FinOps for Private Equity: Why Your Portfolio Companies Need It
If you manage a portfolio of technology companies, you have almost certainly encountered the challenge of cloud costs that grow faster than revenue, engineering teams that cannot explain why the AWS bill doubled, and CFOs who treat cloud spending as an uncontrollable force of nature. These are symptoms of a missing discipline: FinOps.
FinOps -- short for Cloud Financial Operations -- is a cultural practice and organizational discipline that brings financial accountability to the variable spend model of cloud computing. It is not a tool, a team, or a one-time project. It is an operating model that ensures cloud spending is intentional, visible, and continuously optimized.
For PE firms, FinOps is one of the highest-ROI operational improvements you can implement across a portfolio. Here is why it matters and how to implement it.
What FinOps Actually Is
The FinOps Foundation (part of the Linux Foundation) defines FinOps as "an evolving cloud financial management discipline and cultural practice that enables organizations to get maximum business value by helping engineering, finance, technology, and business teams to collaborate on data-driven spending decisions."
In practice, FinOps means three things:
- Visibility: Everyone who provisions or manages cloud resources can see what those resources cost, in near-real-time.
- Accountability: Teams and individuals are responsible for their cloud consumption, just as they are responsible for their headcount budget.
- Optimization: There is a continuous process for identifying and capturing savings opportunities, balancing cost against performance, speed, and quality.
FinOps is not about cutting costs at the expense of engineering velocity. It is about making informed trade-offs. Sometimes the right decision is to spend more on cloud to ship a feature faster. FinOps ensures that decision is made intentionally, with full visibility into the cost implications.
Why FinOps Matters for PE
PE firms care about three things: revenue growth, margin improvement, and exit multiples. FinOps directly impacts all three.
Margin improvement: The most direct impact. FinOps practices typically reduce cloud spending by 20-35% in the first year of implementation. For a company spending $3M annually on cloud, that is $600K-$1M flowing directly to EBITDA. This is not theoretical -- I have delivered these results repeatedly across PE portfolio companies.
Revenue growth (indirect): By establishing visibility into unit economics (cost to serve each customer, cost per transaction), FinOps enables smarter pricing decisions. I have worked with SaaS companies that discovered certain customer segments were margin-negative due to cloud consumption patterns. Armed with that data, they adjusted pricing and packaging -- improving both margins and revenue per customer.
Exit multiples: A company that demonstrates disciplined cloud financial management signals operational maturity to potential buyers. It reduces the perceived technology risk and eliminates the "we can cut 30% of cloud costs" discount that sophisticated buyers apply when they see waste. More importantly, the margin improvement from FinOps directly increases the EBITDA base on which multiples are applied.
The Three Phases of FinOps
The FinOps Foundation describes a maturity model with three phases: Inform, Optimize, and Operate. Each phase builds on the previous one, and most portfolio companies I encounter are stuck somewhere in early Phase 1.
Phase 1: Inform
The goal of the Inform phase is to create visibility into cloud spending. You cannot optimize what you cannot see.
Key activities:
- Implement cost allocation tagging. Define a mandatory tagging standard (environment, team, product, cost center) and enforce it through automation. Tag compliance should exceed 85% within 60 days.
- Set up cost reporting and dashboards. Use AWS Cost Explorer, or tools like CloudHealth, Kubecost, or Vantage to create dashboards that show spending trends by team, product, and environment. These dashboards should be accessible to engineering leads, not just finance.
- Establish showback or chargeback. At minimum, implement showback -- showing each team what their cloud resources cost, even if it does not affect their budget. This single change in visibility drives behavioral change more effectively than any top-down mandate.
- Define unit economics. Calculate cloud cost per customer, per transaction, or per API call. This creates the foundation for understanding whether cloud costs are scaling efficiently with the business.
Timeline: 30-60 days for basic implementation. Ongoing refinement.
Expected outcome: Full visibility into cloud spend by team, product, and environment. Ability to answer the question "why did the bill change?" within hours, not weeks.
Phase 2: Optimize
With visibility established, the Optimize phase focuses on reducing waste and improving efficiency.
Key activities:
- Eliminate zombie resources. Using the visibility from Phase 1, identify and terminate unused resources. This is typically a 5-15% reduction in spend.
- Right-size instances. Analyze utilization metrics and resize over-provisioned compute and database instances. Target instances where average CPU utilization is below 20% or memory utilization is below 30%.
- Implement commitment-based pricing. Purchase Reserved Instances or Savings Plans for stable workloads. Target 60-70% coverage for predictable compute. This typically saves 30-40% on covered resources.
- Optimize storage. Implement S3 lifecycle policies to transition aging data to cheaper tiers (Infrequent Access, Glacier). Review EBS volume types and sizes.
- Schedule non-production environments. Shut down development, staging, and QA environments outside business hours. This can reduce non-production compute costs by 65-70%.
Timeline: 60-120 days for full implementation.
Expected outcome: 20-35% reduction in total cloud spend. Immediate EBITDA improvement.
Phase 3: Operate
The Operate phase ensures that optimization gains are sustained and that FinOps becomes an ongoing operating discipline rather than a one-time project.
Key activities:
- Establish a FinOps cadence. Weekly cloud cost reviews involving engineering leads and finance. Monthly executive reviews. Quarterly strategic reviews of architecture and commitment strategy.
- Implement automated governance. Use policies to prevent waste before it occurs: auto-terminate resources without required tags, auto-stop non-production environments on schedules, alert on spending anomalies.
- Set budgets and forecasts. Each team should have a cloud budget aligned to their planned activities. Variances should be explained, just like any other budget line.
- Continuously optimize. Cloud providers release new instance types, pricing models, and services regularly. A mature FinOps practice continuously evaluates whether the current architecture is optimal.
Timeline: Ongoing. Most companies reach Phase 3 maturity within 6-9 months of starting FinOps.
Expected outcome: Cloud cost growth aligned to or below revenue growth. Sustainable margin improvement. A culture where engineers consider cost as a design constraint, not an afterthought.
Implementing FinOps Across a PE Portfolio
For PE firms with multiple technology companies, there is a significant advantage to implementing FinOps as a portfolio-wide initiative rather than company by company.
Shared playbooks: The same FinOps framework applies across portfolio companies, with adjustments for scale and complexity. A playbook developed for one company can be adapted for the next in a fraction of the time.
Aggregated purchasing power: Multiple portfolio companies may be able to negotiate better terms with AWS through a shared Enterprise Discount Program or by coordinating their commitment-based purchasing.
Benchmarking: With FinOps data from multiple portfolio companies, you can benchmark cloud efficiency across the portfolio and identify outliers that need attention.
Operating partner leverage: A dedicated cloud economics capability at the fund level -- whether internal or through an advisor -- creates a reusable asset that generates returns across every deal.
The ROI Case
Let me make this concrete with a portfolio-level example. Assume a PE fund with 8 technology companies in its portfolio, each spending an average of $2M annually on cloud infrastructure. Total portfolio cloud spend: $16M.
A FinOps program achieving a conservative 25% optimization across the portfolio yields $4M in annual savings. At a blended 10x EBITDA multiple, that is $40M in enterprise value creation across the portfolio.
The cost to implement? Typically $200K-$400K in advisory and tooling fees across the portfolio, plus the ongoing cost of a FinOps practice (which should be less than 3-5% of the savings it generates).
This is not speculative. These are achievable numbers based on real portfolio-level engagements. The question is not whether FinOps delivers value -- it is whether your portfolio companies are capturing it today.
Ready to evaluate cloud economics in your next deal? Book a free discovery call to discuss your specific situation.