In our previous blogpost, we spoke about three FinOps metrics for success, including the shift to unit costing. In this post, we will further elaborate on unit economics as a smarter approach to measuring cloud outcomes, as well as how organisations can determine the North Star metric they will follow in order to accelerate digital transformation and achieve cloud success. Let’s start with a quick recap of the unit economics concept.
The knowledgeable experts at the FinOps Foundation define unit economics as: “direct revenues and costs, associated with a particular business model, that is specifically expressed on a per-unit basis.” Smarter unit cost metrics enable an enterprise to determine the revenue it will gain from a single unit of its business and the cost associated with servicing it, ultimately revealing the business value of spend.
A software-as-a-service company may choose a subscription as its unit; for a logistics company, it might be a parcel delivery; and a bank might define it as the customer acquisition cost. In a cutting-edge FinOps practice, the business should be able to attach an accurate calculation of its cloud costs to a unit. In other words, the enterprise will be able to understand exactly how much it spent on technology to achieve a unit, whether that is the sale of an aeroplane seat or processing an eCommerce transaction.
A North Star for digital transformation:
Unit economics produces a simple, granular picture of cloud costs on a per-unit basis and paints a picture of how sustainable spending (or the pricing of a product) is. As the business grows, the company will be able to reality-check whether cloud spending is growing at a rate justified by the pace at which its business is growing, as reflected in the units it measures. This view of the cost consumed versus revenue generated enables a knowledgeable FinOps team to ensure that waste is reduced and cloud spending is optimised.
A further benefit is that it supports the FinOps goal of moving from centralised financial planning and measurement towards budgeting, forecasting, and allocating cloud spending by project, application, cost centre, business unit, product, or function, in turn improving accountability. The FinOps Foundation sums up the benefits thusly:
“Ultimately, by quantifying the cost to produce or the cost to serve, cloud engineers can articulate their contribution to gross profit margin due to the architectural, development, and operating choices they make. Product teams will have key data points to support pricing decisions, and the business will be able to forecast cloud costs better even though cloud resource consumption is variable.”
Under the FinOps Foundation’s maturity assessment model, the sophistication of unit cost measurement will vary for companies at different stages of their FinOps journey:
- Crawl: The enterprise can measure cloud spend for a particular application against the total revenue for that application or service (for instance, cloud spend is 9% of revenue).
- Walk: The business can tie outputs of a product or service to an associated unit of activity (such as each API call costs us 10 cents)
- Run: It can measure how much it costs to perform a revenue-producing activity (each transaction costs us 20 cents)
FinOps and your digital transformation journey:
Determining which unit costs to measure is complex, but it starts with understanding cloud usage and spending patterns across the enterprise. A knowledgeable partner can help guide your business on this journey. At Nebula, we enable organisations to automate and simplify the management of heterogeneous technology environments. Get in touch to learn about our cutting-edge FinOps practice as well as our Nebula OneView solution for cloud expense management.eBook - FinOps - Nebula