Forecasting

Framework / Domains / Quantify Business Value / Forecasting

Creating a model of the anticipated future cost and value of cloud systems leveraging statistical methods, historical spend patterns, planned changes, and related metrics.

Manage the forecasting strategy

Define functional and non-functional forecasting criteria
Define forecast parameters in the context of business objectives (length of time, variance thresholds)

Create forecast models

Determine the applicable forecasting technique(s) by organizational level
Establish model parameters for timing, implementation, and pricing details
Define forecast model to quantify cost and functional requirements

Track & Manage forecasts

Refine forecast model to quantify cost and reflect value change expectations
Determine how forecasts will influence and inform Budgeting
Identify exception handling for scenarios when forecasting anomalies occur

Definition

The goal of forecasting is not to predict the future but to tell you what you need to know to take meaningful action in the present.
– Paul Saffo

Forecasting defines a model of future spending for a particular scope (a system, service, application, etc.). Forecasts are usually based on Estimating, which looks at a combination of historical spending and evaluates future plans, and an understanding of how future cloud infrastructure and application lifecycle changes may impact current cloud usage.

Forecast models provide an input to the Budgeting capability, where they serve as the baseline for Finance allocating funding. Forecast models may be updated for other reasons, such as the integration of new features, modernization of application architectures, or optimization for efficiency.

While Estimating is investigative, Forecasting represents establishing an expectation among all stakeholders of future cloud spending and value. Engineering typically drives Estimating, but Forecasting will typically involve Product personas, and consult with Finance and Leadership personas to build agreed upon forecast models and KPIs which align with business goals. Once a forecast model is agreed to for an application, the budget owner for that application must live up to the forecast, or be responsible for seeking variance funding to address shortfalls.

Accurate financial forecasting depends on an organization’s other FinOps Capabilities also being robust in order to provide accurate data as input. For example, a foundational element of this capability is the ability to fully categorize and allocate cloud costs.

When Finance, Engineering, and Executives build models to forecast cloud spend reliably and accurately, cloud cost Forecasting will inform investment and operational decisions to accelerate an organization’s growth. In this way, each application owner committing to its own spend forecast model, and providing those to Finance allows for not only effective Budgeting, but also better management of Anomalies, better decision making related to on-premises capital spending, on cloud value, on expected revenue and even on environmental impacts related to cloud sustainability.

The Forecasting Strategy for an organization will be driven collaboratively by FinOps, Engineering, Product, Finance and Leadership personas. Engineering will generate estimates which must be vetted for accuracy, compared to current baseline forecast models (for existing applications or systems) or established as new forecast models to be fed to Budgeting.

Forecast models will include a more robust documentation of the timing and implementation details of the system, the pricing models to be used (and when they will be implemented), the total cost of ownership for the system scope of the forecasting model.

Outputs from Forecasting will go to the Budgeting capability to inform the creation of budgets. But in many cases, changes to systems that fall within the scope of an existing budget will not need to be further approved, but can just be estimated and the forecast updated.

There is a tight integration between Estimating, Forecasting, and Budgeting capabilities. It is important to recognize that although in smaller organizations it may seem like all three capabilities happen simultaneously, they are indeed three capabilities.

Within this domain, the FinOps team will establish a Forecasting Strategy detailing how the organization will conduct its forecasting work. Creating forecast models will largely be done jointly between engineering and product personas, those who own the budget for certain systems or applications. Over time, these owners will maintain the forecast model for their areas of responsibility, and make adjustments as their systems are operated and modified.

When actual costs exceed forecasts, or it is indicated that this will occur, the owners of the forecast model must take action to seek additional funding from budget owners, in coordination with the Budgeting capability.

Maturity Assessment

Crawl

In organizations with simple implementation models or with limited cloud spend, a limited variety of cloud cost data-sources and tools are used for forecasting by stakeholders across the organization
Forecast models are created manually and/or ad-hoc
Forecast are primarily based on historical spending, as workloads tend to be more stable or simple
Forecasting variance analysis is done manually
Limited/aggregate forecasting visibility (only by business unit or cost center)
Engineering/Operations teams are not involved with the creation of cloud cost forecasts or tracking of discrepancies from forecasted spend

Walk

Forecast costs tracked against actual usage and used to establish budgets
Forecast is inclusive of cloud rate optimization and commitment-based discounts
Forecast models are rolling and trend-based
Forecast updates are done on a regular cadence but not automated
Stakeholder teams (Product, Leadership, Engineering, Finance) have access to cloud cost forecasting data
Cloud cost forecast data is used to supplement back-end accounting system data
Regular review cadence by FinOps team of forecast thresholds and trends with stakeholder teams

Run

Global policy for applying allocation metadata to prevent unallocated cost
Forecast tracked and updated against discount-adjusted, amortized cloud usage
Forecast models are a combination of rolling, trend-based and driver-based
Forecast is inclusive of usage optimization opportunities
Forecasts aligned to the organization’s allocation constructs being used across the organization for reporting cloud costs
Granular forecasting visibility (by business unit, cost center, team, product, service, etc …) in the context of organizational KPIs
Stakeholder teams (Executives, Engineering, Finance) have real-time visibility into a single source of truth for how cloud usage is impacting forecast trends and budgets
Integration and automated data flow between cloud cost forecast data and back-end accounting systems used for broader organizational reporting

Functional Activities

FinOps Practitioner

As someone in the FinOps team role, I will…

Develop the Forecasting Strategy in combination with Finance, Leadership, Engineering and Product personas
Establish requirements for when forecasting is due and how frequently forecast updates are needed
Generate granular forecasts with reasonable accuracy
Help to establish forecasting KPIs that are in alignment with business goals
explore optimization opportunities with teams that are forecast to overspend
Provide forecast data for cloud costs to enable stakeholders to create budgets
Provide granular reporting to teams on forecasted spend by different business-centric dimensions
Provide reporting on budgets vs actuals vs forecast to establish trends and compare against variance KPIs

Product

As someone in a Product role, I will…

Develop product centric KPIs to measure the cost effectiveness in achieving my desired business outcomes
Establish forecasting threshold variances that are in alignment with the product-line that i own
Use these KPIs to inform forecast models in collaboration with my engineering counterparts

Finance

As someone in a Finance role, I will…

Establish requirements for when forecasting is due and how frequently forecast updates are needed
Generate granular forecasts with reasonable accuracy
Help to establish forecasting KPIs that are in alignment with business goals
Explore optimization opportunities with teams that are forecast to overspend
Provide forecast data for cloud costs to enable stakeholders to create budgets
Provide granular reporting to teams on forecasted spend by different business-centric dimensions
Provide reporting on budgets vs actuals vs forecast to establish trends and compare against variance KPIs

Procurement

As someone in a Procurement role, I will…

Monitor for cloud spend forecasts exceeding budgets in my area of responsibility

Engineering

As someone in an Engineering role, I will…

Monitor for cloud spend forecasts exceeding budgets
Work with FinOps stakeholders to identify actionable optimization opportunities to avoid forecasted overspend
Get approval for planned changes which will have a negative impact to our cloud spend projections / budgets

Leadership

As someone in a Leadership role, I will…

Be aware of cloud cost forecasts and monitor for impacts to the business
Establish forecasting threshold variances that are in alignment with business goals
Manage competing priorities for active project timelines when forecasted spend impacts budgets for high-priority initiatives
Ensure successful communication between the FinOps team and Business Units

Measures of Success & KPIs

Forecast models leverage discount-adjusted, amortized cloud usage data
Forecast cost vs actual cost trends within established percentage threshold of variance. According to the FinOps Community of Practitioners, acceptable levels of forecasting accuracy translates to a 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 forecast variance threshold exceeded & risk of budget overspend
Forecast frequency that includes intermediate forecasts to update budgets based on business drivers
Teams and Business Units are responsible for managing their budgets based on forecast data

Inputs & Outputs

Inputs

Cost and usage information from Reporting & Analytics
Estimates generated in Planning & Estimating
Functional and nonfunctional requirements for systems from Architecting for Cloud, Onboarding Workloads, Cloud Policy & Governance

Outputs

Forecast model expectations to Budgeting
Updated Forecasting models

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