Definition
Cost Allocation is the set of practices to divide up a consolidated invoice or bill among those who are responsible for its various component parts. In the context of FinOps this typically involves dividing up consolidated Cloud Service Provider invoices among various IT groups who use cloud within the organization.
FinOps, itself, is necessary due to the large quantity of billing and usage data provided by cloud providers, and the speed at which it is delivered. Cloud billing and usage data is aggregated into a few data sources, often with millions of lines of data, delivered multiple times per day. Cost Allocation can be a challenge to appropriately divide the total cloud bill among the many parts of an organization who are using it.
Cost Allocation is done through a combination of functional activities primarily focused around the use of a consistent hierarchy of accounts, projects, subscriptions, resource groups and other logical groupings of resources (and the naming of these hierarchical groupings); along with resource-level metadata – tags or labels – applied within the cloud service provider, or by a third party FinOps platform.
Maturity Assessment
WHERE ARE ORGANIZATIONS IN TERMS OF MATURITY
Crawl
56%Walk
15.9%Run
28.1%Those at the highest maturity are allocating more than 90%, where those at Walk maturity are not far behind and allocation above 80% with the remaining cohort at Crawl.
Take the State of FinOps 2024 SurveyCrawl
- At lower maturity the mechanisms for allocating cost will be less granular and more general, and the ability to handle shared costs or untagged cost will be less effective, granularity of cost allocation will likely be at the business unit or portfolio level
- Crawl phase cost allocation might include simply dividing the total bill by account, project or subscription where a list of these is known to belong to a specific cost center or business unit
- Accounts, projects or subscriptions which are unknown would be fairly common as cloud use grows, and the FinOps or finance team might need to investigate these to determine an owner some months
- Tags or labels may be used for some cost-allocation, but not used consistently, or not used for a majority of spend
- A Metadata strategy, including resource and hierarchy naming standards might exist, but it may not be followed consistently
- Use of Cloud Service Provider tools
Walk
- At a walk maturity, mechanisms for allocating cost will be well-established, and there will be a variety of mechanisms, but all may not be used consistently or universally, and some shared costs or unallocated costs may still exist, granularity of cost allocation will typically be at an application or service level
- Walk phase cost allocation will typically include a combination of factors, such as accounts, projects or subscriptions which are identified by metadata or naming standard as belonging to specific cost centers, resources within shared cost pools which can be identified as belonging to a particular cost center, and some mechanisms for the distribution of shared costs
- There will likely still be either legacy or less critical parts of the cloud infrastructure which are not consistently using the cost allocation standards, which may still require some manual or estimation effort
- There may be some shared cost infrastructure which cannot be directly allocated without some information not available in the cost and usage data, but which can be either budgeted for directly as a shared cost or which can be divided by agreed-upon factors which are available (e.g. the percent of directly attributable other costs paid by an application is the same percent paid of the shared cost items)
- Use of a combination of Cloud Service Provider tools and third party tools of various types
- KPIs for cost allocation understood, not automated likely
Run
- At the run maturity, costs should be allocable to as granular a level as required by an organization, with direct allocation or consistent mechanisms for distributing shared cost items, and the strategies for metadata, hierarchy and naming standards are being used consistently and effectively universally.
- Multiple sources of data are being brought together to effectively allocate shared costs at the level they can be where this is critical to the organization
- There are few scenarios where all cost is not allocated at the most granular level or is unidentified, requiring essentially no research or reporting generation time
- Use of Cloud Service Provider tools, third party tools, home developed and maintained tools and automation
- KPIs well understood and automated
Functional Activity
As someone in a FinOps Practitioner role, I will…
- develop the Naming Standards for all required and optional layers of hierarchical groupings
- develop compliance standards for various groups
As someone in a Business/Product role, I will…
- provide feedback on cost allocations made to products within my control
As someone in a Finance role, I will…
- determine the organizational and budgetary units to which cost will be allocated
- determine how to allocate percentages of any shared cost items
As someone in an Engineering/Operations role, I will…
- determine how and when metadata will be applied to hierarchical groupings and resources
- enforce and automate metadata standards for cost allocation metadata
- identify and provide all metadata sources required for analysis and cost allocation
As someone in an Executive role, I will…
- review and approve cost allocations assigned to organizations within my control
- review and approve cost allocation strategies
- determine and provide feedback when cost allocation must become more granular or mature
Measure(s) of Success & KPI
Measures of success are represented in the context of cloud costs and may include one or more key performance indicators ( KPI ), describe objectives with key results ( OKR ), and declare thresholds defining outliers or acceptable variance from forecasted trends.
- The majority of cloud costs can be categorized and allocated directly to an organizational unit. According to the FinOps Community of Practitioners, comprehensive allocation translates to at least 80% of cloud spend is allocated for a FinOps practice operating at a Walk maturity level; and 90% for a FinOps practice operating at a Run maturity level
- Ability to surface the percentage of cost that cannot be categorized and allocated directly, and which must be investigated at a low level
- Metadata compliance as a percent of spend (i.e. 80% of cost has appropriate allocation metadata, or is within a known hierarchical grouping)
- Stakeholder notifications for missing allocation metadata when resources are deployed
Inputs
- Cloud Adoption Frameworks / Architecture Frameworks from Cloud Service Providers
- Established reference listing an organization’s valid values for each element of allocation metadata (e.g. Project names, Application IDs, Cost Center IDs, Contacts, Organization groupings, etc.)
- Reporting which surface percentage of spend that is allocated and unallocated by established allocation metadata
- Roles defined for cost ownership
- Existing tag/label standards for operations, existing naming standards
- Understanding of the capabilities of CI/CD, platform, cloud provider capabilities
Related Data
2022
Cost Allocation (Metadata and Hierarchy)
The charts shows what respondents can allocate today, they aspire to allocate ~90%, something only ~21% of respondents are currently achieving.
