FinOps Terminology

Introduction

Welcome to our glossary of FinOps terminology, designed to help teams understand the words and phrases they are most likely to encounter in their FinOps journey.

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Last updated: Oct 22nd 2024

FinOps Terminology

Amazon Web Services (AWS)

AWS is the cloud service/platform provided by Amazon.

Anomaly Detection

Involves identifying unusual spending patterns that may indicate inefficiencies, waste, or security issues, often using machine learning and advanced algorithms.

Anomalies

A cloud cost anomaly is an unexpected variation in cost based on historical spending. Although anomalies are most often increases, sudden decreases are also worth investigating. Anomalies often drive up costs unexpectedly and should be addressed quickly.

Automation

In FinOps, the use of automation to manage various aspects of cloud costs, such as automated scaling, scheduling, and tagging, to reduce manual effort and optimize spending.

Autoscaling

Autoscaling is a cloud feature that automatically adjusts the number of active instances of a service or application based on real-time demand. This ensures optimal performance and cost efficiency by scaling resources up during high traffic or usage periods and scaling down during low demand. Autoscaling helps maintain service availability and performance while minimizing costs, as it eliminates the need for manual intervention and overprovisioning of resources. It is commonly used in environments with variable workloads to provide a seamless and responsive user experience.

Azure

Azure is the cloud service/platform provided by Microsoft.

Capacity Reservation

A strategy used to secure cloud compute capacity in advance to ensure sufficient resources are available for critical workloads, even in high-demand situations. This guarantees availability but requires balancing cost versus requirement.

Chargeback

Chargeback is a strategy whereby an organization allocates the cost of cloud services to the specific departments, teams, or business units that use them.

This process ensures that each unit is accountable for its cloud consumption, promoting cost transparency and encouraging more efficient use of resources. Chargebacks help track expenses accurately, support budgeting and forecasting, and align cloud spending with actual usage.

Cloud Center of Excellence (CCoE)

A Cloud Center of Excellence is a cross-functional team within an organization dedicated to implementing and optimizing cloud strategies.

Like a FinOps team, a CCoE typically includes experts in cloud architecture, security, operations, finance, and compliance.

The CCoE's responsibilities include developing cloud governance policies, best practices, and frameworks to ensure efficient and secure cloud usage. By centralizing cloud expertise, the CCoE helps drive innovation, improve cost management, and ensure alignment with business objectives, facilitating a successful and sustainable cloud transformation.

Cloud Cost Governance

A broad term that refers to the policies, processes, and tools used to control and manage cloud spending effectively, ensuring alignment with organizational goals.

Cloud Cost Optimization

Cloud Cost Optimization is the practice of managing and reducing cloud spend by making the most efficient use of cloud resources. It involves a variety of strategies, including resource Rightsizing, autoscaling, Reserved Instances (RIs), eliminating Wastage, Cost Allocation & tagging, and Spot Instances.

Cloud Cost Management & Optimization (CCMO)

Similarly to CFM, CCMO refers to the strategies, tools, and practices used to manage and optimize cloud spending. This involves monitoring cloud costs, ensuring efficient resource utilization, and implementing cost-saving measures. The goal of CCMO is to maximize the value derived from cloud investments while minimizing unnecessary expenses. It is particularly important for organizations leveraging extensive cloud services, as it helps them achieve financial accountability and operational efficiency.

Cloud Economics

Cloud economics refers to the financial principles and cost analysis strategies used to evaluate the value, cost-efficiency, and return on investment (ROI) of cloud computing. It involves assessing resource consumption, optimizing usage, and aligning cloud spending with business outcomes to ensure organisations gain maximum value from their cloud investments.

Cloud Economist

A cloud economist is a specialist who analyzes and optimizes an organization's cloud spending. They use financial models, cost strategies, and data to help businesses manage cloud resources effectively, reduce waste, and align cloud costs with performance and business goals.

Cloud Efficiency Rate (CER)

Coined in 2023 by CloudZero, Cloud Efficiency Rate measures the value derived from every dollar spent on cloud services. It is calculated by subtracting cloud costs from revenue, divided by revenue, and expressed as a percentage. A high CER indicates efficient cloud spending, revealing how well a company converts cloud investment into revenue. Unlike traditional metrics, CER excludes headcount and includes both production and R&D cloud costs, offering a comprehensive view of cloud efficiency. CER relies heavily on full, detailed cloud cost data and precise cost allocation.

Cloud Financial Management (CFM)

Cloud Financial Management, a predecessor to FinOps, is the practice of bringing financial accountability to the variable spend model of cloud computing. It involves a collaborative approach among finance, operations, and engineering teams to manage and optimize cloud costs while maintaining high performance and efficiency. Key activities include budgeting, forecasting, cost allocation, and monitoring cloud expenses to ensure that cloud resources are used efficiently and cost-effectively, aligning cloud spending with business objectives.

Cloud Service Provider (CSP)

A CSP provides cloud services. The three most well-known CSPs are Amazon Web Services (AWS), Microsoft Azure, and Google Cloud Platform (GCP).

Commitment Management

Refers to strategies for managing long-term cloud commitments like reserved instances or savings plans to optimize costs and reduce waste. This involves tracking and adjusting commitments over time based on usage patterns.

Committed Use Discounts (CUDs)

CUDs are a pricing model commonly associated with Google Cloud (GCP). They are similar to AWS & Azure Reserved Instances (RIs). CUDs provide significant cost savings in exchange for a commitment to use a specified amount of resources or spend a certain amount of money over a period, typically one or three years. There are two main types of CUDs:

• Resource-Based CUDs: These require a commitment to use a specific type and amount of cloud resources, such as a number of virtual CPUs or memory, over the term of the agreement.
• Spend-Based CUDs: These allow you to commit to a certain level of cloud spend rather than specific resources, providing more flexibility in how you allocate and use cloud resources while still benefiting from discounts.

What's the difference between SUDs and CUDs? It lies in the commitment required. SUDs automatically apply based on actual usage without any upfront commitment, offering discounts based on the duration of continuous use. CUDs, on the other hand, require a commitment to a certain level of resource use or spend over a longer period, usually in exchange for deeper discounts.

Cost Allocation

Cost allocation is the process of identifying, assigning, and distributing costs to various departments, projects, or business units within an organization. In FinOps, it involves attributing cloud expenses to specific teams, services, or applications to gain visibility into spending, improve accountability, and optimize resource usage. Effective cost allocation helps organizations understand their cloud spending patterns, make informed budgeting decisions, and ensure that costs are aligned with business objectives and usage.

DevSecFinOps

This emerging concept integrates security into the FinOps framework, making security considerations part of the financial operations from the start of cloud projects, ensuring a comprehensive approach to cost management.

Docker

Docker is an open-source platform that enables developers to automate the deployment, scaling, and management of applications within lightweight, portable containers.

Containers encapsulate an application and its dependencies, ensuring consistency across various environments, from development to production.

Docker simplifies application development by allowing developers to package software into standardized units, facilitating continuous integration and continuous delivery (CI/CD) workflows.

Its ecosystem includes Docker Engine, Docker Hub, and Docker Compose, making it a popular choice for building, sharing, and running applications consistently across different systems.

Effective Savings Rate (ESR)

ESR refers to the percentage of potential savings realized from cloud cost optimization efforts. It measures how much an organization saves compared to what it could have spent without optimization.

ESR is calculated by dividing the total savings achieved through strategies like right-sizing, reserved instances, and eliminating wastage, by the total potential cost of cloud services without these optimizations.

A higher ESR indicates more efficient and cost-effective cloud resource management and FinOps strategies.

FinOps

FinOps is a term coined by the FinOps Foundation.

Finance + DevOps = FinOps.

At its heart, FinOps is a cultural practice designed to bring technology, finance, and business teams together to drive financial accountability.

FinOps Foundation

The FinOps Foundation is a project of The Linux Foundation dedicated to advancing people who practice the discipline of cloud financial management through best practices, education, and standards. The FinOps Foundation is a 23,000+ person-strong community, representing more than 10,000+ companies.

The Foundation provides a variety of individual training and certification programs, including the FinOps Certified Practitioner and FinOps Certified Professional. Dozens of major service and platform providers have also become certified through our programs for organizations.

FinOps Maturity Model

A framework for assessing and improving an organization’s FinOps practices, often structured around stages such as Inform, Optimize, and Operate, to benchmark and track progress over time.

FinOps Tools

FinOps tools are apps that support financial operations in cloud environments. These tools help organizations manage, optimize, and control their cloud costs by providing visibility into spending, tracking usage, and identifying inefficiencies. They enable budgeting, forecasting, and cost allocation, ensuring that cloud resources are used effectively and align with business objectives. FinOps tools often include features such as real-time monitoring, automated reporting, and analytics to aid in making data-driven decisions and achieving financial accountability in cloud management.

FOCUS

The FinOps Cost and Usage Specification (FOCUS™) is an open-source framework that establishes standardized requirements for cloud vendors to generate consistent cost and usage data. Endorsed by the FinOps Foundation, FOCUS™ aims to simplify the work of FinOps practitioners, enabling them to make data-driven decisions and maximize cloud value. It also enhances the transferability of their skills across different clouds, tools, and organizations, fostering a more streamlined and efficient approach to cloud financial management.

Forecasting

Forecasting involves predicting future cloud costs and usage based on historical data, trends, and business objectives. This process helps organizations plan budgets, allocate resources efficiently, and anticipate financial needs. Accurate forecasting enables better decision-making by providing insights into potential cost fluctuations and resource demands, helping to avoid unexpected expenses and optimize cloud spending.

GreenOps

Think of GreenOps as a practice within FinOps & CFM specifically focused on reducing environmental impact.

GreenOps involves strategies to minimize energy consumption and carbon footprint associated with cloud services by optimizing resource usage, leveraging energy-efficient data centers, and adopting sustainable practices in cloud architecture and deployment.

GreenOps also aligns cloud cost optimization with sustainability goals, helping organizations reduce costs and environmental impact, and contributing to broader corporate social responsibility (CSR) initiatives.

Google Cloud Platform (GCP)

GCP is the cloud service/platform provided by Google.

Hyperscaler

Also referred to as a Cloud Service Provider (CSP), a hyperscaler is a company that provides scalable cloud computing services, enabling vast, flexible, and on-demand computing power and storage. Hyperscalers operate large data centers and offer a range of services including infrastructure as a service (IaaS), platform as a service (PaaS), and software as a service (SaaS).

Idle Resources

These are cloud resources that are underutilised or not being used at all but continue to incur costs. Identifying and reducing idle resources is a key optimization strategy in FinOps.

Kubernetes

Kubernetes is an open-source container orchestration platform developed by Google. It automates the deployment, scaling, and management of containerized applications, allowing developers to efficiently run applications across clusters of hosts.

Kubernetes manages the lifecycle of containers, ensuring high availability and seamless scaling, and supports automated rollouts and rollbacks. It provides a robust ecosystem with a rich set of APIs and tools, making it a popular choice for managing complex microservices architectures in cloud-native environments.

Kubernetes Optimization

Focuses on cost management within Kubernetes environments, including resource allocation, pod rightsizing, and cluster scaling to ensure efficient resource usage.

On Demand Instance

An on-demand instance is a cloud resource, provided by services like AWS & Azure, where users pay for compute capacity by the hour or second with no long-term commitment.

This pricing model offers flexibility and scalability, allowing users to scale up or down based on their needs without upfront costs or the need to purchase and maintain hardware.

On-demand instances are ideal for applications with unpredictable workloads or short-term projects, ensuring that users only pay for what they use.

Oracle Cloud Infrastructure (OCI)

OCI is the cloud service/platform provided by Oracle.

Predictive Analytics

The application of machine learning and statistical models to predict future cloud spending and usage patterns, allowing for more accurate budgeting and resource allocation.

Rate Optimization

Rate optimization is the practice of minimizing costs by selecting the most cost-effective pricing options for cloud services.

This involves analyzing usage patterns, choosing appropriate pricing models such as on-demand instances, Reserved Instances (RIs), or Committed Use Discounts (CUDs), and leveraging volume discounts. Using cost management tools and negotiating custom pricing with cloud providers can further reduce expenses. Effective rate optimization ensures organizations have the necessary resources while minimizing cloud expenditure.

Reserved Instance (RI)

A Reserved Instance (RI) is a pricing model offered by cloud service providers, such as AWS & Azure. They are similar to a Committed Use Discount (CUD) offered by Google Cloud (GCP).

RIs allow users to commit to a specific amount of cloud resources over a fixed period in exchange for a significant discount compared to on-demand pricing. They provide cost savings for predictable workloads and come in various options, including standard, convertible, and scheduled, each offering different levels of flexibility in terms of modifications and usage.

RIs provide more substantial savings than CUDs but require specific instance selection, making them suitable for stable, predictable workloads. CUDs offer more flexibility than RIs in terms of the types of resources used under the commitment, making them ideal for dynamic workloads.

Right Sizing

Right-sizing (or rightsizing) refers to the process of adjusting cloud resources to match the actual needs of applications and workloads. This involves scaling resources up or down to eliminate over-provisioning or underutilization, ensuring optimal performance while minimizing costs.

Right-sizing helps organizations achieve efficiency by aligning cloud resource allocation with current demands, thereby reducing unnecessary expenses and improving overall cloud cost management. It is critical for maintaining a balanced and cost-effective cloud environment.

Savings Plans

A specific type of cloud commitment that offers flexible pricing in exchange for a long-term usage commitment. Savings plans allow for reduced rates on a wide range of services and automatically apply the best available rates based on actual usage.

Showback

Showback is a practice in which an organization tracks and reports cloud usage costs to its departments or teams without directly charging them.

Unlike chargebacks, which allocate actual costs, showbacks provide visibility into cloud consumption and associated expenses, fostering awareness and accountability. 

Spot Instance

A spot instance is a type of cloud resource offered at a discounted rate by CSPs like AWS and Azure. These instances utilize unused capacity and can be significantly cheaper than regular on-demand instances. However, they can be terminated by the provider with little notice if the capacity is needed elsewhere.

Spot instances are ideal for flexible, non-critical workloads that can handle interruptions, such as batch processing, data analysis, and testing, providing cost savings while leveraging excess cloud resources.

Sustained Use Discounts (SUDs)

SUDs are automatically applied discounts offered by cloud providers based on the amount of time a specific resource, such as a VM, is used within a billing cycle. These discounts increase with usage, rewarding users for longer, continuous use of the resource.

Unlike Committed Use Discounts (CUDs), SUDs do not require upfront commitment or contract, making them more flexible but generally offering smaller discounts.

Total Cost of Ownership (TCO)

Total Cost of Ownership (TCO) is a financial estimate that calculates the overall cost of acquiring, operating, and maintaining a system over its entire lifecycle. In the context of cloud computing, TCO includes direct costs like subscription fees, usage charges, and hardware expenses, as well as indirect costs such as staffing, training, downtime, and maintenance.

TCO provides a comprehensive view of the financial impact of cloud investments, helping organizations make informed decisions by comparing the long-term costs of different cloud solutions or between cloud and on-premises infrastructure.

Unit Cost

Unit cost refers to the cost assigned to a specific, measurable incremental unit of a product or service. In unit economics, it is a critical concept and is often called the marginal cost when associated with the development and delivery of cloud-based software or services. Understanding unit cost helps in assessing the efficiency and profitability of producing or delivering each additional unit.

Unit Economics

Unit Economics is a system that maximizes profit by evaluating the impact of incremental costs relative to incremental revenue for a defined and measurable unit of a product or service.

FinOps teams aim to provide actionable unit costs to calculate unit economics for cloud-based products or services.

This analysis helps assess the success of changes to cloud architecture, development, or operations.

Unit Economics Optimization

This term deals with understanding and improving the cost efficiency of individual units of service, such as cost per transaction or user, helping to align cloud costs with business value.

Weighted Average Cost of Capital (WACC)

WACC refers to the blended cost of raising capital for cloud-related investments, such as Reserved Instances (RIs). It’s an important consideration in making cloud commitment decisions, ensuring that savings from discounted services exceed the capital cost.

Wastage

Wastage refers to the unnecessary expenditure resulting from inefficient use of cloud resources. This includes over-provisioning, where more resources are allocated than needed, and underutilization, where allocated resources are not fully used.

Common examples of wastage include idle virtual machines, unattached storage volumes, and over-provisioned compute instances.