Invoicing and cost allocation
Work with finance personnel and use input from product and engineering staff to develop specific reports, cloud bill reconciliation processes, and cost allocation models. This process aligns cloud cost data and reports with specific budget and accounting requirements.
Manage financial interactions for invoicing
Manage purchase orders with vendors.
Understand vendor invoicing formats and processes.
Develop processes and policies for reconciling vendor bills.
Manage financial interactions for cost allocation
Define and maintain processes for decision-making, collaboration, and integration in finance and accounting.
Provide cost allocation reports to internal budget owners.
Work with accountants to handle accounting settlements.
Make adjustments and corrections to the accounting system.
Definition
Managing cloud bills and formally allocating costs to an organization's financial systems is a key process that requires close interaction between FinOps practitioners and finance and accounting personnel. The accounting department needs to effectively understand, reconcile, and pay bills from cloud service providers. When formal cost allocation to the organization's budget or accounting system is required, the finance department must be able to rely on the consistency, timeliness, and accuracy of cloud cost data to allocate costs in a transparent and traceable manner. This ensures that each profit and loss (P&L) owner is responsible for the cost of the resources or services they consume.
The goal of this capability is to help the finance department allocate invoiced costs to their designated cost centers and meet the format and timing requirements for the organization's accounting and financial activities. Besides managing bills and creating allocation reports, this capability also involves continuously maintaining the required data and reports. This supports maturing cloud practices and changes in accounting or financial needs. This includes providing guidance to the FinOps team on how to check and validate data quality, how to maintain data and report integrity (such as some organizations may require SOC compliance or other similar standards), which cost elements to include in cost allocation reports (and which cost metrics to use), and the process for correcting cost allocation reports if changes occur after the accounting period ends. The cost allocation process should align with the goals of the FinOps team and ITFM/TBM. It should focus on the granularity of cost allocation, the general ledgers (cost centers) used, and the timing requirements for settlement activities.
Reconciling bills from a cloud service provider (CSP) can be challenging because of several variables:
Timing—In most cases, you receive the CSP bill 3 to 12 days after the previous month ends. Cloud usage data is generated throughout the month, and consumption data may arrive after the month's end. Performing accounting settlements shortly after the accounting period closes is very difficult if the bill and usage data have not yet been received. This may require using incomplete data to estimate total spending and individual items. You must also establish a proper process to reconcile with journal entries after the data and invoicing are complete.
Data accuracy and consistency—CSP bills provide summary information down to the sub-account level. This can complicate allocation by cost center. When you use tags or labels to classify or allocate shared costs, it can be difficult to verify the accuracy of the summary data on the bill. In addition, commitment-based discounts (such as custom pricing, committed use discounts, savings plans, and reserved instances) may not be included in the bill as expected.
Number of bills—Organizations may receive many bills from multiple cloud service providers and other vendors. This can include separate bills for prepaid commitments, usage, Alibaba Cloud Marketplace subscriptions, and credit memos. The number depends on how they organize and deploy cloud resources.
To overcome these challenges, this capability works closely with the Data Ingestion, Cost Allocation, and Reporting and Analytics capabilities to create integrated datasets. These datasets provide showback, reconciliation, and chargeback reports to all roles.
The main difference between showback and chargeback is the formality of sending charges to the accounting budget. Showback reports can target any level of granularity and show costs to teams of any size for the areas they are responsible for. There is no difference in maturity between these two reporting methods. Not all organizations need to perform chargeback. When cloud costs can be allocated to single or easily distinguishable cost centers, the extra cost and burden of creating formal chargeback reports may be unnecessary. Every FinOps practice requires showback, while chargeback depends on the organization's accounting policies.
Some activities in this capability depend on decisions made in the Cost Allocation capability. Decisions on tagging and account strategies will affect how you define the granularity of responsibility and help you identify the cost centers for chargeback. Another consideration that depends on the Cost Allocation capability is how to identify shared organizational costs. If these costs cannot be identified through the Cost Allocation capability, the ability to allocate them will be limited to certain types of charges, such as enterprise support fees and commitment-based discounts. However, key questions such as "Are these costs managed centrally or allocated based on consumption?" should be answered within this capability, in consultation between the FinOps team and the finance department.
Maturity assessment
Crawl
Cloud spending is allocated to teams based on monthly estimates, but there are often significant differences between estimates and actuals (with little impact on the overall organization).
Ledger estimates are made using incomplete data, with no additional adjusting entries made after the data is complete.
Due to a lack of cost visibility policies, shared costs such as Enterprise Support are managed centrally.
Commitment-based discounts purchased for a specific sub-account are credited to the account owner, not allocated based on consumption of the discounted resources.
Centrally purchased commitment-based discounts are credited to a central billing account and not allocated to teams based on consumption of the discounted resources.
Monthly bill reconciliation is done at a high level, ensuring the expected total cost for each service provider matches the total invoiced amount.
Invoice payment and chargeback processes are separated by days or weeks due to manual operations.
No tools are used to automate data capture, data reconciliation, or exception handling.
Chargeback is done using workbooks and manual journal entries, with no Service Catalog or cost center hierarchy tools.
Chargeback files have coarse granularity, containing the total cost for each service provider in each cost center, without itemizing shared costs or other costs for better visibility.
The cost center hierarchy is relatively flat and is only managed by leadership.
The only intersection between finance, the central FinOps team, and the accounting team is sharing chargeback data for posting.
Walk
Cloud spending is allocated to teams based on estimates, with some variance between estimates and actuals.
Temporary ledger entries or incorrect charges are common due to manual operations.
Ledger estimates are made using incomplete data, and supplemental entries are often needed to reflect actual costs.
Initial policies on how to charge for and display shared costs are implemented in the chargeback file.
Most purchases of commitment-based discounts are charged to teams based on their consumption of the discounted resources.
A centralized tool is established for chargeback data, which is exported to a file that requires manual editing before integration into corporate financial tools.
Invoice payment and chargeback processes are handled within the financial closing process, typically taking a few days.
The chargeback file includes a breakdown of some shared costs and itemizes charges for committed use or Alibaba Cloud Marketplace purchases.
Invoices are manually validated to ensure the accuracy of credits, discount rates, and one-time fees, which are then entered into the accounting system.
The cost center hierarchy is refined to smaller units within the organization for more detailed allocation.
Currency conversion is included in the chargeback file as part of the monthly process.
Finance, the central FinOps team, and accounting are actively collaborating to improve and refine the chargeback file and to define initial policies for charging shared costs.
Run
Teams understand their direct costs and allocated shared costs based on their actual consumption.
All purchases of commitment-based discounts are charged to teams based on their consumption of the discounted resources.
Chargeback/showback reports are automatically integrated into corporate financial tools.
Bill reconciliation and chargeback processes can occur simultaneously due to tool automation and integration.
The finance department can independently reconcile spending or answer questions about chargeback without intervention from the central FinOps team.
The margin of error for ledger estimates using incomplete data is small enough that additional entries are usually not needed, but adjustments can be made quickly if required.
Chargeback data is automatically and fully entered into the financial system monthly, supporting charges, markups, and allocations for both prepayments and arrears.
The chargeback file provides a detailed breakdown of allocations for all types of charges.
Currency conversion is automated where possible and is itemized or flagged in the chargeback file for additional analysis of any fluctuations not related to cloud usage.
Finance, the central FinOps team, and accounting have finalized all processes related to charging for and showing shared costs, and have refined allocation to the most granular level of the organization.
Functional activities
FinOps Practitioner
Receive invoices from cloud service providers and direct them for payment, or arrange for the appropriate team to be responsible for receiving them.
Understand internal procurement processes to generate purchase order numbers or term sheets for cloud service providers to submit invoices against.
Collaborate with the finance department monthly to validate cloud service provider invoices, including expected costs, discounts, taxes, and credits.
Validate any Alibaba Cloud Marketplace invoices and send them to the appropriate teams as needed.
Understand how cloud costs are generated.
Help teams understand tagging and account strategies, and the importance of implementing cost accountability in chargeback and invoice reconciliation.
Establish and maintain data sources/tools for allocating cloud usage and shared costs (such as commitment-based discounts), and use them to create chargeback data.
Verify that chargeback data aligns with the expected costs from the invoice plus any additional costs.
Help teams reconcile their share of costs allocated to them each month based on chargeback data.
Collaborate with accounting and finance teams during the closing period. Advise on the best estimation methods for initial allocation. Provide 'adjusted' chargeback data to the finance department if the relevant data is not centralized in one system and the data aggregation timeline does not align with the financial closing schedule.
Product
Review assigned cloud costs each month.
Understand how these costs affect the budget.
Understand the allocation policies related to chargeback/showback and shared costs/discounts.
Communicate the application's cost expectations to management.
Use chargeback allocation information to prioritize optimization efforts.
Finance
Understand how cloud costs are generated.
Help teams understand their budgets and update forecasts iteratively.
Explain budget variances to management and budget owners, typically on a monthly, quarterly, and annual basis.
Collaborate with the central FinOps team and accounting department to ensure the chargeback process evolves over time to meet any changes in the organization's budget or adjustment needs.
Help teams reconcile the costs allocated to them each month.
Collaborate with the accounting department and the central FinOps team during the closing period to ensure invoices are validated and paid promptly.
Use a centralized data/allocation tool to post chargebacks in the financial system.
Establish compliance standards for chargeback procedures that align with the company's financial closing, budgeting, and forecasting processes.
Provide detailed project accounting information, such as general ledger codes related to budgets, to enable correct allocation.
Track changes in cloud costs related to exchange rate fluctuations and usage.
Collaborate with the central FinOps team to establish processes for allocating shared costs and commitment-based discounts.
Perform any necessary adjusting entries after settlement data is finalized to ensure the accuracy of costs for each department.
Procurement
Understand how cloud costs are generated.
If cloud charges (such as purchases through Alibaba Cloud Marketplace) require a purchase order (PO), collaborate with finance, accounting, and FinOps teams on closing activities and chargeback.
Provide invoicing and payment terms to the finance and accounting departments to ensure the chargeback process meets contractual standards.
Engineering
Understand how cloud costs are generated for each service used.
Adhere to company tagging and account policies to facilitate more detailed cost allocation.
Review costs allocated to relevant teams/applications monthly to understand trends, budgets, and more.
Communicate the application's cost expectations to management and finance leaders.
Understand organizational policies regarding chargeback/showback and the allocation of shared costs/discounts.
If applicable, collaborate with FinOps practitioners, accounting, and finance teams to validate the planned allocation for managed shared services.
Management
Understand how cloud costs are generated.
Review assigned cloud costs.
Use this information to make real-time decisions.
Establish metrics to evaluate the success of cost allocation.
Understand organizational policies on chargeback/showback and the allocation of shared costs/discounts, and contribute to their evolution when necessary.
Success metrics and KPIs
Success metrics are viewed in the context of cloud costs. They may include one or more key performance indicators (KPIs), describe objectives with key results (OKRs), and set thresholds to define outliers or acceptable deviations from forecast trends.
KPI
Chargeback processing time—The efficiency of the chargeback process, from when a cost is incurred to when it is allocated to departments, projects, and products.
Percentage of invoices paid on time—Adherence to terms with service providers.
General ledger reconciliation variance (total and per cost center)—The difference between cloud spending recorded in the cloud management tool and the amount charged in the general ledger.
Chargeback accuracy—Assigning the correct charges to the correct cost centers.
Percentage variance between estimated and actual chargeback values.
Success metrics
Invoices are reconciled regularly to ensure rates, discounts, and credits are validated.
Budgets and forecasts are not affected by significant cost changes resulting from incorrect charges.
A collaborative relationship is established between finance, accounting, and FinOps teams.
Increased awareness and accountability for cloud spending among all budget owners.
Effective reporting of executed chargebacks.
Accelerate the invoice processing and cost allocation cycle.
Inputs and outputs
Inputs
Tagging standards and policies provided by the FinOps team, as determined by the Cost Allocation capability.
Cost allocation data provided by the FinOps team through established tools.
Cost allocation models for shared services provided by the FinOps team and the finance department.
Internal allocation reports built by the FinOps team to support the chargeback process.
Financial policies, procedures, protocols, and practices, including financial spending approval thresholds, depreciation and amortization policies/strategies, and capitalization variance/policies provided by the finance and accounting teams.
The company's cost center/department hierarchy provided by the finance team.
Invoice payment terms for each CSP provided by the procurement team.
General ledger requirements provided by the accounting team (chart of accounts, cost centers, business unit codes, capital budget codes, location codes).
Outputs
Charges executed in the financial system and visible in the cost center actuals.
A centralized reporting tool that serves as the source of truth for providing chargeback files.
Feedback to the allocation department on how the finance department needs to formally allocate costs to organizational cost centers, general ledger codes, and other financial categories in the chargeback.
Feedback to the Data Ingestion capability on specific data and metadata required for chargeback or bill reconciliation.
Feedback to the Reporting and Analytics capability on how to format showback reports into chargeback reports.
Feedback to the Cross-functional Collaboration capability on how IT finance or other financial extracts should allocate or classify costs.
A glossary of terms for the information provided in invoices and chargeback reports, to be used by other roles for more precise reporting.
Documented period-end closing and invoice processing requirements to meet the organization's financial needs.
A chargeback file containing metadata and data (in a predetermined currency) that is aligned with the organization's general ledger for extraction and processing by the financial system.