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Measuring Unit Costs

Definition

This Capability is about developing metrics that reveal the business value of your cloud spend. By calculating cloud spend for total revenue, you can attach growth in cloud spending to your overall business growth. When these are in line, it makes sense that cloud spend isn’t wasted. When cloud spend is growing faster than the business, there may be cause for concern. For a customer-facing application, that unit might be a user or customer subscription; for an ecommerce platform, it might be a transaction; and for an airline, it might be a seat.

When practitioners address measuring unit costs, it’s often in the context of Cloud Unit Economics. Our practitioners define Cloud Unit Economics as a system of profit maximization based on objective measurements of how well your organization is performing against not only its FinOps goals, but as a business overall. Cloud Unit Economics achieves these goals by leveraging the measurement of marginal cost (a.k.a., unit cost metrics) specific to the development and delivery of cloud-based software and marginal revenue (a.k.a., unit revenue metrics).

By calculating the difference between marginal cost and marginal revenue, practitioners can determine where cloud operations break even and begin to generate a profit. This is an important concept in economics overall and it’s one of the most effective ways to make data-driven business decisions regarding your cloud investment. For further details on defining, implementing, and building upon Cloud Unit Economics with your FinOps teams, please check out our playbook on implementing the Capability.

Maturity Assessment

Cloud Unit Economics can be implemented in many different ways, depending on the size of organization and the scale of its cloud spend. From research by our community, and according to the Cloud FinOps book, cost per-customer (or cost-per-tenant) is a common goal that can typically be applied to most organizations and is often a good metric to start with to assess maturity level of how the organization is adopting unit economics.

Crawl

  • Cloud-only Cost-per-customer: Depending on the complexity of the application, this may also be done in multiple phases, where some cloud costs are handled initially as “direct” and others “shared.”

Walk

  • Cloud, Software-as-a-Service (SaaS), Licenses-based Cost-per-customer: This could include things like Datadog, ServiceNow, or PagerDuty or BYOL (Bring Your Own License) like Windows or SQL Server which are run on cloud infrastructure. Once you start bringing in SaaS tools or Licenses, you may need to work with the team responsible for that product to understand the KPIs they care about and how they quantify time spent such as the SAM or ITAM team.

Run

  • Cloud + SaaS + Hybrid Costs + Human Capital-based Cost-per-customer: Advanced teams bring in costs like labor or even on-premise costs that support a particular product or service. The run phase is typically when a firm starts collecting more than one metric for various parts of a complex system getting more granular over time.

Functional Activity

Do what’s right for your organization

In some cases, engineering might play a more central role in your FinOps organization, and you can leverage engineering time to produce the necessary metrics to determine measurements like Cost-per-customer. Regardless of the resources you have at your disposal, start small and focus on clear metrics that will be tangible to all stakeholders.

Through all of this, the centralized function of FinOps should be apparent: the FinOps team should be responsible for maintaining the Cloud Unit Metrics repository and be capable of clearly articulating their business value. Without it, a company can end up with “one metric to rule them all” or a bunch of clashing metrics.

The following table maps functional input and output activities related to cloud unit economics by persona:

BUSINESS BUSINESS TECHNOLOGY FINANCE FINOPS
Executives Product Owner Engineering and Operations Finance/Procurement FinOps
INPUT A CTO/ CIO / CFO should own the initiative of Unit Economics and determine scope as it relates to coverage of Products VP of Product / Product Owners should collaborate with Finance to determine key product metrics VP Engineer collaborate with Product Owners define input requirements for metrics to best determine how to collect metric data from systems Finance should collaborates with Product Owners to determine key product metrics FinOps should be aware of executive scope and identify gaps in cost allocation alignment to strategy
OUTPUT Actioning on business decisions as a result of cost metric data, define frequency of reviewing unit cost and determine benchmark thresholds Support solutioning automation and identify blockers to outputting metrics, define frequency of reviewing unit cost and determine benchmark thresholds Actioning on business decisions as a result of cost metric data Integrate cost allocation with cost metrics, determine if spend is increasing due to waste or due to growth in the business and determine if cost variances are ‘good’ or ‘bad’ Use data and analysis to determine if spend is increasing due to waste or due to growth in the business and determine if cost variances are ‘good’ or ‘bad’

NOTE: This table is best viewed on a wide viewport, like a desktop or tablet.

Measure(s) of Success & KPI

Cloud Unit Econmics measures of success will differ company to company.

An example KPI that could fit most cases could be how one a team stores customer data: cost-per-GB. Measuring cost-per-GB alone sets up initiatives to optimize storage costs, such as engineers figuring out a new way to further compress the data, e.g. cutting your storage needs by about 30 percent. In this scenario, your cost-per-GB does not change even though your storage costs have decreased.

Instead, it would be more meaningful to measure something like a cost-per-stored-item (whatever that may be). Using a cost-per-stored-item as a unit of measure in this same scenario would show a 30 percent reduction because you are storing the same amount of data with fewer GBs of storage.

Collaborating with all of the necessary organizational stakeholders to first determine what drives business value is essential to getting this part right.

This is one example of many. We welcome additions to build out all the possible ways to measure the efficacy of a cloud unit economics practice.

Inputs

Defining and agreeing on the type of costs to report (e.g.: include or not discounts, negotiated rates, optimizations, shared costs, support, any other operational related cost) Once you’ve decided what to measure, it is imperative that you clearly delineate what financial inputs make up your unit costs.

Is your organization receiving an enterprise discount? Do you have a private pricing agreement with one of your vendors? Are you receiving bulk discounts on licensing costs? Do you amortize upfront payments for commitments? Regardless of which stage your organization is at in the crawl-walk-run cycle, it is important to consider these types of questions when measuring and reporting your unit costs.

Please see the full playbook for more details on how to implement Cloud Unit Economics with your FinOps team.

Related Resources

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Get Involved

Get involved and contribute to the community by sharing your real world experiences related to this Capability in the form of a story or providing a playbook for how you have implemented best practices in your organization. Your real world experiences can be provided in the context of:

  • one or more cloud providers
  • the types of cloud services used (compute, storage, database, etc…)
  • describe a combination of tooling, platform or vendor, and processes including KPIs
  • the industry the organization belongs to
  • the complexity of the organization (global enterprise, start-up, etc…)
  • the [FinOps personas](https://www.finops.org/framework/personas/) involved / organizational roles

Join the conversation about this Capability in Slack . You can submit stories, how-tos and suggest improvements using one of the options for contributing here.

Related Projects


Measuring Unit Costs
Introduction to Cloud Unit Economics