Cloudability

Introduction

FinOps Practitioners focus significant effort into communicating IT costs in increasingly meaningful ways.  Many of the activities of establishing a FinOps practice, such as allocating costs, developing KPIs, and creating persona-based dashboards, are to the end of bringing more context to spend.

But even if you are not a FinOps practitioner, if you have spent any time at all understanding the basics of FinOps, you have encountered a topic that seems to be the summit of the practice. Unit Economics is frequently discussed in blogs, FinOps peer groups, and conference presenters, yet it seems somewhat illusive, as very few organizations are tapping this capability to its full potential.

Is Unit Economics a myth to most and a reality only to a few, or is it accessible, even the inevitable end state, for successful businesses powered by Cloud?

This article does not seek to be the definitive source on the topic but may help you or your business partners understand how you have already experienced the value of Unit Economics, and how you can extend this to your business applications.

Definitions

It is quite common that people will utilize these terms interchangeably.  However, within the context of FinOps, the terms have unique connotations.

• Unit Metric – This is a type of Key Performance Indicator (KPI) composed of a numerator, usually expressed in dollars spent, and a denominator, which represents an increment of value realized for that spend.  
• Unit Economics – This term should be used in a broader sense to describe the resulting value when unit metrics are ubiquitously understood and utilized in communication and decisions.

Business Unit Metrics

In the table below, you will find some examples of unit metrics that could be used to measure the cost to produce business value across a few different industries.

As a team sets out to create a unit metric, the value increment should be somewhat obvious to those who are responsible for, and intimately familiar with the application. This is typically what is inferred when Unit Economics is discussed within the context of FinOps.

Example Unit Metric - Miles per Gallon

Due to a rich historic similarities and the metric’s ubiquity in modern society, we will focus on “miles per gallon” (mpg) to demonstrate some meaningful alignments with the FinOps practice.

So let us stop to consider how truly invaluable the Miles Per Gallon metric is. It allows a layman, with zero knowledge of automotive engineering, to have a meaningful conversation on the fuel efficiency of a vehicle. This would not be possible absent the metric’s simplicity and universal acceptance in our culture.

Coupling mpg with the related metric, Dollars per Gallon, allows us to accurately forecast the cost of a daily commute for a new car, or to set the budget for an upcoming road trip.

The mpg metric simplifies an incredibly complex, technical operation (a machine converting liquid fuel into movement), and in doing so, allows us to sidestep the technical barriers, allowing nearly anyone to speak on the topic with clarity and confidence.

We have ALL utilized and experienced the value of Unit Economics.

In the above example, Miles Per Gallon is a unit metric. And when this metric is utilized to enable accurate budgeting/forecasting and to make key decisions. We are engaged in Unit Economics.

History of Miles per Gallon

But how did this metric become so pervasive in modern society?  Consider the following historic facts related to the metric and note the parallels to the FinOps practice.

• The Fuel embargo crisis of 1973 caused massive fuel shortages in the US.
• Congress established the Corporate Average Fuel Economy (CAFÉ) Standards.
• In 1975, the Energy Policy and Conservation Act was passed. This required car manufacturers to double the average fuel economy of their new car fleets (to 27.5 mpg) by 1985.

There was a problem which threatened economic stability. The US government defined a means to measure fuel economy, and finally, developed a policy which required manufacturers to achieve a result based on this measure. This caused auto manufacturers to devote engineering resources to optimize their fleet within a reasonable time frame.

The Role of Technical KPIs in Unit Economics

In the context of this conversation, let us define Technical KPIs as a collection of measures which describe the cost performance of critical infrastructure components working in concert to produce business value.

Since the cost efficiency of individual components will impact the whole, defining the appropriate KPIs and targets may allow us to quickly pinpoint the component/service which presents the best opportunity to optimize within our stack.

To carry our fuel economy example a bit further, let us consider a scenario where we have purchased a vehicle with a fuel efficiency of 40 miles per gallon.

However, as we drive our first week, it becomes clear that instead of getting 40 miles per gallon, our dashboard indicates that we are only getting 18 miles per gallon. When we return the car to the dealer, their technician plugs the car into a diagnostic system which reads from a series of alerts to highlight a faulty component.

Since the engineers who designed the car are intimately familiar with the mechanisms contributing to the car’s fuel efficiency, they can effectively define a set of monitors and thresholds which quickly identify the non-optimal component.

If we consider the diagnostic measures as technical KPIs, this example illustrates why it is not only important to utilize simplistic unit metrics at the top of the stack (mpg), but it is also critical to measure the cost efficiency of the many technical components throughout the stack.

In the illustration above, we see that our primary business metric is off target. If we look at the technical KPIs, we will see that some of those are also showing red and this is where we should focus our initial efforts. 

For a set of ever evolving technical KPI examples, see the output from the FinOps Foundation Working Group on the same topic.

Summary - What is your 'Miles per Gallon'?

As a producer of business value, it is important for you to provide your leaders and stakeholders with accurate and meaningful information related to the cost and value of your application. As we have seen in our examples, creating a simple and effective unit metric, and taking steps to ensure that it is widely utilized, allows us to:

• Bypass technical complexity and provide a financial health snapshot of our application.
• Highlight how resource optimization decreased our cost to produce each increment of value.
• Enables more accurate budgeting and forecasting.
• Provides the team and stakeholders with a common north star for communication and decision making.

Know your miles per gallon but don’t know how to get started? Apptio has solutions and expertise to assist with Unit Economics! Ask your Apptio team how you can get started!