Advanced Techniques for Cloud Cost Allocation in FinOps
By: Ben Mejia, Senior, Certified FinOps Expert
Advanced Techniques for Cloud Cost Allocation in FinOps
If your business is utilizing a cloud infrastructure, making sure the resources are allocated properly is just as crucial as it is complex. This importance and challenge only increases as companies scale their cloud usage along with their growing business needs.
The Cloud Finance basics can get your business in a good place as you begin to take full advantage of the power of cloud computing. However, learning and leveraging advanced techniques can bring about even more financial accountability and operational efficiency. Your bottom line will reap the benefits.
Understanding Cloud Cost Allocation in FinOps
First, let’s understand what cloud cost allocation is and why it’s so important. As companies become more and more digitized, cloud infrastructure makes its way into nearly every department, project, or business unit. The allocation of cloud resources ensures that each part of the organization pays for its usage of the cloud—no more, no less. This enables better financial planning and budget optimization. In essence, organizations should strive to implement the same discipline of cost allocation within the cloud that they do with every other expense. This cost allocation happens through a concept of a “tag” within a cloud environment.
AI technology can help break through the complicated jargon and convert the data into easy-to-understand language that’s useful to management and finance professionals. These AI features are becoming standard in cost attribution model tools.
Squire’s team of Cloud Finance experts can help you with the next steps in your Cloud FinOps journey. Here are a few cloud cost allocation techniques we can employ:
Cost Attribution Models
Direct Cost Attribution
The most straightforward model of cost attribution—direct cost attribution—also promotes the highest level of accountability. Simply put, if a department or project uses a specific portion of the cloud infrastructure, that amount is charged directly to its budget. Say for example, if the marketing department uses a specific server, the cost of that server will be a line item on the marketing budget. Easy enough.
Indirect Cost Attribution
This model is best suited for when resources are shared across multiple departments. Cloud resources such as network bandwidth and storage capacity are often blanketed over an entire organization and distributed based on usage. It may take a bit of math, however, to fully account for which percentage of resources are being allocated to each department.
Activity-Based Costing (ABC)
The most granular and therefore, most complex, method of cost attribution can be activity-by-activity based. This technique attributes costs based on individual activity, such as computing hours, data transfers, and storage usage. While this is the most time-consuming way to figure it all out, it’s also the most accurate and can provide the most detailed information to guide future allocation decisions.
For example, if you have a cloud database X that supports products Y and Z, you can allocate the total cost of X to Y and Z in a common sense manner, such as number of records, data flow traffic and more.
Chargeback and Showback Strategies
Both chargeback and showback methods provide a comprehensive “post-mortem” of cloud resource consumption. While both schools of thought are rooted in accountability and the ongoing pursuit of optimization, there is a simple difference between the two.
In a chargeback method, departments are billed for the exact amount of cloud resources they use. Further, the charges are assigned to department-specific general ledger accounts directly in the accounting system. In contrast, a showback method provides detailed reporting, but does not go as far as billing departments or reflecting cost allocations within the accounting system..
Tools for Transparent Cost Allocation
Third-party tools are a favorite of Squire’s Cloud Cost Allocation process due to their robust reporting and optimization capabilities. Some standouts include Moneta, DigitalEx and Finout. The transparency and user-friendly nature of these tools allows non-technical users to fully grasp the data and be an active participant in the decision-making process..
Best Practices and Next Steps
Aligning your business’ objectives with effective cloud cost allocation will separate you from the pack. It is essential to understand and implement these advanced techniques to supplement the FinOps basics you already have in place.
Take the time to figure out which techniques work best for you. Direct or indirect? Activity-based or not? Chargeback or showback? Which tool suits our needs best? Who is responsible for tagging the resources? These are all questions your financial leadership needs to answer.
Of course, Squire can help show the way. We’re well equipped with technical certifications like AWS Certified Cloud Practitioner, FinOps Practitioner and more. Reach out to connect with a Cloud FinOps expert from our award-winning firm.