A Forrester Total Economic Impact Study Prepared For EMC The Total Economic Impact Of EMC Mainframe Transformation Service

Transcription

1 A Forrester Total Economic Impact Study Prepared For EMC The Total Economic Impact Of EMC Mainframe Transformation Service Project Director: Jonathan W. Lipsitz Contributor: Jon Erickson August 2013

2 TABLE OF CONTENTS Executive Summary... 2 Mainframe Transformation Can Lower Total TCO And Increase Business Agility... 2 Factors Affecting Benefits And Costs... 4 Disclosures... 5 TEI Framework And Methodology... 6 Analysis... 7 Interview Highlights... 7 Costs Benefits Flexibility Risk Financial Summary EMC Mainframe Transformation: Overview Appendix A: Composite Organization Description Appendix B: Total Economic Impact Overview Appendix C: Glossary Appendix D: Supplemental Material Appendix E: Endnotes , Forrester Research, Inc. All rights reserved. Unauthorized reproduction is strictly prohibited. Information is based on best available resources. Opinions reflect judgment at the time and are subject to change. Forrester, Technographics, Forrester Wave, RoleView, TechRadar, and Total Economic Impact are trademarks of Forrester Research, Inc. All other trademarks are the property of their respective companies. For additional information, go to About Forrester Consulting Forrester Consulting provides independent and objective research-based consulting to help leaders succeed in their organizations. Ranging in scope from a short strategy session to custom projects, Forrester s Consulting services connect you directly with research analysts who apply expert insight to your specific business challenges. For more information, visit Page 1

3 Executive Summary In February 2013, EMC commissioned Forrester Consulting to examine the total economic impact and potential return on investment (ROI) enterprises may realize by utilizing EMC s Mainframe Transformation Service to move mission-critical applications from a mainframe to an x86 server environment. The purpose of this study is to provide readers with a framework to evaluate the potential financial impact of fully retiring an existing mainframe on their organizations. Mainframe Transformation Can Lower Total TCO And Increase Business Agility Our interviews with five existing customers and subsequent financial analysis found that a composite organization (with an outsourced mainframe) which is based on these interviewed companies experienced the risk-adjusted ROI, internal rate of return (IRR), costs, and benefits shown in Table 1. See Appendix A for a description of the composite organization. Table 1 Composite Organization Four-Year Risk-Adjusted ROI 1 ROI IRR Payback period Total benefits (PV) Total costs (PV) Net present value 161% 80% 16 months $29,343,871 ($11,242,870) $18,101,002 Benefits. The composite organization experienced the following benefits that represent those experienced by the interviewed companies: o Eliminated mainframe outsourcing contract. The composite organization had outsourced its mainframe operations to an IT service company many years ago. For simplicity, we completed the ROI analysis using a constant outsourcing cost of $5,200 per MIP over the life of the study. In Year 1 of the study, the mainframe was 1,100 MIPS and growing 15% per year. The four-year savings totals $28.56 million. o Business user productivity. By moving applications to an x86 environment, business users get moretimely access to data, have greater self-service capabilities for creating custom reports, and can more easily adjust business processes. This results in increased productivity. The study looks at business analysts who realized a 20% productivity increase and other headquarters-based business users who realized a 10% productivity increase. Only 85% of the total potential benefit was realized since not all productivity increases translate into added work, e.g. time wasted surfing the internet. This benefit totals $13.02 million over four years. Page 2

4 o Improved time-to to-market (non-quantified) quantified). By moving to an x86 environment, the IT organization and systems can now more quickly adjust to changing business realities. Having more-flexible business processes and data analysis allows new products to be brought to market and the organization to more easily handle changing financial regulations. Costs. The composite organization experienced the following costs: o Initial implementation internal labor. The entire migration project, from the time the decision was made to work with EMC until all systems were migrated and the mainframe fully retired, was 18 months. Twelve internal full-time equivalent (FTE) resources worked on the project. These resources came from the operations, infrastructure, security, and database administration teams plus representatives from the application teams. The total cost in the initial period was slightly less than $2 million. o Professional services. The composite organization used EMC professional services for the entire 18- month migration. Eleven FTE consultants worked on the project, for a total cost of $4.75 million. o Hardware. The composite organization migrated its mainframe to two VCE converged infrastructure Vblock 3200 systems. These were both virtualized, with one Vblock used for production and test/development and the second for full disaster recovery. The Vblocks had more computing power than required for the migrated mainframe applications, so they were used for both the mainframe applications and for other existing x86 server applications. 25% of the Vblock capacity was used for the mainframe applications, and this could be expanded as additional capacity was needed. 25% of the four-year total cost, including maintenance, was $217,250. o Software. Software to replace supporting systems previously on the mainframe needed to be added. Examples include a COBOL compiler, transaction process monitoring, debugging and versioning systems, file management, and raster analyzer. In addition to the investment in the initial period, additional licenses were purchased in years 2 through 4 as the size of the deployment grew. The total four-year cost, including maintenance, was $3.65 million. o Ongoing administration. The composite organization already had an in-house IT operations team to support x86 server environments. To handle the additional work required to support the Vblock systems, 1.5 IT operations FTEs were added to the team. The existing application development/support team continued to manage the business applications sitting on the systems. The total incremental costs were $660,000 over four years. During the initial period, the composite organization incurred costs for the legacy mainframe solution as well as the costs of deploying and migrating to an x86 environment. Once the migration was complete, the legacy costs were eliminated and the benefits began to accrue. The net results are the ROI and payback period shown in this study. Page 3

5 Figure 1 Four-Year Risk-Adjusted Cash Flow Factors Affecting Benefits And Costs Table 1 illustrates the risk-adjusted financial results that were achieved by the composite organization. The riskadjusted values take into account any potential uncertainty or variance that exists in estimating the costs and benefits, which produces more-conservative estimates. The following factors may affect the financial results that an organization may experience: Size of the mainframe. The size of the mainframe in use and the corresponding systems running on it affect the costs, benefits, and feasibility of undertaking a mainframe migration. Smaller mainframes are much easier to migrate, which reduces costs but likely delivers smaller absolute benefits as well. Mainframes considerably larger in terms of MIPS would be much more complex and costly to migrate. There should be a corresponding increase in benefits realized which can result in a similar ROI. Nature of the transformation. There are several flavors of a mainframe transformation, ranging from a complete migration off of the mainframe hardware and systems, to rehosting to an x86 environment while retaining COBOL and other systems, to modernizing an existing mainframe environment. (See Appendix D for a citation to Forrester research that explains the options more fully.) Depending on the type of transformation undertaken, costs and benefits can vary greatly. Page 4

6 Disclosures The reader should be aware of the following: The study is commissioned by EMC and delivered by the Forrester Consulting group. Forrester makes no assumptions as to the potential return on investment that other organizations will receive. Forrester strongly advises that readers should use their own estimates within the framework provided in the report to determine the appropriateness of an investment in EMC s Mainframe Transformation Service. EMC reviewed and provided feedback to Forrester, but Forrester maintains editorial control over the study and its findings and does not accept changes to the study that contradict Forrester s findings or obscure the meaning of the study. The customer names for the interviews were provided by EMC. Page 5

7 TEI Framework And Methodology Introduction From the information provided in the interviews, Forrester has constructed a Total Economic Impact framework for those organizations considering utilizing EMC Mainframe Transformation Service. The objective of the framework is to identify the cost, benefit, flexibility, and risk factors that affect the investment decision. Approach And Methodology Forrester took a multistep approach to evaluate the impact that the EMC Mainframe Transformation Service can have on an organization (see Figure 2). Specifically, we: Interviewed EMC marketing personnel and Forrester analysts to gather data relative to the EMC Mainframe Transformation Service and the marketplace for mainframes in general. Interviewed five organizations that used the EMC Mainframe Transformation Service to obtain data with respect to costs, benefits, and risks. Designed a composite organization based on characteristics of the interviewed organizations (see Appendix A). Constructed a financial model representative of the interviews using the TEI methodology. The financial model is populated with the cost and benefit data obtained from the interviews as applied to the composite organization. Figure 2 TEI Approach Perform due diligence Conduct customer interviews Design composite organization Construct financial model using TEI framework Write case study Forrester employed four fundamental elements of TEI in modeling EMC Mainframe Transformation Service: 1. Costs. 2. Benefits to the entire organization. 3. Flexibility. 4. Risk. Page 6

8 Given the increasing sophistication that enterprises have regarding ROI analyses related to IT investments, Forrester s TEI methodology serves the purpose of providing a complete picture of the total economic impact of purchase decisions. Please see Appendix B for additional information on the TEI methodology. Analysis Interview Highlights A total of five interviews were conducted for this study, involving representatives from the following companies (EMC customers based in the United States): 1. An insurance i company (specialty division). This division of a large, US-based insurance company is overseeing the gradual elimination of its product offering. The costs associated with operating a mainframe no longer made sense because the product was a declining business. Originally, the company had an 84 MIPS mainframe in-house. This was replaced with a 55 MIPS outsourced mainframe that was then subsequently fully retired. All applications have been fully migrated to a server environment. 2. A county c gove overnment rnment. This county decided to move all systems to a.net environment. In 2005, it decided that COBOL was no longer a strategic language and that the mainframe no longer made sense from a long-term cost perspective. There were two main systems on the 60 MIPS mainframe: a tax/billing system and the county courts system. These have been migrated to MicroFocus in a Windows environment, and the mainframe has been fully retired. 3. A human h resources services company. This company had several applications running on several mainframes. The applications being considered for retirement used approximately 1,500 MIPS. It contained 39 million lines of code and 14,000 programs. Because the company had two other mainframes with approximately 25,000 MIPS, the decision was made to merge the smallest mainframe s remaining work into one of the larger mainframes. 4. A medical m services company ompany. This US-based medical services company initiated a project to retire a 47,000 MIPS mainframe because of increasing costs. The CFO decided the mainframe was not sustainable. The multi-year project was approximately one-third complete when it was cancelled due to the company being acquired. Some early benefits were already being realized when the project ended. 5. A US government agency. This agency had a 200 MIPS mainframe. To reduce costs, it undertook a complete modernization of everything sitting on the mainframe. The databases were converted by EMC in 2007, and all databases and online screens migrated to a server environment. More than 6 million IDMS data fields were cleaned before moving to DB2. The five interviews uncovered the following salient points: Page 7

9 Interviewees gave a variety of reasons for migrating from the mainframe. The third-party vendor applications available for mainframe environments were decreasing in level of modernity. They were no longer consistent with our IT strategic direction. Switching to relational databases from IDMS provided much greater flexibility. Our employees with mainframe experience were retiring. This caused an ever-increasing skills shortage and labor costs. The long-term costs to maintain and grow our mainframe could no longer be justified. We needed to bend the cost curve down. Interviewees gave numerous selection criteria for deciding to work with EMC as the mainframe migration partner. Total cost for the services being provided. Time to complete the migration and meet aggressive timelines. Ability to convert all systems. Providing a turnkey solution that could be managed in-house, not a black box solution that would require ongoing professional services. Experience completing similar projects. Interviewees complemented EMC s professional services on several levels. EMC provided excellent turnaround time when had problems. They worked with us to solve the most difficult problems. Their technical skills were excellent and everyone was very helpful. EMC provided best practices and tools to automate parts of the migration. This made conversions consistent and fast. Other vendors did not have these tools. The benefits to the business in terms of agility and modernization were very large. The real benefit was increased agility that allows us to keep up with the pace of change in the marketplace. Actual IT costs were small compared to the costs incurred by the business because of inflexible processes and systems. Composite Organization Based on interviews with five customers that used EMC s Mainframe Transformation Service, Forrester constructed a composite organization that encompasses characteristics heard across the interviews. Forrester then created a TEI financial framework and an associated ROI analysis for this composite company. By aggregating the findings from the customer interviews and portraying a composite organization that has Page 8

10 benefited from migrating systems from a mainframe to a distributed environment, this Forrester study illustrates the financial impact of leveraging EMC s services. Forrester named the composite organization Acme Savings Bank (ASB). ASB is a regional bank providing retail and commercial banking products. The company is headquartered in Colorado and has branches across four states. It is looking to expand its presence in the next few years. ASB has a total of 5,000 employees. The internal IT organization has approximately 250 members. ASB has outsourced its mainframe to a large IT services company. The outsourcing contract included mainframe associated hardware, software, maintenance, and operations. Only business applications development and maintenance was kept in-house. The mainframe runs core banking transactional processes, such as financial transaction journals and loan origination. Human resources, finance, and other supporting systems are already housed on x86 servers. The mainframe was a 1,100 MIPS machine when ASB decided to retire it. It was estimated that MIPS usage would grow at 15% per year. In the end, all applications were migrated to VCE Vblock converged infrastructure systems and the mainframe was fully retired. See Appendix A for a fuller description of the composite organization. Framework Assumptions Table 2 provides the model assumptions that Forrester used in this analysis. Table 2 Model Assumptions Ref. Metric Value A1 IT FTE blended fully burdened cost* $110,000 A2 Business FTE blended fully burdened cost* $95,000 *Fully burdened cost includes insurance, paid vacation, and any other cost borne by the organization. The discount rate used in the PV and NPV calculations is 10% and time horizon used for the financial modeling is four years. Organizations typically use discount rates between 8% and 16% based on their current environment. Readers are urged to consult with their respective company s finance department to determine the most appropriate discount rate to use within their own organizations. Some dollar values presented in this study have been rounded to the nearest whole cent or dollar. Therefore, some of the calculation results in the subsequent tables may not exactly match the results if the reader follows the formulas and values presented. Page 9

11 Costs This section describes the costs associated with utilizing the EMC Mainframe Transformation Service and the ongoing operation of the expanded server infrastructure. Initial Implementation Internal Labor The composite organization s mainframe migration effort lasted 18 months. The project consisted of detailed requirements definition, a proof of concept (POC) migrating one application set to an x86 environment, setting up the full server environment, and then the full conversion/migration of databases, business logic, and applications. The applications were kept in COBOL. The internal team consisted of 12 FTEs from the operations, infrastructure, security, and database administration teams as well as representatives from the affected application teams. Extended team members worked on a part-time basis when their areas of expertise were required. Table 3 Initial Implementation Internal Labor Ref. Metric Calculation Initial B1 Number of FTEs 12 B2 Number of months 18 B3 Monthly fully burdened cost A1/12 $9,167 Bt Initial implementation internal labor B1*B2*B3 $1,980,000 Professional Services The composite organization engaged EMC for professional services. EMC worked with the in-house staff to ensure that they would be able to take full ownership of the solution once the implementation was completed. EMC made use of many proprietary tools to automate analysis, translation, and testing. EMC had 11 FTEs working on the 18-month project. Page 10

12 Table 4 Initial Implementation Internal Labor Ref. Metric Calculation Initial C1 Number of consultant FTEs 11 C2 Number of months =B2 18 C3 Monthly rate $1,200 * 20 workdays $24,000 Ct Professional services C1*C2*C3 $4,752,000 Hardware Replacing the 1,100 MIPS mainframe required two VCE Vblock 320 converged infrastructure systems. The systems provided significantly more computing power than required for the migrated mainframe applications. 25% of the Vblocks were used for these applications. The remainder was used for existing x86 applications that were on other servers. Each system consisted of 16 Cisco blades and approximately 100 terabytes of usable EMC storage. They use VMware virtualization technologies to provide the number of (virtual) servers required. One system is used for production as well as test/development, and the second is used for full business continuity. The Vblock systems had the capacity to handle the anticipated 15% annual growth in mainframe MIPS. Table 5 Hardware Ref. Metric Calculation Initial Year 1 Year 2 Year 3 Year 4 D1 Added hardware: no. of VCE Vblock systems 2 D2 Cost of added hardware D1 * $350,000 $645,000 D3 Ongoing maintenance 0 $56,000 $56,000 $56,000 $56,000 D4 % of Vblocks used for ex-mainframe apps 50% 50% 50% 50% 50% Dt Hardware (D2+D3)*D4 $161,250 $14,000 $14,000 $14,000 $14,000 Page 11

13 Software The composite organization needed to replace all of the supporting systems that were previously part of the mainframe solution. This included a COBOL compiler, application development systems (debugging, versioning, etc.), transaction process monitoring, file management, etc. This software was all purchased and installed during the initial period. Additional licenses for some of the products were required when servers were added. Twenty percent maintenance was incurred on all software licenses. Table 6 Software Ref. Metric Calculation Initial Year 1 Year 2 Year 3 Year 4 E1 Software licenses $1,500,000 $225,000 $225, ,000 E2 Maintenance E1*20% $300,000 $345,000 $390,000 $435,000 Et Software E1+E2 $1,500,000 $300,000 $570,000 $615,000 $660,000 Ongoing Administration The composite organization was already using x86 servers for nonbanking systems, such as HR, corporate finance, and procurement. Therefore, it already had an IT organization experienced in server operations and data centers in which to add the new infrastructure. There was a need to add some additional resources to support the new Vblock systems. Because the mainframe solution had previously been outsourced, there was not an opportunity to eliminate internal headcount associated with mainframe maintenance. Because of this, there is a net increase of 1.5 FTEs in the IT operations organization. Readers who have in-house mainframes should consider all the associated labor costs and offset those against the related costs. Page 12

14 Table 7 Ongoing Administration Ref. Metric Calculation Initial Year 1 Year 2 Year 3 Year 4 F1 Number of added IT operations FTEs F2 Annual fully burdened cost =A1 $110,000 $110,000 $110,000 $110,000 Ft Ongoing administration F1*F2 $0 $165,000 $165,000 $165,000 $165,000 Total Costs Table 8 shows the total costs associated with using the EMC Mainframe Transformation Service to move applications to an x86 server environment and fully retire the mainframe. Table 8 Total Cost, Non-Risk-Adjusted Ref. Costs Initial Year 1 Year 2 Year 3 Year 4 Total Bt Initial implementation internal labor ($1,980,000) ($1,980,000) Ct Professional services ($4,752,000) ($4,752,000) Dt Hardware ($161,250) ($14,000) ($14,000) ($14,000) ($54,000) ($217,250) Et Software ($1,500,000) ($300,000) ($570,000) ($615,000) ($660,000) ($3,645,000) Ft Ongoing administration ($165,000) ($165,000) ($165,000) ($165,000) ($660,000) Total ($8,393,250) ($479,000) ($749,000) ($794,000) ($839,000) ($11,254,250) Benefits The section looks at the benefits associated with using the EMC Mainframe Transformation Service to fully retire a mainframe. Page 13

15 Eliminated Mainframe Outsourcing Contract The composite organization outsourced the 1,100 MIPS mainframe to a global IT services organization. This eliminated many in-house cost categories, including: IT labor to maintain/expand the mainframe hardware and systems. Specialized mainframe data center environment. Mainframe hardware maintenance costs along with costs to expand MIPS by 15% per year. Software costs for mainframe management systems. When evaluating savings from completely eliminating the mainframe, readers should take all of these costs into consideration, along with any others they may identify, if their company has not outsourced their mainframe operations. The composite organization was paying $5,200 per MIPS for the outsource contract. Studies have shown that outsourcing can reduce mainframe operations costs by upwards of 20%, depending on the size and nature of the mainframe. At the time the mainframe was retired, it used 1,100 MIPS. It was estimated that this would grow at 15% per year from a combination of business growth and natural expansion of MIPS as software programs are rewritten. This would result in the outsource contract being 52% more expensive in Year 4 than at the beginning of the study. Table 9 Ongoing Administration Ref. Metric Calculation Year 1 Year 2 Year 3 Year 4 G1 Number of MIPS Grows at 15% 1,100 1,265 1,455 1,673 G2 Total cost per MIPS HW, SW and support $5,200 $5,200 $5,200 $5,200 Gt Eliminated mainframe outsourcing contract G1*G2 $5,720,000 $6,578,000 $7,564,700 $8,699,405 Business User Productivity In addition to cost savings, migrating mission-critical applications to an x86 environment can provide numerous business benefits. Among these is an increased productivity for various types of knowledge workers. The interviewed companies provided several examples of how users have benefited, including: Business users now have better access to data and reports. This means they can get their work done faster. Page 14

16 There is definitely a productivity gain for business users. This comes largely from improved selfservice tools to complete their responsibilities. We have eliminated numerous positions that spent all their time pulling data. Our financial analysts are now 25% more efficient. Seventy-five business analysts at the composite organization saw a very large increase in productivity. In Year 1, the productivity gain was 15%, and it increased to 20% beginning Year 2. There were another 300 business users who saw a smaller productivity gain; the productivity gain was 5% in Year 1 and increased to 10% beginning in Year 2. Only 85% of the total potential benefit was realized since not all available time added translates into actual work completed. Table 10 Business User Productivity Ref. Metric Calculation Year 1 Year 2 Year 3 Year 4 H1 Number of business analysts affected H2 Productivity improvement 15% 20% 20% 20% H3 Number of other business users affected H4 Productivity improvement 5% 10% 10% 10% H5 Annual fully burdened cost =A2 $95,000 $95,000 $95,000 $95,000 H6 Potential productivity gain (H1*H2*H5)+(H3*H4*H5) $2,493,750 $4,275,000 $4,275,000 $4,275,000 H7 Percent realized 85% 85% 85% 85% Ht Business user productivity H6*H7 $2,119,688 $3,633,750 $3,633,750 $3,633,750 Improved Time-To-Market (Non-Quantified) Moving all critical applications to an x86 environment made the composite organization more responsive to market dynamics and allowed for greater flexibility and business process reengineering. Several of the interviewed companies cited this benefit. Specific examples included: We now have much greater flexibility to meet the business needs. Page 15

17 We have been able to make many process improvements that we previously could not. By reducing system silos and replacing hard-coded logic with a rules-based data transformation engine, we can now give the business the information and tools it needs much faster. We definitely would not have been able to make some of the business changes as fast as we did if we were still on the mainframe. In the past, if wanted to add a data field it would take six months and cost $1 million because a small change would open the doors to wholesale change. The result was that we were not as responsive to the business as we wanted to be. The reader should consider the value of creating more-agile business and IT organizations when calculating all of the potential benefits of retiring the mainframe environment. Total Benefits Table 11 shows the total quantified benefits realized by using the EMC Mainframe Transformation Service to retire a mainframe. Table 11 Total Benefits, Non-Risk-Adjusted Ref. Benefits Year 1 Year 2 Year 3 Year 4 Total Ht Eliminated mainframe outsourcing contract $5,720,000 $6,578,000 $7,564,700 $8,699,405 $28,562,105 It Business user productivity $2,119,688 $3,633,750 $3,633,750 $3,633,750 $13,020,938 Total $7,839,688 $10,211,750 $11,198,450 $12,333,155 $41,583,043 Flexibility Flexibility, as defined by TEI, represents an investment in additional capacity or capability that could be turned into business benefit for some future additional investment. This provides an organization with the right or the ability to engage in future initiatives but not the obligation to do so. There are multiple scenarios in which a customer might choose to use the EMC Mainframe Transformation Service and later realize additional uses and business opportunities. Flexibility would also be quantified when evaluated as part of a specific project (described in more detail in Appendix B). As described above, switching from a mainframe to an x86 server environment made the composite organization more agile and flexible in responding to market changes. Moving to an x86 environment also makes future IT initiatives possible that would otherwise have been too costly or completely impossible to undertake. Page 16

18 One interviewee said, We can now do things that would have not been possible with traditional mainframe structures. Another explained that they were able to expose more functionality to users after completing the migration. None of these flexibility benefits were included in the ROI analysis. Risk Forrester defines two types of risk associated with this analysis: implementation risk and impact risk. Implementation risk is the risk that a proposed investment in the EMC Mainframe Transformation Service may deviate from the original or expected requirements, resulting in higher costs than anticipated. Impact risk refers to the risk that the business or technology needs of the organization may not be met by the investment in EMC Mainframe Transformation Service, resulting in lower overall total benefits. The greater the uncertainty, the wider the potential range of outcomes for cost and benefit estimates. Quantitatively capturing investment and impact risk by directly adjusting the financial estimates results in more meaningful and accurate estimates and a more accurate projection of the ROI. In general, risks affect costs by raising the original estimates, and they affect benefits by reducing the original estimates. The risk-adjusted numbers should be taken as realistic expectations since they represent the expected values considering risk. The following implementation risk that affects costs is identified as part of this analysis: Size of deployment. A larger mainframe could take substantially longer to migrate and bring greater complexities. This would increase internal labor, professional service, hardware, and software costs. This should come with a corresponding increase in benefits, resulting in a larger ROI than shown in this study and a slightly longer payback period. The following impact risks that affect benefits are identified as part of the analysis: Size of deployment. A much smaller mainframe would deliver fewer benefits. However, associated costs would also be lower, which would likely result in a similar ROI and shorter breakeven period. Nature of applications on mainframe. Applications that are mission-critical and/or tied to revenue creation have the opportunity to deliver greater benefits than less important applications. The interviewed companies described how EMC helped to reduce the risk of a mainframe migration. EMC was with us throughout the process. They fully specified the solution and helped us transition 2,000 applications. The conversion was very routine because they used their automated tools. They provided us with a lot of guidance and were very knowledgeable. It was obvious EMC had gone through a similar process many times in the past. Table 12 shows the values used to adjust for risk and uncertainty in the cost and benefit estimates. The TEI model uses a triangular distribution method to calculate risk-adjusted values. To construct the distribution, it is necessary to first estimate the low, most likely, and high values that could occur within the current environment. The risk-adjusted value is the mean of the distribution of those points. Readers are urged to apply their own risk ranges based on their own degree of confidence in the cost and benefit estimates. Page 17

19 Table 12 Cost And Benefit Risk Adjustments Costs Low Most likely High Mean Initial implementation internal labor (medium risk) 100% 100% 115% 105% Professional services (medium risk) 100% 100% 115% 105% Hardware (medium risk) 100% 100% 115% 105% Software (high risk) 100% 100% 125% 108% Ongoing administration (medium risk) 100% 100% 115% 105% Benefits Low Most likely High Mean Eliminated mainframe outsourcing contract (medium risk) 80% 100% 103% 94% Business user productivity (high risk) 50% 100% 100% 83% Page 18

20 Financial Summary The financial results calculated in the Costs and Benefits sections can be used to determine the return on investment, net present value, and payback period for the organization s investment in the EMC Mainframe Transformation Service. These are shown in Table 13 below. Table 13 Cash Flow Non-Risk-Adjusted Cash flow Original estimates Initial Year 1 Year 2 Year 3 Year 4 Total Present value Costs ($8,393,250) ($479,000) ($749,000) ($794,000) ($839,000) ($11,254,250) ($10,617,305) Benefits $7,839,688 $10,211,750 $11,198,450 $12,333,155 $41,583,043 $32,403,723 Net benefits ($8,393,250) $7,360,688 $9,462,750 $10,404,450 $11,494,155 $30,328,793 $21,786,418 ROI 205% IRR 96% Payback period 14 months Table 14 below shows the risk-adjusted ROI, NPV, and payback period values. These values are determined by applying the risk-adjustment values from Table 12 in the Risk section to the cost and benefits numbers in Tables 11 and 8. Table 14 Cash Flow Risk-Adjusted Cash flow Risk adjusted estimates Initial Year 1 Year 2 Year 3 Year 4 Total Present value Costs ($8,857,913) ($511,950) ($803,550) ($852,150) ($900,750) ($11,926,313) ($11,242,870) Benefits $7,136,141 $9,199,333 $10,126,831 $11,193,453 $37,655,757 $29,343,871 Net benefits ($8,857,913) $6,624,191 $8,395,783 $9,274,681 $10,292,703 $25,729,444 $18,101,002 ROI 161% IRR 80% Payback period 16 months Page 19

21 Figure 3 Four-Year Risk-Adjusted Cash Flow Page 20

22 EMC Mainframe Transformation: Overview According to EMC, their Mainframe Transformation Service enables organizations to migrate mainframe applications to an x86 platform. EMC consultants analyze existing applications, build a new open systems environment and migrate the mainframe applications, ultimately replacing the mainframe. Planning EMC's experienced mainframe modernization team analyzes the existing environment and develops a plan to migrate the mainframe applications to a modern architecture. Implementation Having completed the mainframe application analysis and planning, EMC will build a modern IT architecture and migrate your mainframe applications. Depending on the size and complexity of the mainframe, the modernization effort can take from 6 months to 3 or more years. Appendix A: Composite Organization Description Based on interviews with five customers that used EMC s Mainframe Transformation Service, Forrester constructed a composite organization that encompasses characteristics heard across the interviews. Forrester then created a TEI financial framework and an associated ROI analysis for this composite company. By aggregating the findings from the customer interviews and portraying a composite organization that has benefited from migrating systems from a mainframe to a distributed environment, this Forrester study illustrates the financial impact of leveraging EMC s services. Forrester named the composite organization Acme Savings Bank (ASB). ASB is a regional bank providing retail and commercial banking products. The company is headquartered in Colorado and has branches across four states. It is looking to expand its presence in the next few years. ASB has a total of 5,000 employees. The internal IT organization has approximately 250 members. ASB has outsourced its mainframe to a large consulting company. The outsourcing contract included mainframe associated hardware, software, maintenance, and operations. Only business application COBOL programmers and maintenance of business applications remained in-house. The mainframe runs core banking transactional processes, such as financial transaction journals and loan origination. Human resources, finance, and other supporting systems are already housed on servers. The mainframe was a 1,100 MIPS machine when ABS made the decision to migrate applications off of it. Application development would continue to be done in COBOL but in an X86 server environment. It was estimated that MIPS usage would grow at 15% per year. Page 21

23 ABS decided to explore and eventually migrate off of their mainframe environment to address several issues. These included increasing outsourcing costs for the mainframe, a lack of innovative systems being developed for the mainframe environment, and a general lack of agility in bringing new services to market. ABS undertook a typical process that included an assessment, proof on concept, and then a full migration. In the end, all applications were migrated and the mainframe was fully retired. Appendix B: Total Economic Impact Overview Total Economic Impact is a methodology developed by Forrester Research that enhances a company s technology decision-making processes and assists vendors in communicating the value proposition of their products and services to clients. The TEI methodology helps companies demonstrate, justify, and realize the tangible value of IT initiatives to both senior management and other key business stakeholders. The TEI methodology consists of four components to evaluate investment value: benefits, costs, risks, and flexibility. Benefits Benefits represent the value delivered to the user organization IT and/or business units by the proposed product or project. Often product or project justification exercises focus just on IT cost and cost reduction, leaving little room to analyze the effect of the technology on the entire organization. The TEI methodology and the resulting financial model place equal weight on the measure of benefits and the measure of costs, allowing for a full examination of the effect of the technology on the entire organization. Calculation of benefit estimates involves a clear dialogue with the user organization to understand the specific value that is created. In addition, Forrester also requires that there be a clear line of accountability established between the measurement and justification of benefit estimates after the project has been completed. This ensures that benefit estimates tie back directly to the bottom line. Costs Costs represent the investment necessary to capture the value, or benefits, of the proposed project. IT or the business units may incur costs in the form of fully burdened labor, subcontractors, or materials. Costs consider all the investments and expenses necessary to deliver the proposed value. In addition, the cost category within TEI captures any incremental costs over the existing environment for ongoing costs associated with the solution. All costs must be tied to the benefits that are created. Risk Risk measures the uncertainty of benefit and cost estimates contained within the investment. Uncertainty is measured in two ways: 1) the likelihood that the cost and benefit estimates will meet the original projections, and 2) the likelihood that the estimates will be measured and tracked over time. TEI applies a probability density function known as triangular distribution to the values entered. At minimum, three values are calculated to estimate the underlying range around each cost and benefit. Page 22

24 Flexibility Within the TEI methodology, direct benefits represent one part of the investment value. While direct benefits can typically be the primary way to justify a project, Forrester believes that organizations should be able to measure the strategic value of an investment. Flexibility represents the value that can be obtained for some future additional investment building on top of the initial investment already made. For instance, an investment in an enterprisewide upgrade of an office productivity suite can potentially increase standardization (to increase efficiency) and reduce licensing costs. However, an embedded collaboration feature may translate to greater worker productivity if activated. The collaboration can only be used with additional investment in training at some future point in time. However, having the ability to capture that benefit has a present value that can be estimated. The flexibility component of TEI captures that value. Appendix C: Glossary Discount rate: The interest rate used in cash flow analysis to take into account the time value of money. Although the Federal Reserve Bank sets a discount rate, companies often set a discount rate based on their business and investment environment. Forrester assumes a yearly discount rate of 10% for this analysis. Organizations typically use discount rates between 8% and 16% based on their current environment. Readers are urged to consult their respective organization to determine the most appropriate discount rate to use in their own environment. Net present value (NPV): The present or current value of (discounted) future net cash flows given an interest rate (the discount rate). A positive project NPV normally indicates that the investment should be made, unless other projects have higher NPVs. Present value (PV): The present or current value of (discounted) cost and benefit estimates given at an interest rate (the discount rate). The PV of costs and benefits feed into the total net present value of cash flows. Payback period: The breakeven point for an investment. The point in time at which net benefits (benefits minus costs) equal initial investment or cost. Return on investment (ROI): A measure of a project s expected return in percentage terms. ROI is calculated by dividing net benefits (benefits minus costs) by costs. A Note On Cash Flow Tables The following is a note on the cash flow tables used in this study (see the example table below). The initial investment column contains costs incurred at time 0 or at the beginning of Year 1. Those costs are not discounted. All other cash flows in Years 1 through 3 are discounted using the discount rate (shown in Framework Assumptions section) at the end of the year. Present value (PV) calculations are calculated for each total cost and benefit estimate. Net present value (NPV) calculations are not calculated until the summary tables and are the sum of the initial investment and the discounted cash flows in each year. Page 23

25 Table [Example] Example Table Ref. Category Calculation Initial cost Year 1 Year 2 Year 3 Total Appendix D: Supplemental Material Related Forrester Research Mainframe Migration Panacea Or Pandora s Box? Forrester Research, Inc., August 17, 2011 Proofpoints For Mainframe Application Migration, Forrester Research, Inc., September 28, 2011 Appendix E: Endnotes 1 Forrester risk-adjusts the summary financial metrics to take into account the potential uncertainty of the cost and benefit estimates. Page 24