Introduction
Building a detailed, comprehensive financial model to justify an investment in virtualization is a straight-forward task for some and a nightmare for others. VMware has recruited an external expert consultancy called Alinean to create a TCO/ROI calculator on vmware.com.
This document explains how to use that tool to create a financial justification for a server consolidation solution on VMware. It explains how to build a base case, and also how to make the model your own by adding/removing/editing assumptions and entering your own financial data.
Intended Audience
VMware Certified Professionals (VCP) and VMware Architects (VCDX), and the management and finance teams who will support and fund the virtualization project.
Outline
The steps to build a financial justification follow a pattern outlined in this document:
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Setting your financial objectives
Understanding financial terms
Building your base case
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Getting your own figures
Making the model your own
Presenting your case
VI3 Financial Justification
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The method to create a financial justification has been split into two parts, and the detail has been delegated to two sub-documents. This framework makes it much easier to present a high-level approach in this document while providing the opportunity to dig into the more detailed sub-documents if necessary. According to the feedback we've received, taking this approach was much easier than providing one huge (35 page!) document.
Part 1 - Creating the base case
The following is the high-level approach to creating a base case. For a more detailed approach, see the sub-document The specified document was not found..
1. Setting your financial objectives
The business case provides input to the financial justification by describing what the goals are. The business case also incorporates the results from the financial justification as supporting data.
The objectives for this project are detailed in The specified document was not found. , but in summary they are:
Consolidation of around 100 physical servers in the first year, and containment of around 100 new servers over three years.
Reduce capacity costs by a minimum of 30% through avoiding purchasing new hardware.
Increase throughput of projects without increasing operational costs (e.g. hiring more staff).
A bonus would be a reduction in operating expenditure or clear data to show that operational staff are working on more valuable tasks than unplanned work.
Some observations about this example situation:
The servers that are candidates for consolidation are a mixture of fully depreciated servers but also servers that are relatively new and still being depreciated. For the purposes of this model, I will only include the servers that are newish and still being depreciated and that are still costing me money: this represents 100 servers.
The forecast 100 servers for the next three years is a conservative forecast of growth by 30% each year.
Other common industry objectives are:
Space and real estate savings
Power consumption savings
Capital cost avoidance
Labour reductions and productivity improvements
Service level and availability improvements
Business agility and new revenue opportunities
2. Explaining the terms of financial analysis
Formal financial analysis uses a series of mathematical tools to analyzea business case and aid decision making. The main ones that are typically used in investment analysis are:
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These terms are fully explained in The specified document was not found..
To be really thorough, decisions should take into account each of these tools and so a business case developer needs to be familiar with the meanings and usage of these terms.
3. Building your base case
First you need to access the VMware Online TCO/ROI Calculator
WARNING: For best results, use Internet Explorer with this online application
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VMware and Alinean have developed a TCO and ROI calculator model for VMware virtual infrastructure which brings together all of the financial analysis tools we have discussed so far. This tool provides a fast track method to develop a professional and comprehensive business case for VMware server consolidation, VMware VDI and VMware Lab automation. This tool is freely available on the VMware web site and it provides full access to the TCO model supported by documentation on the methodology used to build the model.
3.1 Enter your profile
The values we input:
Organization name: Acme Widgets
Industry: High Technology Software and Hardware
Location: United States
State/Region: California
Currency: Dollar ($) - default
Analysis Options: VMware Infrastructure (VI)
3.2 Complete the Current-as-is questionnaire and assumptions
Although the title of this tab is "Current-as-is", the assumptions links at the bottom let you influence the "to-be" (virtualization) models so instead of thinking of this as a simple input of your current situation, you should think of this tab as having important values for both as-is and to-be.
KEY POINT For financial justification you only care about things with cost/values associated with them, which means those old depreciated services that might be P2V'd and virtualized are not part of the financial modelling. You only model the servers still depreciating, and the future servers |
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The data input on the main tab was:
2-CPU servers: 75
4-CPU servers: 25
Person hours to provision a server: 20 (default)
GB of storage in current environment: 10,000 (default)
% servers attached to SAN: 10% (defualt)
Virtualizing DR? No (default)
At this point in building a base case we are not going to change any of the assumptions - that comes later.
3.3 Infrastructure Optimization Solutions
Based on our simple, base figures, and accepting all the default assumption (see next section about changing these and making the model your own).
In summary, by consolidating 100 existing servers, removing them from the books and replacing them with virtual machines, the the VMware TCO Online tool as produced the following TCO/ROI solution.
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The report produced by our scenario is attached to this document.
Before we move on to the customization steps, some common questions:
What happens to the servers I have consolidated/virtualized?
If you have purchased the servers and have to keep them until they are fully depreciated then you will not be removing the $1.3m hardware costs from the books, but you will be able to repurpose those servers and avoid making any other capital purchases. If you can run VMware Infrastructure on those servers, then you might be able to stretch the capital expenditure avoidance even longer.
Why are my storage costs so much higher with virtualization?
To use enterprise virtualization you need a shared storage backend. These days this can be as cheap or expensive as your requirements dictate, and you can customize the model for this. Without shared storage you cannot use vMotion to avoid planned maintenance downtime (what cost is that to the business?), or the high-availability features to drastically reduce unplanned downtime (what cost is that to the business?). Shared storage also brings many benefits to the organization in addition to the benefits which VMware delivers. Through centralization of storage islands of disk capacity can be avoided, which often wastes available space that is isolated from other systems which require it.
Why are the provisioning costs drastically reduced but not the administration costs?
VMware technologies transform the datacenter release management processes meaning less effort to do more: however, this does not reduce operating system and application counts. So while consolidation reduces hardware maintenance because there is simply less hardware, the administration on operating systems and applications is the same because there are the same number of OS instances. VMware have developed solutions to improve this virtual machine administration through technologies such as off-line backup, patching and security; so expect the administration costs to be drastically reduced with VMware. |
These are just a brief sample of questions: of course, it is unlikely that a CFO or other finance expert will take these figures on face value; they are likely to want to:
Validate and change the assumptions to match the specific situation
Understand the model and how it works
The next step "Make the model your own" takes you through this process - see The specified document was not found.
Resources
Authors
Content authored by Simon Townsend, SE Manager at VMware Editing by Steve Chambers, Senior Architect at VMware and Rodney Haywood (Rodos)
VMware (NYSE: VMW) is the global leader in virtualization solutions from the desktop to the datacenter. Customers of all sizes rely on VMware to reduce capital and operating expenses, ensure business continuity, strengthen security and go green. With 2008 revenues of $1.9 billion, more than 130,000 customers and more than 22,000 partners, VMware is one of the fastest-growing public software companies. Headquartered in Palo Alto, California, VMware is majority-owned by EMC Corporation (NYSE: EMC). For more information, visit www.vmware.com.
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Document StatusThis document is currently under development by members of the VIOPS community.
Current state of the document
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I think on this it would be worth a line to factor in servers that are off book, but still in operation. Typically these are older servers running legacy apps. As they are still running, they usually require (expensive) hardware maintenance contracts.
This is one of the biggest savings areas I have had with P2V.
Typical DL380 G5 is around £200 p.a. while within warranty. As soon as the 3 year period is over, the annual maintenance for this would go up to around £600 p.a. and a 380 is one of the cheaper servers out there.
Multiply that out by a few hundred servers and it doesn't take long to make the FD smile.