According to the Flexera 2024 State of the Cloud report, 84 percent of organizations cite cost optimization as their top cloud initiative.
Private equity firms are experts in identifying and exploiting growth opportunities in their portfolio companies. However, as these firms increasingly rely on cloud technologies to fuel growth, they face a new challenge: managing associated costs effectively. In this blog, we discuss how private equity firms navigate the intersection of growth and cloud costs through the lens of cloud financial operations.
Growth imperatives and cloud adoption
Private equity firms are driven by dual mandates to maximize the value of their portfolio companies and boost returns for their investors. To achieve this, they often implement growth strategies that involve digital transformation, expansion into new markets and operational optimization within their portfolio companies. Cloud computing is pivotal in enabling these growth initiatives by providing the scalability, agility and innovation required to drive business expansion. However, growth initiatives often entail the deployment of new applications, expansion into new regions and handling increased user traffic. These expansion opportunities can be lucrative but can also result in complex and challenging visibility to cloud spending without appropriate planning and due diligence, complex and unpredictable resource utilization and fluctuating cloud costs.
The challenges of cloud costs in private equity
1. Lack of visibility and cost allocation: Private equity firms often deal with many cloud services, accounts and instances across their portfolio companies. This decentralized environment requires more centralized visibility into cloud spending, making it challenging to track expenses accurately, especially as the cloud environment increases in size and complexity. Furthermore, traditional cost allocation methods are often manual, error-prone and time-consuming, leading to discrepancies and disputes.
2. Complexity and unpredictability: Overprovisioning and underutilization of cloud resources are common issues within portfolio company operations. The combination of complex and fluctuating cloud workloads due to organizational transformation, coupled with unpredictable cloud resource usage patterns make it challenging to optimize cloud resources effectively. This can lead to unnecessary costs and inefficiencies, underscoring the need for effective cloud optimization strategies.
3. Acquisition dynamics and rationalization: Private equity firms frequently acquire and integrate companies with diverse IT infrastructures, applications, and cloud contracts, which can complicate the management of cloud costs. However, these acquisitions also present a significant opportunity for Private Equity firms to reduce their costs. By leveraging their position to renegotiate vendor contracts under more favorable terms and by consolidating services and negotiating as a single entity, they can achieve economies of scale and stabilization of pricing that can lead to substantial savings, opening exciting possibilities for cost reduction and future separability of the portfolio company.
4. Growth-driven workloads: Growth initiatives often entail the deployment of new applications, expansion into new regions and handling increased user traffic. These growth-driven workloads can result in unpredictable resource utilization and fluctuating cloud costs, making it challenging to forecast expenses accurately. As artificial intelligence (AI) capabilities and usage increases, private equity firms can explore opportunities to leverage AI to support growth-driven workloads through adjusted resource provisioning and sizing, monitoring, and data storage.
Understanding Cloud FinOps and getting started
Cloud FinOps, short for cloud financial operations, is a discipline focused on managing the financial aspects of cloud computing. It combines financial management principles, cloud technology and business best practices to optimize cloud spending while maintaining operational excellence and driving business value. At its core, Cloud FinOps is about aligning cloud usage with business objectives, enabling organizations to make informed decisions, and continuously optimizing cloud resources to maximize ROI. It involves processes, tools and, most importantly, a cultural shift that fosters collaboration between finance, operations, and engineering teams.
FinOps emphasizes the importance of financial governance in managing cloud costs across the entire investment portfolio. By adopting best practices for financial governance, private equity firms can ensure cost transparency, accountability and compliance, thereby minimizing financial risks and optimizing cloud spending. An important aspect of financial governance is to have the appropriate representation to build out and establish the FinOps Center of Excellence (COE) function responsible for achieving these goals; Protiviti’s methodology establishes this as a critically important step to maximize the organizational FinOps function and accomplish desired outcomes.
As private equity firms consider this transition, an effective starting place is to perform an assessment to derive the current state of FinOps maturity. The desired outcome should yield results that establish a digestible baseline with outputs for activities such as creating a roadmap for desired end state, compliance benchmarking, remediation, and optimization opportunities. FinOps is a journey that can be incrementally iterated upon to reshape fiscal responsibility as a practice that starts to consider technology as a value driver rather than a cost.
In part 2 of this series, we will discuss how to leverage FinOps in Private Equity.
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