At a growing SaaS company, cloud costs can change dramatically from month to month depending on the software you’re building, the number of customers you have, and how products are performing.
That’s where FP&A teams and cloud cost intelligence come into play. Without a team on the lookout for issues, you could run into costly setbacks that go on for months.
We talked to two finance pros, Mallory Woehler, Director of Strategic and Financial Planning at Ping Identity, and Steve Ferreira, Director of Sales Engineering at CloudZero, to share their insights on how you can take control of cloud costs and drive your business forward.
Where Cloud Cost Management Goes Wrong
The deeper into SaaS you go, the more cloud infrastructure will impact your P&L. Anytime you’re providing a SaaS offering and have to pay for hosting expenses, you need to be able to monitor expenses, fix issues, and keep ROI in line.
Lack of visibility
The issue that most companies run into is operating with a huge blind spot: they don’t have visibility into what their team is doing. This is when the cloud turns into a “blank check” — it’s easy to keep pouring money into it if you’re not operating wisely.
“I like to think of the cloud bill sort of like your utility bill. It doesn’t tell me if the oven’s on, it doesn’t tell me if the refrigerator’s on. It doesn’t tell me what’s on. But I need to know what it is so I can turn that off,” Steve says.
In his previous roles as a fractional CFO working with SaaS startups, Steve often says customers
deploying Kubernetes environments did not understand why their costs were going up. The lack of visibility into the full picture meant they couldn’t attribute the skyrocketing cost to anything.
“They were asking everyone to show them their AWS accounts and logging in and just trying to figure it out,” he says.
Needless to say, that’s not the situation you want to be in when you have executives and board members breathing down your neck.
Comparing month-over-month
Another pitfall is comparing something like Amazon EC2 month over month. If you’re a growing SaaS company, this is like comparing apples to oranges.
“You may have 100 customers this month and 120 customers next month. So it’s going to be completely different. So just looking at those raw dollars, I don’t know what that’s actually telling me other than it just increased,” says Steve.
The alternative is to look at unit economics in terms of COGS, or cost of goods sold per customer.
“When you look at the unit economics, or the unit cost, or the COGS cost per customer, it gives you that visibility into understanding what is driving it,” says Steve.
This is helpful to determine if rising cloud costs are due to two or three customers or something happening across the board.
You’ll then know when you need to loop in engineering, and have a handy way to communicate the big picture to the CEO, investors, and other stakeholders.
The Benefit Of Building Partnerships
Organizational success relies on relationships and collaboration. Keeping cloud costs in line requires a joint effort between finance, operations, and engineering.
This has been the greatest lesson that Mallory learned as she dove deep into the world of cloud in her role with Ping.
“Anytime you’re in an FP&A role, you’re a liaison between your cross-functional partner groups, and then your leadership within finance and your counterparts in finance,” she says.
“My role is to go out there and have as many conversations as I can with the engineers, as well as provide them insights into what we’re seeing through the numbers using various reporting platforms such as CloudZero.”
The better you learn to speak the language of your engineers, the better you can work with them to understand cost drivers and encourage them to help you improve the financial picture.
In addition to engineering conversation, Mallory is also busy digging into the use cases of Ping’s clients. By asking the right questions, she can model the financials correctly based on customer use of products and the associated cloud costs.
Steve agreed that business partnering is huge. “If you don’t understand what your counterparts do, you can’t really add value,” he says. The more time you spend at the proverbial lunch table with engineering, the better off you will be.
You won’t see a direct or quantifiable ROI impact from this behavior, but chances are it’s there. A symbiotic relationship benefits all parties: when you advocate for your engineers, they will go the extra mile for you to nail down the cost side of things.
Empower Engineering To Drive Profitability
A great relationship with engineering can work wonders, but there are also tangible ways to empower your engineering team and reward them for keeping cost and profit top of mind.
Product-level P&Ls
One way to foster transparency and educate your engineering team is to report financials at the product level.
Engineers are often hardwired to think about the deliverable on their product roadmap, and little else. But that doesn’t have to be the case if you implement visibility through product-level P&Ls.
“When I joined Ping, we were not reporting different P&L profitabilities. Now what we’ve rolled out is we do report on our product level a P&L to each group of engineering leaders, product management leaders. We’re having a quarterly business review where we can dive into the details of why their gross margin and their ROI on their product line is either declining, increased, or staying flat,” says Mallory.
Her team revisits those P&Ls every quarter, and creates forecasts to show engineers how a small change now can have an exponential impact down the line.
“Any time you can give them data to help them make better decisions, I think that empowers everyone to think more wisely about, should I be creating the product this way? Should we be pricing it this way?” she says.
Incentives
If a spreadsheet and modeling isn’t as effective as you’d hoped, you can also consider linking clear incentives to adopting engineering changes that save money.
Steve has seen companies that implement bonuses tied to the dollar amount they save the company, which further motivates them to turn around and save even more money through smart practices.
Incentives don’t necessarily have to be monetary.
“It may be another way of being that partner, giving them data. They need different resources. If they’re saving you $400,000, you may be able to reward them with some system that they’ve been wanting for the last few years, but you haven’t had the budget. So it’s something where it’s a little give and take,” Steve says.
4 KPIs To Watch
Perhaps the biggest question when it comes to the cloud is what KPIs should you monitor? Here are several that Mallory and Steve recommend:
1. COGS cloud cost as a percent of revenue
COGS grows with your revenue, making this an easy indicator to tell you when something’s gone awry. If this percentage increases noticeably month over month, it’s a clue that the product isn’t functioning properly or a customer is using it in an odd way.
2. AWS cost per headcount in R&D
This allows you to determine if you are using resources responsibly. Are you keeping things spun up when they don’t need to be spun up? Do you have unused instances sitting out there that are slowly eating up costs?
3. Unit cost by service
This is important not only for monitoring current products, but also for modeling out scenarios for new products that would combine with existing services.
4. Cost per customer
When you have a private tenant offering and those customers are using those in unique ways, those costs can grow and drop unexpectedly and require investigation into the cause.
Do You Need A FinOps Role?
At Ping, Mallory made the case for a FinOps role that straddles finance and engineering, and it’s been a game-changer.
“I would say if you don’t have a toolset for monitoring your cloud expenses and you don’t have a dedicated FTE and you plan to grow as a SaaS company, you have some really big challenges ahead of you,” she says.
The sooner you can make the case to your leadership about the importance of investing in this area, the higher the ROI is going to be.
If you’re in a position where you haven’t hired for a FinOps position yet, do a business case on it.
“If you really look at how much a FinOps person is able to save the company, and then we look at the cost to hire that person, you have your case made,” Mallory says. “That’s exactly how I went about it, and the ROI has been 5x what I even presented in my business case.”
If funding remains an issue, take education into your own hands by utilizing free training in the form of webinars, LinkedIn Learning, and of course using your internal business partners to your best advantage.
Remember that you don’t have to tame the cloud alone. Solutions like CloudZero were built to help companies power profitable growth.
CloudZero organizes your cloud spend so that costs are broken out into concrete, accurate, and business ready dimensions so that you’re never left in the dark about why your costs are going up or down.
for personalized recommendations that will take your FinOps practice to the next level.
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