Applying EVM to FinOps

Introduction

Earned Value Management (EVM), a well-established technique in project management, can be effectively adapted to FinOps Cloud Cost Management. While EVM traditionally focuses on project execution, its principles can be harnessed to track, control, and forecast cloud costs. In this article, we explore how EVM can enhance financial visibility, optimize resource allocation, and align cloud spending with business objectives.

Where EVM fits in FinOps

As FinOps is a big discipline, it is important to deliniate where EVM fits in, considering the entire framework. EMV is a technique that should be considered within the realm of Quantify Business Value domain.

If we dig a little deeper at this domain, we will find the following definition.

If we dig a little deeper at this domain, we will find the following definition.

It is almost the description of EVM. When EVM first started, computing was on its first steps. But regardless of that, we will see that the technique still applies. The combination of EVM and FinOps can be of great value for the general ‘Quantify Business Value’ domain knowledge.

You make different colors by combining those colors that already exist. Herbie Hancock

What is EVM?

Earned Value Management (EVM) is a powerful project management technique that integrates cost, schedule, and performance metrics. It provides a holistic view of project progress by assessing the value of work accomplished against the planned budget and schedule. EVM enables project managers to make informed decisions, predict outcomes, and take corrective actions proactively.

Origins of EVM

EVM traces its roots back to the 1960s when it was initially developed by the U.S. Department of Defense for managing large defense projects. The technique gained prominence during the execution of complex projects such as the Polaris Missile Program. Since then, EVM has been widely adopted across various industries, including construction, engineering, software development, and information technology.

Key Components of EVM

1. Planned Value (PV): PV represents the authorized budget allocated for the planned work. It is also known as the Budgeted Cost of Work Scheduled (BCWS). PV is established during project planning and reflects the cumulative cost of work scheduled up to a specific point in time.
2. Earned Value (EV): EV signifies the value of work actually completed. It is also referred to as the Budgeted Cost of Work Performed (BCWP). EV is determined based on the completion status of project tasks or deliverables.
3. Actual Cost (AC): AC represents the actual cost incurred for the work performed. It is also known as the Actual Cost of Work Performed (ACWP). AC is derived from financial records and reflects the real expenses associated with project execution.

Adapting EVM to FinOps

Recognizing the Differences

While EVM is a project management technique, FinOps deals with ongoing cloud operations. Here are some key differences:

1. Time Span: EVM typically operates within project timelines, whereas FinOps spans an entire year or budget cycle.
2. Percent Complete: In EVM, percent complete reflects project progress. In FinOps, it relates to planned vs. actual unit economics (e.g., cost per order).

Applying EVM Concepts

1. Planned Value (PV): In FinOps, PV represents the budgeted cost for cloud resources over the year. It aligns with the annual budget plan.
2. Earned Value (EV): EV corresponds to the actual value of cloud services consumed. Tracking EV helps measure progress against the budget.
3. Actual Cost (AC): AC reflects the actual cloud spending. Comparing AC with EV provides insights into cost efficiency.
4. Cost Performance Index (CPI): CPI indicates whether cloud spending is on track. A CPI < 1 suggests overspending. CPI = EV / AC
5. Schedule Performance Index (SPI): SPI assesses the pace of cloud resource consumption. An SPI < 1 indicates inefficiencies. SPI = EV / PV

Conclusion

By integrating EVM principles into FinOps, organizations can achieve better cloud cost management. The cultural impact of FinOps extends throughout the organization, emphasizing collaboration and value-driven decision-making. As cloud adoption continues to grow, leveraging EVM concepts within FinOps ensures efficient resource utilization and cost optimization.

Remember, it’s not just about saving money; it’s about maximizing business value through the cloud! 🌐💡

References:

1. What is FinOps? – Microsoft Cost Management | Microsoft Learn
2. Basic Concepts of Earned Value Management (EVM) – Humphreys & Associates
3. Earned Value Management Defined: Formulas & Examples
4. FinOps framework for cloud cost management and optimization