Cost allocation
Develop strategies to allocate cloud costs using accounts, tags, and other metadata to hold teams and projects accountable for their cloud usage.
Maintain an allocation strategy
Define the organizational groups to which you will allocate cloud costs.
Define the specific terminology for each grouping.
Maintain a tag and hierarchy strategy
Establish a specific set of tags, tagging practices, naming standards, and grouping hierarchies to identify costs allocated to each group.
Determine how to identify costs that require shared allocation.
Maintain a shared cost strategy
Determine if any costs need to be shared among multiple groups.
Define an allocation mechanism for each shared cost item.
Validate allocation compliance
Create mechanisms to ensure costs are fully allocated to the appropriate groups.
Develop and maintain allocation methods for different categories of cloud usage.
Establish and maintain a policy to document how shared costs are distributed and how this impacts allocation goals.
Definition
The cost allocation capability embodies the FinOps principle of "everyone owns their cloud costs."
Cost allocation defines how to assign cloud costs to the right owners, either directly or through shared allocation. In FinOps, you use account structures, tags, tagging, and derived metadata to ensure costs are correctly attributed to the right categories. This gives product managers, engineers, and others a transparent and complete view of the cloud costs they are responsible for.
You can allocate aggregated cloud usage data to groups by manually splitting costs or by using known groupings such as accounts, projects, subscriptions, resource groups, or other cloud resource groupings. Resource-level naming conventions, tags, or tagging increase allocation granularity. For finer allocation, or to allocate the costs of portions of a shared resource, use other data sources such as a configuration management database (CMDB), observability data, or utilization data. As an organization's need for detailed reporting and analysis grows, the methods and complexity of cost allocation also typically increase.
Cost allocation uses three primary strategies: an allocation strategy, a tagging strategy, and a shared cost strategy.
An allocation strategy defines how to map cloud costs to the organization. The core of the strategy is to understand and define how the organization wants to view cloud costs. This enables Showback for teams to see their costs, Chargeback for finance teams to allocate expenses, or assignment of costs to various cost centers. For more information on how cost allocation affects billing presentation and Chargeback, see the Cloud Invoicing & Chargeback capability. Cost allocation can operate at multiple levels, and cost and usage data can be segmented in many ways. For example, the finance department may need costs broken down by cost center or expenditure type (such as R&D or cost of goods sold), while engineering teams may require a more detailed breakdown by application, and operations teams may need to focus on all costs related to production environments across all applications.
A tag (or metadata) strategy defines how to map cloud usage and resources to the appropriate organizational units. The strategy focuses on understanding the combination of cloud data the organization needs, how to place resources into accounts, how to group accounts, how to use naming standards, how to apply tags or tagging, and how to integrate all this information. A tagging strategy must address the challenges of tag compliance and consistency, differences in how resources are tagged across environments, and the inability to tag some costs within the cloud environment. Adopting automation, Infrastructure as Code (IaC), and tools to manage tags can make a tagging strategy more effective. While the metadata strategy discussed here is limited to cost allocation, it may also need to consider requirements from other areas within the organization, such as operations, automation, and security. An organization’s tag strategy may be owned by a Cloud Center of Excellence (CCOE), cloud platform team, or DevOps team. The FinOps team must collaborate with these teams to ensure the overall strategy includes cost allocation requirements.
A shared cost strategy defines how to allocate the costs of each group of shared resources to budgets. Most organizations have costs that need to be shared. For example, when costs are for customer support, all users benefit and therefore should share those costs. Other scenarios involving shared costs include centralized network services, platforms, or container environments. Although the ultimate goal may be to fully allocate all costs, allocating and reporting on shared costs is complex. Many early FinOps practices adopt an "informed ignoring" approach, where a business decision funds shared cost items from a central budget instead of allocating them from each cost center's budget. To choose the best allocation strategy for each shared cost item, most organizations use a hybrid approach: some shared costs are allocated to cost center budgets, while others are funded from a central FinOps budget. Shared costs can be allocated in several ways, including fixed, proportional, or using proxy metrics to determine a variable ratio. As an organization's cloud usage and FinOps practices mature, especially with the introduction and advancement of automation, these strategies also evolve. These changes drive the Data Ingestion capability to acquire the necessary data and context. At any given time, various versions of these strategies may be in effect, making it difficult to achieve absolute uniformity in allocation, tagging, and shared cost distribution. A reasonable goal is to achieve a degree of allocation that provides the organization with enough effective information to make sound decisions based on its current maturity level.
Maturity assessment
Crawl
The allocation strategy is simple, allocating costs of accounts, projects, or subscriptions to business units, product portfolios, or cost centers based on a list of accounts known to belong to a specific cost center or business unit.
The tagging strategy includes:
Resource naming standards
Account, project, and subscription naming standards
Tagging does not consistently follow established policies and standards.
Identifying untagged and unidentified account owners each month is a challenge.
50% of total cloud costs can be allocated without adjusting metadata.
Tags or tagging are used in some allocations but not consistently or across the majority of spend.
Shared costs other than common fees like business support and taxes are not identified.
Shared costs are allocated directly to a central budget or a cloud platform team, rather than being passed on to cost centers or business units.
Direct costs are managed in isolation by product and engineering personnel, reducing overall forecasting and budgeting accuracy.
Basic cost allocation KPIs are defined but are tracked inconsistently and without tooling.
Allocation tasks are managed primarily using cloud service provider systems and tools.
Walk
The allocation strategy is documented, and multiple mechanisms for allocating costs are in use, though they may be applied inconsistently.
Unallocated, untagged, or unidentified costs are investigated and addressed periodically.
75% of cloud costs can be allocated without adjustments or investigation.
Costs can be allocated to the application or service level.
The tagging strategy for resources and hierarchical groupings is well-documented and followed.
The established tagging strategy is followed for key areas and applications, but not universally.
Allocation mechanisms typically include a combination of factors, such as accounts, projects, or subscriptions belonging to a specific cost center identified through metadata or naming standards; resources in a shared cost pool belonging to a specific cost center; and some mechanisms for distributing shared costs.
For legacy or non-critical parts of the cloud infrastructure, allocation standards remain inconsistent, requiring some manual work or estimation.
The shared cost strategy is well-documented and covers multiple elements of shared costs.
Appropriate allocation models (proportional, fixed, or even split) are used to distribute shared costs across the organization.
A combination of cloud service provider tools, third-party tools, or custom tools is used to manage cost allocation and sharing.
Cost discounts are proportionally allocated across all teams' cloud spend.
Cost allocation KPIs are understood but not yet automated.
Shared platform owners can show internal customers the costs they incur.
Product and engineering personnel understand their share of shared platform or service costs and can factor these costs into their forecasting and budgeting.
A shared cost allocation process is defined to set the expectation of a "fair share" for new cost centers or business units.
Run
Cloud costs can be allocated at any granularity the organization requires.
Each cost item has a direct or standardized allocation mechanism, and policies for metadata, hierarchies, and naming standards are consistent, widely adopted, and efficient.
80-100% of FinOps-managed costs can be allocated without adjustment or investigation.
Automation leverages multiple data sources to allocate costs for more significant items, for example, using metering tools to determine usage and supplement billing data for more accurate allocation of shared costs.
In the rare cases where not all costs are allocated to the finest granularity or some costs are unidentified, the organization spends minimal time on additional cost research or report generation.
There is consistent and integrated use of cloud service provider tools, third-party tools, and custom tools.
Automation is used in resource provisioning to maintain consistency in resource and account tags and metadata.
After receiving billing data, automated mechanisms correct or supplement the cloud service provider's tagging capabilities to achieve high allocation coverage.
KPIs are fully understood and automated.
Cost allocation strategies are executed in near real-time, giving product and engineering personnel better insight into their monthly costs.
Product and engineering personnel understand their share of shared platform and service costs and factor all costs into their forecasting and budget planning.
Shared platform and service owners can fully allocate and charge back the costs incurred by internal customers.
Shared platform and service owners can allocate the costs incurred by internal customers and perform accurate forecasting and budget planning.
Shared cost recovery reflects commercial or subscription commitment discounts.
The shared cost process is automated, enabling a "fair share" allocation for new cost centers and business units.
The organization can distinguish between shared and dedicated costs.
Roles and responsibilities
FinOps Practitioner
Define naming standards for all required and optional hierarchical groupings (such as accounts, projects, files, subscriptions, departments, and organizational units).
Establish compliance standards for each hierarchical grouping.
Collaborate with the Cloud Center of Excellence (CCOE) or the cloud platform team to align tagging strategy requirements with other operational or security needs.
Coordinate with shared service owners to determine the appropriate level of shared cost management for each service and document it in the shared cost strategy.
Coordinate with executives on the appropriate granularity for the cost allocation strategy.
Assess compliance with the established allocation strategy.
Product
Provide feedback on cost allocation for their assigned products.
Finance
Determine the organizational and budget units to which costs will be allocated.
Determine the expense distribution ratios for each shared cost item.
Engineering
Determine how and when to apply metadata to hierarchical groupings and individual resources.
Drive the adoption and automation of metadata standards for cost allocation.
Identifies and provides all metadata sources for analysis and cost allocation.
Comply with your organization's cost allocation policies, identify issues, and suggest improvements.
Executive
Review and approve cost allocations for the organizations you manage.
Review and approve cost allocation strategies.
Provide prompt feedback to help refine and improve cost allocation.
Associated Role
Provide feedback to FinOps personnel on the appropriate granularity and compliance requirements for cost allocation in your areas of responsibility (for example, security, ITAM, ITSM, and ITFM).
Success metrics and KPIs
The percentage of costs that require further investigation because they cannot be directly classified and allocated should be visible.
Measure metadata compliance as a percentage of spend (for example, 80% of costs have appropriate allocation metadata or are within a known hierarchical grouping).
Notify stakeholders when a resource is deployed without the required allocation metadata.
Consult the KPI library for more FinOps KPIs that can be used for cost allocation.
Consult the KPI library for more FinOps KPIs that you can use for cost allocation.
Map business metadata
KPI: Percentage of cloud costs directly allocated to organizational units.
Thresholds:
Threshold:
Crawl: 50% or higher
Run: 90% or higher
Uncategorized Cost Percentage
KPI: Percentage of cloud costs that cannot be directly classified and allocated.
Threshold: Keep below a defined threshold, such as 10%.
Threshold: The value must remain below the specified threshold, for example, 10%.
Metadata Compliance
KPI: Percentage of cloud costs with appropriate allocation metadata.
Threshold: Maintain a compliance rate of at least 80%.
Threshold: Maintain a compliance rate of at least 80%.
Notify stakeholders
KPI: Number of notifications sent to stakeholders for missing metadata.
Threshold: Minimize notifications by ensuring comprehensive metadata compliance.
Threshold: Minimize the number of notifications by ensuring comprehensive metadata compliance.
Investigating response time
KPI: Average time required to investigate and resolve unallocated costs.
Threshold: Set a target response time, such as within 48 hours.
Threshold: Set the target response time, for example, within 48 hours.
Cost Variance
KPI: Percentage variance of actual costs from forecasted trends.
Threshold: Define an acceptable range for variance levels based on financial goals.
Threshold: The acceptable range for variance based on financial goals.
Continuous improvement of cost allocation accuracy
KPI: Quarterly improvement in cost allocation accuracy.
Threshold: Achieve a set percentage improvement each quarter.
Threshold: Meet the set improvement percentage each quarter.
Resource Deployment Compliance
KPI: Percentage of resources deployed with missing allocation metadata.
Threshold: Minimize missing metadata on resource deployments.
Threshold: Minimize missing metadata for resource deployment.
Training and Awareness
KPI: Percentage increase in awareness of and adherence to cost allocation practices.
KPI: Percentage increase in awareness and adherence to cost allocation practices.
Input and Output
Provide requirements to the Data Ingestion activity to create a feedback loop and improve allocation strategies.
Use requirements from the Reporting & Analytics activity to provide feedback for allocation mapping and meet the organization's reporting goals.
Integrate cloud adoption frameworks and architecture frameworks from the cloud service provider.
Integrate existing tagging standards to establish consistent naming conventions.
Fully map allocation metadata to business metadata across the organization, including project names, application IDs, and cost center IDs.
Report all spending that is not allocated using allocation metadata.
Align the roles of internal profit and loss (P&L) groups to apply cost attribution information to the Invoicing & Chargeback activity.
Make full use of Continuous Integration/Continuous Deployment (CI/CD), platforms, and cloud service provider capabilities.
Align allocation requirements and policies with governance activities, including tag compliance, allocation compliance, and governance mechanisms.