Nicola Sfondrini – Partner Digital and Cloud Strategy at PWC.
With the growth of organizations operating at cloud scale, the challenges associated with managing cloud spend complexity have commensurately risen. A common struggle of optimizing cloud spend is to balance the costs of cloud infrastructure relative to the value it delivers.
FinOps is the practice of applying financial accountability to cloud spend, and one of its core pillars is the discipline of unit economics, which can help tie cloud spending to business outcomes. In this article, I take a deep dive into how unit economics can be the strategic lever that enables organizations to turn cloud investments into value engines.
Understanding FinOps Unit Economics
At its foundation, unit economics is about tracking costs and revenue at the most granular level—translating the abstract expenses of the cloud into tangible business value by line number. This allows an organization to track the cost per unit of value, whether that unit is a user, transaction, gigabyte of data or something else. This granularity enables FinOps teams to calculate how efficiently cloud resources are being used, which in turn leads to better decisions and greater alignment between cloud spend and business objectives.
For example, a SaaS (software-as-a-service) company might calculate its cloud expenditures in terms of cost per active user or cost per transaction (such metrics are known as unit-based metrics), using these numbers to tweak its pricing models or service delivery. Unit-based metrics are equally relevant for measuring cloud expenditures not in isolation but in the context of how well they’re generating revenue.
Merging Quantitative And Qualitative Metrics
Unlike unit economics, where the metrics are quite straightforward for revenue-generating services, scoring and benchmarking internal or non-revenue-generating services requires a more nuanced treatment that places greater reliance on qualitative factors such as time-to-market reduction, innovation enablement and team productivity.
For Revenue-Generating Services
For companies that directly monetize their cloud usage, the math is straightforward. How many customers do you need to serve to recover your cloud spend? Or how many transactions do you need to process? Such measurements are easy to calculate. For instance, for a financial services SaaS platform, you can determine if the investment in the cloud is yielding equivalent financial returns simply by knowing the cloud cost per financial transaction analyzed. This kind of clarity helps the business consider pricing as well as investment.
For Internal Or Non-Revenue-Generating Services
So, external services like payment processing or order fulfillment are charged back to the business unit in some way. Conversely, internal services—such as research and development, customer support or internal applications—are often more cross-cutting. They might not be revenue-generating, but they can provide critical value through other means, such as speeding up innovation, improving employee productivity or reducing the time to market for new products.
For example, spend value might be based on how much faster new products can be developed and launched. Unit economics here would measure things such as innovation speed or process efficiencies rather than strictly financial outcomes. Qualitative measures can be important in justifying cloud investments in non-revenue functions.
Best Practices For Implementing Unit Economics In FinOps
Putting unit economics to effective use via a FinOps framework takes planning and coordination across teams. Here are a few best practices:
1. Start small but strategic. Start with a few qualitative unit metrics that reflect your organization’s priorities. If you’re a profit-generating business, metrics such as cost per user or cost per transaction might be appropriate. For an internal operation, focus on qualitative metrics that are closely linked to strategic goals such as innovation or time to market.
2. Foster cross-functional collaboration. It’s also not just a finance function—unit economics demands close collaboration between finance, engineering and business teams to ensure that the metrics tracked are the right ones and that they’re actionable. This means that engineers need to understand how their decisions impact cloud costs and finance teams need to link spend to business outcomes.
3. Use automation and real-time monitoring. Use FinOps tools providing continuous visibility into cloud usage and spend to enable teams to make data-driven decisions and react in real time to the performance of their cloud consumption. Automation helps dynamically scale cloud resources, which in turn reduces the risk of overprovisioning.
4. Regularly review and adjust metrics. Cloud usage and business goals are constantly evolving, so your unit metrics will need to be reviewed on a continual basis. The more your cloud consumption patterns change, the more your unit metrics need to change as well. If you’re adding additional features to a product or scaling operations, unit metrics need to be flexible enough to reflect those changes.
Conclusion
Through FinOps unit economics, businesses can link cloud spending to business outcomes, whether they’re quantitative (e.g., revenue per user) or qualitative (e.g., innovation and time to market). This enables them to move beyond cost optimization and leverage the cloud as a lever for innovation and growth. Forward-thinking cloud management must go beyond just reducing costs, creating a system where companies can extract the maximum value possible from their cloud investments.
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