Understanding IT Cost

Transcription

1 Understanding IT Cost By Peter Bye White Paper 1

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3 Contents Introduction... 4 TCO analysis... 4 Cost components... 5 Model description... 6 Delivery... 7 Sample results... 7 Comparison with IT industry metrics IT strategy cost analysis Model description Delivery Sample results Summary and more information About the Author

4 Introduction Understanding the costs and benefits of IT is essential. Rational investment and strategic decisions are impossible without this knowledge; the organisation is working in the dark. There are two contexts in which the knowledge can be used. First, organisations need to understand what IT contributes to the cost of delivering the products their business produces. A product could be a physical entity, such as a vehicle. It may be less tangible, for example a bank account managed or an insurance policy sold, or a public sector service delivered, such as processing a benefit claim. Each organisation, public or private, will have a view of what constitutes its products. Having an accurate picture of the cost and a breakdown into its constituent components has a number of benefits. A detailed understanding of cost enables comparison with peers and examples of best practice. It is cost/performance that matters. If an organisation s IT costs are twice the industry average that could be a cause for concern. However, it may be delivering much better business outcomes because the IT investment has given it a competitive edge. This is a major reason for measuring IT cost per outcome, such as products produced, rather than just the cost. As well as providing the basis for comparison with peers in the same business sector, knowing the costs allows comparison with industry IT averages, such as cost per MIPS or per operating system image for organisations of a similar size. Gartner, for instance, publishes global IT averages (its key metrics) annually. Management can focus on the biggest cost contributions for potential savings and not waste time on small items. Costs sometimes believed to be a significant factor in the total cost can on analysis turn out to be relatively minor contributors and vice versa. The second context is where an organisation is considering a major change in the strategic direction of IT. A typical example is moving from one system type to another, for instance moving applications to a different operating system or replacing custom applications with a package. Understanding the cost not only requires knowing the Total Cost of Ownership (TCO) of the current environment and the expected TCO of the new one. The cost of the move and the impact on the business are critical, and often underestimated, factors. Unisys has developed analytical tools, referred to as models, for: 1) analysing the TCO of ClearPath and other systems; and 2) comparing the financial implications of one IT strategy with another. This paper describes the TCO and strategy comparison models, and ends with a summary and pointers to more information. TCO analysis This section explains the TCO models Unisys has developed, describes how they are used and presents a selection of results. It starts by describing the cost components including within the TCO. 4

5 Cost components The TCO of a system should include the components shown in figure 1. The primary contributors are hardware, software and people. The figure shows four environments, spread over two data centres: live, DR (disaster recovery), test and development. Although they appear in the figure as four separate platforms, there may be more than one in each environment. For Windows, Linux and UNIX environments, these may be logical representations. The assets associated with each environment could include several physical and virtual servers, the costs for all of which should be included. Environments may be combined, for example test and development, and in some cases the role of systems may change. For example, a test and development environment may be used for DR if the live is lost. Site 1 Site 2 Live DR Test Development Hardware Applications Dedicated local storage Software Connectivity (LANS, routers, telecoms etc.) Storage (e.g. SAN) People System support & operation Applications development & support Facilities Power & cooling Space & equipment Storage (e.g. SAN) Figure 1: Schematic of components used in TCO calculations Table 1 contains more information on components that make up a TCO. Component Hardware, including firmware Software Disaster recovery Personnel Facilities Connectivity Applications Explanation Systems and dedicated local storage, including maintenance and installation. System software, including operating systems, virtualisation software, database managers, systems management software (from whatever source) and any other third-party software. Includes maintenance and support. The hardware, software, maintenance, and other facilities and services used for disaster recovery. The full-time equivalents (FTEs) providing technical support, operations and their management and administration. Fully-burdened costs are required, not just salaries. Power consumption and space for all systems, and other facilities costs, including office space and resources such as PCs. Inter- and intra-data centre communications equipment such as network products, as used between the components systems. It does not include general data centre LANs, or end-user external networks. Product licence fees, maintenance and upgrade fees, database and other storage costs, e.g. SANs. Personnel costs for applications development and support, and the facilities they use. Table 1: TCO component details 5

6 The TCO is calculated as the annual cost, not a one-off purchase cost. Costs such as the purchase price of a multi-year licence are annualised. It can be useful to separate the TCO including applications from the infrastructure part, which comprises everything except the applications. The separation allows comparison of infrastructure costs with IT industry averages. The cost including applications can be used for comparison with others in the same business sector, for example the IT cost to produce a given product. For mainframe installations, these costs are well known or can easily be calculated. There is generally a long history of running mainframes so the principles of accounting for people and other cost components are well-established. The relative simplicity of mainframe environments helps: the number of servers is low and their functions clearly defined. This is less true for other system types. The proliferation of servers and system images in distributed, virtual environments introduces complexity. It is not easy to include the cost of all the TCO components, as software may come from many different sources. Model description Models were developed for ClearPath systems and have been extended to include other system types as well as environments containing a mixture of systems. The models were reviewed in detail with a leading analyst; their comments and suggestions have been included. Table 2 shows the various models that can be built. Type Description Key outputs High-level TCO Full TCO Other system types Distributed environments - ClearPath & other mainframes only - Limited input + assumptions, rapid results - ClearPath & other mainframes only - Comprehensive input no assumptions - TCO for systems other than mainframes - Comprehensive input no assumptions - TCO for distributed environments: ClearPath & other systems - Comprehensive input no assumptions - TCO & distribution with and without applications - Comparison with. IT industry averages cost per MIPS and MIPS per FTE - Comparison with. business sector averages cost per business product(s) - As High-level TCO but more precise - Many options for what if questions, e.g. variation in facilities costs - TCO & distribution, with and without applications - TCO & distribution including applications - Comparison with.it averages - TCO & distribution with and without applications - TCO & distribution per system type - Comparison with. business sector averages - Comparison with IT averages Table 2: TCO model types The high-level TCO focuses on the major contributors to the cost, and makes assumptions about the remaining components; the other models require all data, making no assumptions. The rationale for this approach is based on the distribution of the costs. Published industry averages and Unisys experience show that about 90% of the TCO comes from hardware, software and personnel. The remaining 10% or so comprises the other components, that is: 6

7 Connectivity Facilities Disaster recovery Unallocated Gathering the data required for the other costs can be very time-consuming. The high-level TCO uses the hardware, software and personnel costs as input data. A percentage of the sum of these costs is then used to cover the remaining items. The results are reasonably accurate. The same ClearPath installation has been modelled using both a full TCO model and a high-level analysis, using the relevant subset of data from the full model. The results were within a percentage point or two. Variations are easily made, depending on the amount of information available. Consider the high-level model, for instance. It may be easy to be more precise about the other components, for example DR costs. In that case, the DR cost would be explicitly included in the model and the percentage for the other components reduced. Delivery TCO models are delivered as a Unisys Advisory service. Unisys works with the client to gather the required data. Checklists and guidelines provide detailed information about the data needed. Unisys then builds the model and reviews it with the client. After incorporating any changes resulting from the review, Unisys prepares a report and presents it to the client. As well as a summary of the results, the report contains any recommendations arising from them. For example, a relatively high operations personnel cost may suggest that more automation is required. A TCO model may also suggest an Appraisal service, which is a complementary Unisys Advisory service 1. The Appraisal determines the current state and direction of an IT environment, the desired future state to meet business requirements and recommends steps to close any gaps. In the case of a high operations cost, for example, the Appraisal would explore in more detail the level of automation in the installation and suggest possible changes to improve it. An Appraisal service can of course trigger a TCO model. The two Advisory services together produce a detailed picture of the IT environment. Sample results A number of TCO studies have been carried out around the world. This section illustrates just some of the output that can be obtained, using data from two typical organisations. An interesting point in both cases is that, contrary to some perceptions, hardware contributes a small percentage of the ClearPath TCO: under 10% in both cases. This is quite normal, and is reflected in other TCO models Unisys has performed. The first is a retail corporation, which operates a number of stores. It uses Libra systems for the major applications. Figure 2 shows the cost distribution across the various components. The client chose the cost per store as a business metric for comparison with competitors. 1 The IT state model and Appraisal are described in another White Paper Understanding IT System State Experiences from the ClearPath Appraisal Process 7

8 TOTAL COST DISTRIBUTION (%) Hardware Hardware maintenance Software Software maintenance Other software and middleware Other software support Technical support Operations Management /supervision Security Workspace & facilities Other factors Application licence & support Storage (SAN etc ) and other resources Application development Application management External application support & operations External liaison Workspace & facilities Oversight 7% 1% 3% 0% 5% 1% 0% 2% 2% 6% 26% 1% 3% 1% 0% 2% 3% 8% 11% 19% Figure 2: Annual cost distribution across all components. Hardware (5%) starts at just after The colours progress clockwise on the chart and left to right across the key. The second example is a large organisation providing a critical assistance service to the public. It is an example of a distributed environment, comprising several different system types. Figure 3 is a schematic of the configuration. Those requiring assistance contact the service, primarily by telephoning call centres. Details of calls are entered in the C application and requests needing further action are passed to the A application, via the ESB (Enterprise Service Bus). A then continues to manage the requested action. The B application provides further data for both A and C. A shared infrastructure, including a SAN, VTL and systems management supports all the applications. A second site provides DR, test and development facilities. There are two versions of all the applications. One supports the live operation; the other is for training (TR) users of the system. The Dorado system runs both live and TR in the same system; live and TR have separate configurations for the other applications. Table 3 shows the various technologies used. 8

9 Site 1 C B A Site 2 DR ESB Live TR Live TR Live TR A B C ESB Test DEV SAN Continuous backup SAN Shared infrastructure: SAN, VTL, systems management... Figure 3: Configuration schematic, showing major components Table 3 shows the various technologies used. Component Application A Application B Application C ESB Shared infrastructure Technology used ClearPath Dorado Windows UNIX Windows,.Net Windows, Java EE SAN, VTL, Wintel servers. Table 3: Technologies used for each component Figure 4 shows the distribution of the TCO across the component application systems, the ESB and the shared infrastructure. Figure 5 shows the cost distribution for the Dorado system only. The client chose the cost to manage an action resulting from a request as the business metric. 9

10 Component system costs as % of total ESB 6% Infrastructure 13% A 38% B 24% C 19% Figure 4: Annual cost distribution across component systems Dorado total cost distribution Hardware, Live, Test & DEV 4% 3% 4% 2% Software, Live, Test & DEV 19% Maintenance & installation Power 29% 10% People: support & operation People: applications 1% People: management & administration Connectivity 28% DR system Figure 5: Annual cost distribution for Dorado systems only Comparison with IT industry metrics Understanding TCO allows comparison with industry IT averages. Gartner key metrics reports are published in December each year, with the number of the following year: the 2014 metrics were released in December 2013, for instance. Mainframe (primarily IBM), UNIX, Windows and Linux operating systems 10

11 each have separate reports. Copies of any of them may be obtained from Gartner. The data used are drawn from a wide sample of installations globally. For ClearPath systems, two mainframe metrics in particular are of interest: the cost per MIPS and the number of MIPS per FTE (full-time equivalent) personnel involved in operations, technical support and their management. Gartner segments its samples into installation size bands: small, medium and large. Application costs are not included. The cost per MIPS is obtained by dividing the TCO by the number of installed MIPS. The MIPS in question assume that there is no metering or other capacity on demand facility. Rather, the MIPS are those which would be required to handle any peaks within the service level agreements. For example, the peak time could be month or year-end report generation which must be completed within a specified number of hours. Peak MIPS requirements vary according to the profile of the applications but are typically around 2.5 times the average 2. Lower numbers suggest a more cost/effective installation than higher ones. MIPS per FTE is a measure of efficiency. It is the number of MIPS divided by the number of FTEs (costs are not involved). Higher numbers more MIPS per FTE indicate a more efficient IT organisation than lower numbers. An analysis of a number of TCO models from Europe, North and South America, and Australasia shows that ClearPath systems are on average about 77% of the Gartner cost per MIPS for the installation size and 160% of the MIPS per FTE. However, while ClearPath installations on average show better cost/mips and MIPS/FTE than overall industry averages, these figures do not represent the true TCO saving. A study performed some years ago by The Yankee Group 3 showed that MCP and OS 2200 systems required about 20% of the MIPS used by other mainframes with a similar workload. Recent cases where a direct comparison has been possible still show that a ratio of about 4-5. The efficiency of the data model used for both MCP and OS 2200 (DMS II and DMS 2200) is part of the explanation. Comparisons with the industry averages are a useful indicator of the relative position of the organisation, and can provide valuable pointers to areas of potential improvement. For example, a relatively low number of MIPS per FTE may indicate that more automation would be desirable. However, the cost per MIPS and MIPS per FTE values must be viewed with caution, for the following reasons. They should be seen in the context of the owning organisation. Factors such as service level expectation, security and resilience requirements, and the amount and complexity of the work being done all affect the TCO. There are significant economies of scale. Very small installations show a high cost per MIPS and low MIPS per FTE. Even a small installation requires a number of people with different skills. The industry averages for cost per MIPS are published in USD. Exchange rate fluctuations therefore affect the cost per MIPS for TCOs using other currencies. For example, the USD per GBP exchange rate between 2008 and 2014 fluctuated between about 1.4 and 2. 2 The majority of ClearPath systems use metering or other capacity on demand for MIPS. Material providing detailed guidance for calculating the required peak MIPS value is available. 3 Contact Unisys for details of the report, 11

12 IT strategy cost analysis The models provide a means of comparing two possible IT strategies. Some examples are shown in table 4; there are many more possibilities. Strategy 1 Strategy 2 1) Stay with existing ClearPath systems & applications Move ClearPath applications to another OS, or replace with packages or other applications 2) Stay with existing ClearPath systems & applications Move to ClearPath fabric-based systems and modernise applications 3) Move to ClearPath fabric-based systems Move ClearPath applications to another OS, or replace with packages or other applications 4) Move to ClearPath fabric-based systems & modernise application Move ClearPath applications to another OS, or replace with packages or other applications 5) Stay with internal ClearPath operation Keep systems and applications but move to Unisys managed services 6) Move applications from one OS to another Replace applications with packages or other applications using same or another OS Model description Table 4: Examples of strategies to be compared An understanding of the financial implications of each strategy requires the following: The TCO on completion what may be regarded as the steady-state TCO The cost of the implementation process The business impact The model calculates the net benefit of one course of action rather than another, where benefit is measured in terms of cost savings and business impact. A benefit may be negative, that is, a cost. Consider, for instance, a case where one of the options is maintaining the status quo or perhaps just moving to a new system release, while the other option is to move the applications to another operating system. In the first case, the implementation cost will be limited and predictable, with low risk. The implementation cost of the other option is for the conversion, which is frequently underestimated, often grossly so. There may also be a negative business impact during the conversion. The combination of negative business impact and conversion cost may dwarf any expected TCO reduction. For each course of action, the model uses input data for expected costs and business impact per year over a number of years. Items such as a licence renewal, which may be for a number of years, can be taken in the year they occur or spread over the period covered. A variety of summaries can be produced, including annual averages and year by year views for a selected period of between three and seven years. (There must of course be data available for the period selected: if only four years of data are provided, selecting a longer period makes no sense.) Table 5 summarises the data required for each course of action. Items can be changed or new ones added. All data are required per year for between three and seven years. 12

13 Component Subcomponent Explanation TCO Estate Hardware, software, connectivity, and facilities such as power and spacel. Personnel Applications The full-time equivalents (FTEs) providing technical support, operations and their management and administration. Fully-burdened costs are required, not just salaries. Product licence fees, maintenance and upgrade fees, database and other storage costs, e.g. SANs. Personnel costs for applications development and support, and the facilities they use. Implementation - Hardware, software, personnel, training and delayed implementation costs. Business impact - Revenue, end-user productivity, security breaches (risk) and compliance cost changes. Delivery Table 5: Summary of data required for comparison model As for TCO models, comparison modelling is delivered as a Unisys Advisory service, perhaps complemented by other Advisory services. Unisys works with the client to find and agree the two courses of action and the necessary data required to build the model. The process is more complicated than just TCO modelling. Consider for instance example 3 from table 4. One choice is staying with ClearPath applications but moving to a fabric-based ClearPath system. This is well-defined implementation process so gathering the required information about the continuing cost is straightforward. The other choice in example 3 is to move the ClearPath applications to another operating system, or to change to use other applications, for example a package. The alternative configuration has to be determined and agreed before its steady-state TCO can be calculated. The cost of implementation must then be decided, together with any business impact, to get a true picture of the financial implications of the move. As with the TCO model, Unisys prepares a report on the comparison, together with recommendations for discussion with the client. Sample results The results shown are typical of the output the model can generate. The example installation is large, with critical ClearPath-based applications. The choice modelled is to keep ClearPath applications but move to a fabric-based ClearPath system, or to move the applications to run under Linux. The data are based on a real case, apart from the business impact figures which, have just been chosen to illustrate the kind of output the model can generate. The ClearPath configuration is well-known, so its TCO data were straightforward to obtain. The configuration of the alternative configuration was defined and agreed, together with the personnel and 13

14 application requirements. The data for the two choices were then entered into the model. The cost of the implementation for each choice was then calculated and added into the model 4. The business impact figures used to illustrate the model assume that the organisation expects its annual revenue over the next four years to rise from USD 1,000M to USD 1,030M, assuming no IT changes. With the proposed IT changes, revenue is expected to increase by an extra 1% per year for each approach, due to improved flexibility in delivering new capabilities. However, there is a cost associated with each course of action: USD 693,000 for the ClearPath approach and USD 46M for the Linux alternative. There is also an expected negative business impact during the implementation of the Linux approach. Over the first three years, revenue is expected to fall due to an inability to implement new features during the move. Table 6 summarises the data. The implementation cost for ClearPath is shown in year 1 while the Linux cost is spread over four years. Year Planned revenue Implementation Implementation Revenue impact Revenue impact (1,000,000) cost (Linux) cost (ClearPath) (Linux) (ClearPath) 1 1,000 15,000, ,000-5% 1% 2 1,010 15,000, % 1% 3 1,020 10,000, % 1% 4 1,030 6,000, % 1% Table 6: Summary of implementation and business impact data Figure 6 is generated by the model and summarises the four-year effect of the two approaches. Four-year cost ClearPath Linux Linux benefit Estate 32,907,047 16,860,756 16,046,290 Personnel 14,525,957 17,895,464-3,369,507 Applications 44,144,443 48,621,951-4,477,508 Implementation cost 693,000 46,000,000-45,307,000 Estate & Personnel 47,433,004 34,756,221 12,676,783 Estate, Personnel & Applications 91,577,447 83,378,171 8,199,276 Total: Estate, Personnel, Applications & Implementation 92,270, ,378,171-37,107,724 Business impact 40,600, ,400, ,000,000 Net impact 51,670, ,778, ,107,724 Figure 6: Summary of four year view of the two approaches The column headed Linux benefit shows the difference in cost between Linux and ClearPath for the various components. A negative value is a cost rather than a benefit. Thus, the Linux TCO (estate, personnel and applications see table 5) is just over USD 8M lower than ClearPath but, when the 4 The processes for determining alternative configurations and implementation costs vary according to the case in question, but there are recognised industry approaches and data sources to help. Unisys would be happy to discuss the subject with clients who are interested. 14

15 conversion cost is included, the Linux cost is over USD 37M higher than ClearPath. The business impact shows that the revenue loss due to the implementation of Linux would be USD 100.4M compared with a gain of USD 40.6M for the ClearPath approach. The difference is therefore USD 141M. The net impact of a move to Linux, including implementation, is just over USD 178M. Here are two examples of the charts the model can generate. Figure 7 shows the cost profile over the four years while figure 8 shows the cost saving, the business and net benefits. Again, a negative benefit is a cost. 40,000,000 Chart 1: costs and cost savings 30,000,000 20,000,000 10,000, ,000,000-20,000,000 Linux cost ClearPath cost Linux cost saving (-ve = extra cost) Figure 7: Costs and Linux cost savings of the two approaches Chart 2: cost saving, business and net benefits 0-10,000,000-20,000,000-30,000,000-40,000,000-50,000,000-60,000,000-70,000,000-80,000, Linux cost saving Linux business impact Linux Net impact (cost saving + business impact) Figure 8: Cost savings, business and net benefits of the Linux approach There are many options for summarising the data; the above are just a few examples. As with the TCO model, many what if questions can be asked, and assumptions changed and questioned. 15

16 Summary and more information TCO and IT strategic direction modelling provide senior management with the essential financial information for improving current IT economics or making strategic decisions about IT direction. The modelling services can be combined with complementary Advisory services such as the ClearPath Appraisal to create a rounded view of the state of the IT environment, together with recommendations for enhancements. More information about Unisys ClearPath products and services can be found at: The White Paper Understanding IT System State Experiences from the ClearPath Appraisal Process can be found at 16

17 About the Author Now an independent consultant, Peter Bye was a senior system architect in Unisys, based in London. His special area of interest is networked computing, including communications networking, middleware, and architectures. He has many years of experience in information technology, working as a programmer, analyst, team leader, project manager and consultant in large-scale customer projects in banking, transportation, telecommunications and government. He has also worked in software development centres, during which time he spent two years as member of an international standards committee working on systems management. He has worked for extended periods in Sweden, Denmark, Finland, Norway, the USA, France and Spain, as well as the UK. He has presented at a wide variety of conferences and other events and is the author of a number of papers on networking, systems management and middleware. He is the co-author of a book on middleware and system integration IT Architectures and Middleware: Strategies for Building Large, Integrated Systems (2 nd Edition) which was published by Addison-Wesley. Some recent white papers include: ClearPath as an Open System ClearPath Systems with Fabric-based Infrastructure Unisys ClearPath Systems: Integrated Hardware/Software Stacks Delivering value: the Economics of ClearPath Systems and various white papers on service-oriented architecture and ClearPath systems. 17

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20 For more information visit Unisys Corporation. All rights reserved. Unisys and ClearPath are registered trademarks or trademarks of Unisys Corporation. All other brands and products referenced herein are acknowledged to be trademarks or registered trademarks of their respective holders. Printed in the United States of America 08/