Cloud services are essential for operating and growing banks and financial services (BFS) enterprises today. The core cloud benefits of scalability, agility and flexibility are enabling banks to support remote work, launch new services faster and capitalize on pay-as-you-go pricing models.
The 3Q 2021 Global ISG IndexTM shows tremendous growth in investments in cloud technology solutions across all industries, including BFS. During the first nine months of 2021, infrastructure-as-a-service (IaaS) investments grew by 35.5% against the prior year. This was its highest growth rate in three years, recording $25.8 billion of annual contract value (ACV). Specifically, for BFS, 2021 year-to-date growth in the IaaS market was 43% higher globally, over last year, reaching $4.1 billion in ACV. Financial institutions continue to rely on hyperscale cloud service providers to help them meet their changing capacity needs, access a host of services such as analytics and automation, accelerate their digital transformation and stay attentive to their clients’ needs.
In the past couple of years, ISG has seen strong growth in demand for multicloud services from enterprises of all sizes. As cloud adoption grows, so does the reliance of companies on governance and cloud financial management, otherwise known as FinOps. FinOps adds a governance layer to detect anomalies or budget overruns for controlling and optimizing cloud spend and usage, while balancing speed, quality and agility. Early on, enterprises saw significant savings from converting fixed, upfront CapEx investments to variable-cost, subscription models. Now, those savings are diminishing due to rising cloud invoices. Many financial institutions have long been struggling to track cost drivers and measure and mitigate the spiralling costs of cloud computing. Multiple billing and pricing structures from hyperscalers further increase the complexity of managing cloud costs. As J.R. Storment, Executive Director of the FinOps Foundation puts it, “The dirty little secret of cloud spend is that the bill never really goes down.”
What Are the Top Factors Driving Cloud Pricing Spikes?
The top five factors driving cloud pricing include the following:
- When organizations transition from on-premises IT infrastructure to public cloud, their financial IT operating model changes, too. IT expenditure shifts from fixed and predictable CapEx to a variable and dynamic OpEx model, which is often underappreciated when estimating cloud spend and budgeting.
- When a company shifts away from a traditional and structured procurement process, which has multiple levels of approval before the transition begins, to a federated process in which cloud services are procured in real-time by consumers of the services, procurement oversight is eliminated.
- The federated procurement process enables distributed teams to make business trade-off decisions related to speed, cost and quality. These trade-offs, if used incorrectly, can lead to excess purchase of cloud services. In turn, this may result in budget overruns incurred before remediation can take place – something that would not happen in a more traditional process.
- A lack of communication and coordination between the IT, finance and business teams can lead to inaccurate cloud cost estimates and forecasting.
- Current macroeconomic instability is driving cloud consumption and spend, and cloud providers are capitalizing on the increased demand for their services.
Why Banks and Financial Institutions Face Complexity with Multi-cloud Environments
A majority of BFS companies are already using cloud technology to modernize their outdated IT systems. Recent research by Google found that 83% of surveyed financial services companies were deploying cloud technology as part of their primary computing infrastructures. Among those, 38% adopted hybrid cloud, 28% adopted single cloud and 17% adopted multi-cloud as an architecture of choice. And 88% of non-multi-cloud strategy users are considering adopting a multi-cloud strategy in the near future. As businesses continually scale and decentralize, complexities in managing multi-cloud ecosystems increase.
When cloud buying is decentralized across an organization, users can spin up instances and accrue costs with little or no accountability. In reality, “you pay for the resources you provision, whether you use them or not,” states J.R. Storment. When running at scale, most business users are either overprovisioning or not using resources effectively, resulting in wasted resources and increased cost. And according to a recent survey report, enterprises waste an average of about 30% of their cloud spend.
The easy provisioning of cloud services and suboptimal cloud governance for spend control – combined with the complexity of multiple billing and pricing models from hyperscalers – make cloud cost management a significant challenge for financial institutions. A lack of data logistics and insight, data silos and security complexities across the multi-cloud estate increase the financial and operational risks – including cyber and third-party risks – for BFS organizations, which are subject to governance, risk and compliance regulations.
A lack of 360-degree visibility and control over cloud computing resources can cause “cloud sprawl.” This leads to budget overruns, particularly when enterprises don’t have the right tools and processes in place to trace and charge cloud costs back to internal business users. Many BFS organizations don’t have a roadmap or processes in place to deal with the problem and often employ cloud cost optimization strategies on a reactive or crisis basis when costs escalate unexpectedly.
A disciplined strategy for FinOps is best implemented before moving to a public cloud platform or at an early stage in their cloud journey. This means an enterprise needs to maximize its understanding of good cloud financial management ahead of moving to the public cloud and should consider best practices, such as aligning Finance and IT pre-migration and post-migration, to better manage their public cloud costs.
How Does FinOps Work?
FinOps is the operating model for the cloud, enabling a cultural shift with a set of best practices, processes and tools aimed at optimizing cloud spend. It requires a cost-aware culture involving a cross-functional collaborative approach by the IT, finance, procurement, engineering and business teams. By promoting responsible spending and financial accountability in cloud spend, FinOps empowers stakeholders and business teams to make informed decisions. A centralized governance model and reporting help optimize public cloud resources.
A successful FinOps practice can help BFS enterprises accurately chargeback business units and forecast spend, apply cost optimization best practices, make metrics-driven decisions and provide continuous value and cost savings.
FinOps typically involves a central team that is tasked with finding opportunities for rate and discount optimization with cloud providers. A key to making FinOps successful is internal benchmarking of processes, metrics and KPIs to measure performance against overall business objectives for continuous improvement and real-time decision making.
ISG’s FinOps framework, which aligns with the principles of FinOps Foundation, suggests that FinOps lifecycle is a continuous process that comprises three iterative phases — inform, optimize and operate:
- Inform Phase – Empower teams across the enterprise with visibility for informed decisions, allocation of cloud spend for accurate chargeback and showback. Conduct benchmarking using necessary metrics and KPIs to measure performance and drive ROI while staying within the budgeting and accurate forecasting of cloud spend.
- Optimize Phase – Organizations must take action to identify and measure efficiency efforts, such as unused, underutilized or overprovisioned resources for rightsizing, storage access frequency and eliminating cloud wastage. It includes improving reserved instances for discounts, utilization, rate optimization and automation.
- Operate Phase – Organizations need to continuously adapt cloud governance and usage controls for all cloud resources. The Operate phase also involves assessing effectiveness by comparing business objectives against the metrics and KPIs for continuous improvement to achieve the stated business goals.
How to Build a Cloud Financial Management Framework
Finding a way to get engineers to act on cost optimization was the most cited FinOps challenge, as per a report by FinOps Foundation, indicating that a cultural shift of this magnitude is difficult. As enterprises move more workloads to the cloud, they often miss out on addressing these questions.
Enterprises can identify their most common challenges in managing cloud costs by answering the following questions:
- Do you lack traceability and accountability of cloud spend?
- Are you using resources and cloud features in the most efficient manner?
- Are your cloud procurement practices cost-effective?
- Do you have processes, guardrails and automation strategies in place to manage cloud spend?
- Do you have the right tools and reporting capabilities for managing cloud sprawl, budgeting and forecasting, rightsizing and dashboards to deliver metrics-driven insights for real-time decisions?
- Do you have the communication strategy and framework for cloud-related decision-making that aligns with business goals?
- Do you measure financial cloud performance efficiently for continuous optimization and sustainable value?
How To Achieve Cloud Financial Excellence
There are many challenges for financial institutions (the emphasis of our next FinOps article) as they manage their cloud spend. Partnering, however, with an expert provider to implement the right cloud financial management platform can help successfully fill the gaps in the cloud environment. Such platforms combine data science, machine learning and automation to optimize cloud spend and drive real-time informed decisions, without comprising on the speed and agility of innovation. As the cloud environment becomes more complex and dynamic, automation becomes crucial to ensure reliability and consistency across processes. Additionally, collaborating with the right advisory firm to leverage an impartial “outside-in” perspective and industry best practices as highlighted below can further contribute to significant cloud cost savings.
Jumpstart your FinOps Journey with the Following Steps
- Assess cloud cost optimization: An assessment of current FinOps maturity levels and insights into potential bottlenecks in cloud cost management, with actionable recommendations and tailored roadmap for cost optimization opportunities and required FinOps capabilities.
- Design the operating model: Proven and highly effective FinOps operating model design which enables enterprises to maintain shared financial accountability for the variable cloud spend model.
- Implement cloud governance: In collaboration with the cross-functional teams, setting up a FinOps practice with centralized governance in order to incentivize and enforce enterprise-wide policies, guardrails and guidance; sharing best practices; and selecting governance tools for cloud financial and risk management.
- Align and improve processes: Support enterprises in operationalizing their FinOps Practice with process alignment across cross-functional teams, such as finance, IT, procurement, engineering, and architecture, then helping define business goals for measuring performance against business objectives, continued process improvement, and driving metric-driven cost optimization and ROI efficiently.
- Cultural transformation to drive business value: An effective organizational change management (OCM) practice ensures organizations land this change successfully by developing the right approaches and training solutions to enable the shift towards a cost-conscious culture, understanding cloud finance, and upskilling or reskilling people, thus laying the foundation required to implement FinOps Framework.
- Invest in the right tools: To better understand and engage with the emerging platform and tooling ecosystem, enterprises buyers must engage with trusted advisors to guide their selection of best-fit partner and invest in the right tools, enabling automated cost management to increase the efficiency and reduce cloud wastage.
ISG helps BFS enterprises establish a FinOps framework that includes a set of tools, processes, best practices and metrics for achieving cloud financial excellence at scale. We offer best-in-class FinOps operating model advice and cloud governance, enabling enterprises to benefit from a measurable return on their cloud investment, sustainable value and cost efficiency. ISG’s expert OCM practice and next-gen sourcing solutions ensures successful enterprise change, helps in realizing benefits faster and increases productivity through technology usage. Contact us to find out more about how we can help you.
About the authors
Sandra Williams is a Partner with ISG Banking & Financial Services (Americas).
Sowmiya Bakthavatchalam is a Senior Lead Analyst with ISG Research.