Thursday, February 29, 2024

FinOps: Why are CFO Joined at the Hip with CTO/Chief Architects at Technology Organizations?

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By Mayur Shetty 

Chief Technology Officers (CTOs) and Chief Financial Officers (CFOs) share a complex dynamic when it comes to cost management. The CFO role emphasizes the need for strict expenditure accountability, while a CTO seeks to maximize resource and budget utilization, all while driving technological advancements.

In the realm of cloud management, CFOs have demonstrated proficiency in navigating the fundamentals of financial operations (FinOps) by successfully implementing strategies such as utilizing reservation instances and managing costs through perpetual licenses. However, their struggle arises when dealing with complex architectural designs that make direct cost allocation impractical.

One of the challenges of modern architecture is that the delineation of costs is inversely proportional to shared architecture. 

To illustrate this point, let’s consider an example of a gym with ten pieces of equipment and two types of memberships. 

  • The first membership type assigns each member to a specific piece of equipment, restricting members from using any other equipment. In this case, the CFO can easily understand the revenue generated from each equipment.
  • However, in the second membership scenario where all equipment can be used by all members, challenges and opportunities emerge. 

Opportunities include:

  • Increased membership due to the flexibility of using any equipment, resulting in a higher number of users.
  • Positive feedback from the initial set of users, driving more membership sign-ups.

Challenges include :

  • Some equipment may be overused while others may be underused, leading to imbalanced utilization.
  • Allocating revenue per equipment becomes challenging because usage monitoring and cost delineation must be performed.
  • Increased users can result in stress at the front desk, utilization of utilities during peak hours, etc., resulting in surprise unbudgeted costs. 

In the context of SaaS or technology companies, let’s explore a common scenario. Traditionally, analytics relied on data transformation using products like SQL, which had predetermined capacity limits for processing. Consequently, this approach led to isolated allocation of capacity for each client, making scaling a costly endeavor. To address this challenge, CTOs have introduced alternative technologies such as Data Bricks and Snowflakes, which offer on-demand and practically limitless capacity. 

While these modern technologies provide the benefits of scalability and flexibility, achieving optimal capacity utilization remains a complex task. It requires a delicate balance between resource allocation and scheduling to control costs effectively. This aspect of achieving optimal capacity utilization often poses challenges in the real world. Ballooning costs can be difficult to anticipate and allocate based on usage alone unless financial operations (FinOps) are intricately integrated into the product design. 

By incorporating FinOps as an integral part of the product design, SaaS companies can better manage and budget for the fluctuating costs associated with achieving optimal capacity utilization.

How should the CFO navigate through the complexity?

  • Organizational Alignment: From an organizational standpoint, it is advisable for FinOps to have a reporting relationship with the CFO’s office. FinOps resources should have an equal stakeholder position within the organization’s community of practice or any design forum where architecture designs are reviewed and approved.
  • Budget approval requirements: Prior to approving the procurement of a tool or the adoption of new offerings within public cloud providers like AWS or Azure, the CFO should address the following questions:
  • Can costs be allocated and attributed to specific products, clients, or services even after the introduction of the new component/tool?
  • Will the introduction of the new component/tool lead to additional costs related to shared infrastructure, compliance, or security, both during the initial implementation and throughout the adoption process?

About Mayur ShettyMayur Shetty

Mayur Shetty has actively contributed to the transformation of Duck Creek, a leading provider of P&C insurance software, in his role as a Software as a Service (SaaS) evangelist. From its early stages, Shetty played a crucial part in shaping Duck Creek’s evolution from a software/product-focused organization to a prominent provider of P&C insurance SaaS solutions, culminating in a successful IPO.

During this transformative journey, Shetty led the modernization of Duck Creek’s software into a cloud-native application hosted on Microsoft Azure. This involved implementing robust governance measures that encompassed security, scalability, and financial operations (Fin-Ops) practices. Under Shetty’s guidance, the SaaS business experienced remarkable growth, expanding its customer base from less than 3 customers to over 100.

Recently, Shetty has joined Curinos as VP of SaaSops , a renowned player in the analytics and artificial intelligence (AI) domain, where he is responsible for maturing their SaaS practices. With his passion for coaching and sharing knowledge, Shetty is well-equipped to excel as a writer and effectively communicate complex concepts to a broader audience.

Learn more: https://www.linkedin.com/in/mayur-shetty-43238b18/

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