A Roadmap to Total Cost of Ownership

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1 A Roadmap to Total Cost of Ownership Building the Cost Basis for the Move to Cloud A white paper by Penny Collen

2 The Roadmap to Total Cost of Ownership Getting a clear and complete financial picture of your existing IT environment is a critical first step in your journey to the cloud. Executive Summary Few enterprise IT professionals question the value of moving to the cloud. However, many skip the fundamental step of getting an accurate baseline of their existing environment s usage and costs before starting to consider various cloud options. This paper provides a step-by-step process for determining your Total Cost of Ownership (TCO) - a critical tool for evaluating and comparing various sourcing alternatives and forecasting your IT costs in the cloud. The Overview The benefits of creating a mix of traditional IT support with a cloud environment are great. Whether looking for increased agility, reduced time to market, improved productivity or accessibility, organizations are eager to reap the benefits of using cloud resources to create a more innovative approach to providing services. There are numerous technical options to be considered when moving a workload to a cloud environment. The operational staff or IT architectural analysts will capture resource usage and sizing information. IT Finance then must tackle the challenge of costing both the existing workload and preparing comparisons to one or more sourcing alternatives. Even when doing a pilot project using cloud, breaking out costs for comparison can be challenging. First, costs for the existing environment must be compiled. This environment may include operating costs for a dedicated server, a shared (stacked) server, or a virtualized instance. The options from a cloud perspective will include private, public, hybrid, or community. The number of public cloud providers abound. Each provider may have a unique pricing structure, making estimating more complex. Capturing relevant cost and usage data is critical for producing a credible financial comparison.

3 The best financial comparisons used for your cloud analysis will be based on Total Cost of Ownership (TCO). Using a consistent method of compiling costs will facilitate preparing your business case for every workload analyzed. The TCO model also makes the complex process of determining benefits easier because you have exposed more cost data early in the analysis cycle. For IT, TCO includes hardware and software acquisition, management and support, communications, enduser expenses and the opportunity cost of downtime, training and other productivity losses. - Gartner TCO is not Activity Based Costing (ABC). Many people hear the term TCO and immediately cringe at the idea of collecting costs from a myriad of sources and determining complex algorithms to allocate shared costs. The ABC concept, applied correctly, involves analysis of work activities, and the costs associated with each activity. The pressure to create more and more accuracy in the ABC model can make tracking and analyzing costs very time-consuming. The key principle in TCO is capturing lifecycle costs. TCO emphasizes considering costs of endto end operations from project inception, design, implementation, operation to decommissioning. In the past, business case financials were done completely but had more emphasis on the incremental costs needed to bring a project to production state. The first year of funding was transferred to the IT operations group and became part of the base budget. With this amount in the baseline, operations was thought to be covered. Sadly, contract increases and cost of living adjustments were not included so after the second year, IT was scrambling to cover the on-going costs. TCO won t guarantee that those future year increases will be included in the budget process but the TCO process does expose the future year costs for anyone reviewing the business case. What follows is a step-by-step process to help you determine costs for your cloud business case., along with a job aid to guide your efforts. Click on the link below to open the TCO workbook. DOWNLOAD TCO TOOL STEP ONE: Assess the cost of your current environment. When compiling costs for the existing workload, there are three options to consider: dedicated server, stacked server (fixed instance), or virtualized server. The natural starting point is to compile the costs for the entire server operation. From that point, the costs can be broken down to represent the specific configuration where the target workload is operating. Current operational costs to be included in your assessment and hints on where to find the associated costs are defined in Table 1.

4 Cost Category Where to Find Costs Hardware Current procurement records, vendor price lists, contracts Software Current procurement records, vendor price lists, contracts Technical Support Time entry records to determine level of effort are helpful but usually not detailed enough in the operations area. Estimate number of FTE s and determine costs using average technical salary (fully loaded.) Network and Connectivity Network should include equipment costs (network devices, cables, racks etc.) These costs may be expressed as a percentage of hardware cost if actual costs are not available. Connectivity should consider the costs of LANs, WAN s, Remote Access charges, Leased lines Power Vendors publish PUE (Power usage effectiveness) ratings for equipment. These can be used along with utility costs to calculate power. Creating a power ratio based on power costs compared to total hardware or total IT spend can provide representative costs. Facilities Multiply square footage by cost per square foot, usually expressed as an annual number. General administration costs (including physical security, data security, and disaster recovery sites) Use average general expenses including IT technical training, office supplies, travel, and management overhead. Include any shared costs such as physical security, site security, and disaster recovery if not included in facilities charges. Estimate costs as a percent of total direct costs based on the total operating budget. Future year costs should include a factor for inflation/cola Corporate Finance will provide this assumption Table 1: Operational Costs

5 Figure 1: TCO Components STEP TWO: Break down costs for the targeted workloads Total operational costs for the configuration where the targeted workload is running have now been determined. If the workload operating on a shared (stacked or virtualized) server, apply an appropriate percentage to isolate costs for the workload. This is most often done by allocating costs based on the number of cores used for the workload compared to the total cores in the configuration. Storage on SAN/ NAS equipment can be allocated using a similar process.

6 STEP THREE: Calculate one-time implementation costs There are a number of activities to consider when moving a workload to the cloud. Be sure to calculate these one-time implementation costs (see Table 2). In some cases, the move may provide the priority to clean up areas which have been neglected due to lack of funding or resources. Do not over burden the cloud move with these types of costs. In addition to the costs for establishing the new environment, determine costs to decommission the existing environment. Activity Where to find costs Design Architecture Data migration, porting Data cleansing, archiving User training Technical support training Standardization, upgrading and customization of applications Penalties for early termination Expenses to write off assets if not redeployed Staff costs to wipe hard drives and disks Packing, shipping and junking Table 2: One-time Costs Consult the project plan for estimated hours Consult the project plan for estimated hours Consult the project plan for LOE. Vendor selection may impact this estimate Consider changes in process for the business units using or supporting the new environment Consider changes in process for the business units using or supporting the new environment Technical skills may need to be adapted to include new technical skills as well as vendor relationship skills Consult the project plan and architecture design Check hardware and software contract terms. This first action is to redeploy assets to other workloads. However, in some cases, the equipment may be junked. Check with the corporate asset management team for any net book value remaining, along with policies on writing off assets. The IT group responsible for asset disposal can provide an estimate of time required. The IT group responsible for asset disposal can provide an estimate of costs.

7 STEP FOUR: Estimate new recurring costs There are some new type of functions and costs which will result from a move to the Cloud environment. The best way to estimate these costs is to run a cloud pilot using data from the existing environment as the base. The pilot goals should be carefully defined in advance, with timelines and measureable success criteria. If a public cloud is included in the final solution, keep in mind that the invoice received monthly will be an operating expense rather than a capital expense. Cost impacts from a cloud environment usually include Expanded network capacity Vendor invoice (If using public cloud) Administration of invoices from cloud vendor Staff to manage vendor and client relationships STEP FIVE: Estimate public cloud costs A public cloud is normally billed on a usage basis rather than a dedicated amount. There are some public cloud providers which do offer reserved (dedicated) instances. The variability and size of the targeted workload will determine if this option is preferred. Estimating the costs for the public cloud option is best based on using usage information captured at the resource level. The invoice costs can be estimated based on the usage information and published CSP rates. The results can then be directly compared to the cost of the current environment as determined in Step One. Unfortunately, each type of platform has unique usage units. When comparing platforms, this wide array of usage units makes direct comparisons extremely difficult. The best way to deal with this issue is to reduce the comparisons to the three or four units which all share. Those units are normally CPU, Memory, and Storage. Reducing the large variety of units to a limited number of common units makes usage and financial analysis more feasible. The best way to estimate the cost of moving to a public cloud is to capture actual usage from the existing environment. The most common resources priced are CPU, Memory, Storage (GB), and Network. When anticipating a move to a public cloud, usage collection tools should be installed on the current hardware to capture actual usage levels. Once the actual usage is available, the usage can be used to estimate the cost of a public cloud by combining prices from cloud service providers with the projected workload usage. Capture actual usage for your current workload CPU Memory Storage Network Apply currently published cloud rates from vendors

8 If your organization has not previously determined rates for individual resources, you can still create a credible estimate to compare to the estimated Public costs. Using the total server costs from the original TCO calculations, break the costs into the categories of CPU, Memory, Storage, and Network using a percentage. Total Cost $ CPU 35% Memory 25% Storage 20% Conclusion With costs for the current environment and estimated costs for the new environment, comparisons can be performed for a variety of options. Calculating Total Cost of Ownership does not need to become tedious collection overload. Accurate numbers are an important part of your overall analysis of deployment to a cloud environment. Knowing where to find numbers and how the cloud pricing structures can be estimated can make this effort straightforward. Network 20% The resulting amounts will offer a relative range of costs which can be compared to the CSP cost estimate. A final item to check before ending your collection of public cloud costs is cancellation terms. Review the contract terms from the selected cloud provider. Be fully aware if there are any potential penalties if you leave the provider on short notice. These costs would be included in the final year of your analysis if applicable. STEP SIX: Estimate the costs to build a private cloud Building a private cloud is essentially the same process as used to provision any new environment within your data center. Again, if actual usage has been collected for the targeted workload, sizing the private cloud will be much easier. Follow the process for estimating the costs of the current workload as explained in Step One.

9 Penny Collen Penny Collen is the Financial Solutions Architect for Cloud Cruiser, Inc. Her work in operations and development provides a foundation for business process analysis across a broad spectrum of disciplines, including asset management, service pricing, software capitalization and activity-based cost models for hybrid IT. Ms. Collen is sought as trusted advisor on IT financial processes and shares her knowledge through Web lectures, seminars, workshops, interviews, blogs and articles. Ms. Collen holds a BS in Business Administration from the University of Nebraska Omaha; an MBA from Creighton University. The IT Financial Management Association recently named her Educator of the Decade. Cloud Cruiser Founded in 2010 and headquartered in Silicon Valley, California, Cloud Cruiser offers an innovative IT financial management solution that was built from the ground up to support hybrid IT environments, including traditional, virtualized, public, and private cloud platforms. It maximizes freedom of choice for enterprises and service providers by providing dynamic financial intelligence, chargeback, and billing across heterogeneous IT environments. The company s key strategic partners include: Microsoft, HP, Cisco, VMware, Amazon, and Openstack. info@cloudcruiser.com (USA) (Netherlands)