, 2020 at

Many public cloud customers are struggling to control costs, facing common challenges such as budget overruns or a lack of visibility into the drivers of spend. While elasticity in peaks and valleys of usage is a major benefit of a cloud environment, that same flexibility can cause you to incur costs and overrun budgets in advance of organizations' ability to control them. In order to effectively control cloud costs, you need the right combination of measurement and governance tools.

Download the Improving Cloud Cost Transparency and Management guide to learn more.

Eliminate cloud waste by accurately segmenting cloud spend

As practitioners of a relatively nascent discipline, some FinOps professionals are developing basic forms of cloud cost chargeback. Others have implemented automated governance, using software to enforce best practices. However, to truly manage key business metrics such as product or service gross margin, these two practices need to be combined into a holistic approach that integrates chargeback with incentive compensation packages. Implementation of segmentation strategies that accurately trace the cost of resources back to specific departments, products, or services is the first—and most critical—step in this process.

Thankfully, the ability to segment IT spend with granularity is one of the great benefits of cloud computing relative to the comparatively imprecise process of allocating a large block of central IT spend to products or services as an overhead allocation. After cloud spend is completely allocated, organizations achieve the following advantages:

  • Greater transparency into cloud spend: Segmentation makes cloud spend data much more useful to managers who want to identify cost drivers. For example, if you’re responsible for budgeting and forecasting, segmentation can clearly show what areas are driving costs so you can plan accordingly.

  • Ease of management: FinOps practitioners find the process of managing and optimizing their cloud spend is easier when you segment and trace that spend to technical and financial Responsible Parties (RPs). If you’re seeing red all over your monthly cloud bill, thoroughly segmented cloud spend allows you to quickly identify those areas that are creating the most expenses to help you triage budget overruns with greater accuracy and speed.

  • Opportunity to optimize: When you accurately trace costs to individual technical managers, businesses can surface and execute on new optimization opportunities in real time. By relying on technical-performance data (as opposed to financial-cost data), you can often realise these benefits before you significantly exceed your budget.

Learn more about best practices for creating segmentation and chargeback of cloud spend data in the Improving Cloud Cost Transparency and Management white paper.

The end game: Managing profitability

For every FinOps professional, the ability to quickly and accurately manage and measure directly on the gross margin should be the ultimate goal. By creating greater insight into cloud spend through segmentation, business leaders across the firm can better measure and manage product and service profitability and can facilitate far superior governance, budgeting, and forecasting. This is why it’s essential that anyone considering a move to the cloud has a well-developed strategy for segmenting cloud spend. That strategy begins with assembling the right combination of FinOps capabilities.

The Rackspace Technology Onica FinOps team can help by providing Cloud Financial Analysts to assess and optimize your internal FinOps capabilities, while providing high-impact, near-term recommendations for optimal cost savings. If you’re ready to start implementing measures that can help you assess and optimize your cloud spend, contact us to learn more.

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Learn more about cloud cost optimization.

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Richard Hoyer

Rich Hoyer is Director of FinOps at Onica, a Rackspace Company. Rich began his career in finance, conducting valuation analysis of mergers and acquisitions. After business school, he began a career in technology, founding a small business to provide outsourced IT to other small businesses. He got his first exposure to the public cloud after he sold his business and conducted his first cloud migration at Zenoss. Since then, he has been combining his finance and technology experiences as practitioner in FinOps, first at Cloudability and subsequently at Onica.

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