Budgeting

Strategic and ongoing process for setting limits, monitoring, and managing technology spending, aligned with business objectives, to ensure accountability and predictable financial outcomes for IT systems.

Definition

FinOps Budgeting establishes approved funding to support an organization’s planned technology activities, tracks spending and value within that funding, makes transparent adjustments as appropriate, and ensures accountability from each budgeted cost center through a consistent set of budgeting strategies.

Budgeting will typically begin as part of the broader IT budgeting process, and will evolve and mature as the complexity of the technology landscape increases. The faster pace of development and nearly unlimited capacity of modern technology categories like cloud, AI, and data cloud platforms ultimately requires organizations to adopt a shorter budgeting cycle, with more flexibility built in through holdbacks and out of cycle adjustments. The FinOps team must collaborate with Finance who primarily drive Budgeting, to establish and adjust the Budgeting strategy and holdback strategy over time.

Budgeting is closely related to both Forecasting and Planning & Estimating. Budgets for a system or application are typically based on the forecasts provided by those teams. There is a strong tie to the organization’s allocation strategy, which will define how costs are to be allocated to different cost centers, and to Invoicing & Chargeback which will apply costs to those specific budget cost centers each period.

However, while Forecasting is a promise by the engineering and product owners to deliver some amount of value for some amount of spending, budgeting is the organization’s commitment to those engineering or product owners to fund them at a certain level. Budgets should provide clear support for the work the product team is doing, while providing healthy constraints on those teams to work within the budget that will produce value for the organization as a whole.

Budgets are allocated to budget owners, responsible for a specific scope of work. There may be multiple levels of budget owners in some organizations. Each budget owner will have one or more systems or applications they are responsible for delivering. System owners will be continuously estimating the cost (and other impacts) of their development work, and maintaining their forecasting model. When forecasts begin to appear that they will exceed budgets, collaboration between Personas must be done to resolve the issues causing the potential or actual overages.

Budget provided for a documented scope of cost and value will typically also provide a holdback allocation to the budget owner. This holdback can be thought of as money that is not allocated to a specific purpose but is available to a budget owner to account for changes, overages, forecasting errors and other small corrections required during a budget period. As an organization matures, the amount of holdback, and rules for its use may be reduced, at least in areas where budgeting for more stable workloads.

When a system owner determines that Budget adjustments may be necessary a potential process for resolution will follow steps such as these:

1. Budget threshold reports anticipate exceeding budget (Engineering)
2. Investigate the reasons for the overage (Engineering, Product)
   • Take corrective action to optimize, or
3. involve budget owner to request additional funding from holdback (Engineering, Product, and Budget Owner)
   • Designate additional funding if available and reasons for the adjustment are understood, or
4. Involve higher level budget owner, or Finance directly to review the request (Engineering, Budget Owner, Product, Finance)
   • Designate additional funding from higher level holdback, or
5. Involve Leadership to make adjustments to budgeted spending levels and record/adjust impacts to organizational performance expectations (Engineering, Product, Finance, Leadership)
   • Approve adjustment to budget, or
   • Deny adjustment and collaborate on corrective adjustments to be made

The above assumes that actual spending is unfavorable to budget. The term favorable to budget means that there are less expenses than as planned in the budget. The term unfavorable to budget means that there are more expenses than as planned in the budget.

Being unfavorable to budget requires action as soon as it is detected. However, being strongly favorable to budget is also not ideal. Large amounts of unused holdback funding could have been used to invest in other areas. Once risks and uncertainties are well understood, even within a budgeting cycle, budget owners and Finance should also collaborate on making adjustments to reclaim holdback that is no longer required and put it to work.

In organizations that are more simple, more stable or steady state, adjustments to budgets should lessen over time, and holdback can be reduced each budgeting cycle. Organizations that are very dynamic or experiencing high growth in cloud use may need to have higher holdback amounts, or more layers among its budget owners to accommodate the inevitable need to adjust funding when forecasting for unknown or dynamic workloads.

Shortening the budgeting cycle or extending budget thresholds can also be an effective way to manage change. More frequent budgeting cycles allow organizations to make more frequent adjustments, release undesignated holdback, spot forecasting problems, and redirect efforts more often. Exercising this process builds muscle memory for the organization, and allows even out of cycle changes to become more routine. This incremental budgeting can be particularly useful for AI investments which are faster-paced and more frequently submitted than traditional IT projects.

Budgeting is driven primarily by Finance, but following the principle of “Everyone takes responsibility for their cloud use” should lead organizations to distribute the budget (and holdback) to budget owners throughout the organization. These budget owners are then empowered to work autonomously within their sphere of control, and to allow the entire organization to operate more quickly and efficiently without budget approvals becoming a gridlock risk.

In many organizations there will be more than one way to manage budgets. Finance partners may work with some parts of the organization differently due to the importance of some systems or business units. R&D work, purely internal IT systems, and customer-facing systems may be handled in different ways. Financial budgets may be combined with other resource budgets such as labor cost, license cost, cloud sustainability goals, or the like.

Particularly in government, public sector, or highly-regulated organizations, the source and timing of funding may also create more restrictions on the budgeting process. Compliance with regulation will create more complexity that may not allow more efficient budgeting or which may require more collaboration or process to understand and follow. The FinOps team can be the catalyst for understanding these requirements and helping to facilitate changes over time as technology use diversifies.

Measures of Success & KPIs

• Budgeting leverages appropriate discount-adjusted, amortized cloud usage data, as identified in the Budgeting Strategy
• Budget vs actual cost trends within established percentage threshold of variance. Acceptable levels of budget variance is maximum 20% variance from actual spend for a FinOps practice operating at a Crawl maturity level; a 15% variance for a FinOps practice operating at a Walk maturity level; and 12% variance for a FinOps practice operating at a Run maturity level
• Stakeholder notifications for actual or anticipated budget variance threshold exceeded & risk of budget overspend
• Budget cadence that includes rolling forecasts to update budgets based on business drivers
• Teams and Business Units are responsible for managing their budgets based on forecast data and actual cost, usage, and impact

KPIs

CSP Cloud Budget Burn Rate

The rate at which an organization is consuming or spending its allocated budget for cloud services from a CSP.

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CSP Cloud Budget Burn Rate

The rate at which an organization is consuming or spending its allocated budget for cloud services from a CSP. This rate provides insights into how quickly the organization is using up its budgeted funds for cloud resources and services. A higher burn rate indicates that the organization is consuming its budgeted cloud funds at a faster pace. This might be due to increased resource usage, additional projects, or unexpected costs. It can prompt the need for adjustments in resource allocation, optimization efforts, or budget reconsideration. Lower Burn Rate: A lower burn rate suggests that the organization is spending its cloud budget at a slower pace than anticipated. This could mean that the allocated budget is sufficient, resources are being used efficiently, or cost-saving measures are effective. Matching Burn Rate to Budget: If the burn rate closely matches the budget allocation over the specified time period, it indicates that the organization is on track with its spending plans. Measure of success: Matching burn rate to budget.

Formula

(Actual Cloud Spending / Time Period)

Data Sources:

• CSP Billing Data
• Internal Finance Metrics

Related Capabilities

Budgeting

Percentage Variance of Budgeted vs. Forecasted CSP Cloud Spend

Measures the difference between budgeted costs and the forecasted costs for using CSP cloud services.

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Percentage Variance of Budgeted vs. Forecasted CSP Cloud Spend

Measures the difference between budgeted effective costs and the forecasted effective costs for using CSP cloud services. This metric provides insights into how well an organization's initial budget aligns with subsequent forecasts of cloud expenses. This also measures the difference between budgeted cloud spending, which is fairly static and often used to set spending limits, vs. forecasted cloud spending, which should use close to real-time data to project and anticipate actual spending on a rolling basis. This KPI requires an organization to establish a methodology for forecasting in order to compare results to the established budget. Forecasting methodology should consider past cloud consumption, anticipated changes in cloud utilization or rates (e.g. commitment-based discounts).

Formula

((Budgeted CSP Effective Cost for a Time Period – Forecasted CSP Effective Cost for that Time Period) / Budgeted CSP Effective Cost for that Time Period)

Data Sources:

• CSP Billing Data
• Internal Finance Metrics

Related Capabilities

Budgeting

CSP Cloud Carbon Budget Burn Rate

CSP Cloud Carbon Budget Burn Rate

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CSP Cloud Carbon Budget Burn Rate

The rate at which an organization is consuming its allocated carbon budget for cloud services from a CSP. This rate provides insights into how quickly the organization is using up its budgeted emissions for cloud resources and services. A higher burn rate indicates that the organization is consuming its budgeted cloud carbon at a faster pace. This might be due to increased resource usage, additional projects, or unexpected emissions. It can prompt the need for adjustments in resource allocation, optimization efforts, or carbon budget reconsideration. Lower Burn Rate: A lower burn rate suggests that the organization is consuming its carbon budget at a slower pace than anticipated. This could mean that the allocated budget is sufficient, resources are being used efficiently, or carbon-saving measures are effective. Matching Burn Rate to Budget: If the burn rate closely matches the budget allocation over the specified time period, it indicates that the organization is on track with its consumption plans. Measure of success: Matching burn rate to budget.

Formula

(Allocated Cloud Emissions / Time Period)

Data Sources:

• CSP Billing Data,
• Internal ESG Metrics,
• Sustainability OKRs

Related Capabilities

SustainabilityIntersecting DisciplinesBudgeting

Related Assets

Cloud Sustainability and Its Intersection with FinOps

Inputs & Outputs

Inputs

• Forecasting models from stakeholders in all relevant areas
• Budgeting Strategy input from Leadership and Finance identifying Budget owners, P&L owners, levels of budgeting required, and other parameters
• Organizational P&L and cost center strategy from Allocation
• Cost, impact, and usage reporting data from Reporting & Analytics

Outputs

• Budget Strategy for use by all P&L owners and budget owners
• Budget allocations to all funded cloud systems grouped by budget owner
• Budget adjustment process to be used for out of cycle adjustments
• Holdback strategy for use by all P&L owners and budget owners
• Budgeted holdback allocations to appropriate budget owners
• Budget allocations to P&L cost centers to Invoicing & Chargeback