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Data Center Modernization Financial Business Case
Data Center Modernization Financial Business Case
Introduction
IT departments are under more pressure than ever to deliver increasing value back
to the business. In addition to responding to day-to-day operational challenges,
IT is being asked to define an efficient path to new deployment paradigms,
including server virtualization, cloud computing, and ultimately, a software-defined
infrastructure. For IT decision-makers, the question becomes: How do you help
lead your business forward?
While there is no silver bullet for all the challenges IT faces today, spearheading
IT modernization initiatives and replacing outdated data center technologies with
the latest, cost-effective innovations, IT decision-makers can better meet business
needs for greater performance, security, networking, storage, and software
efficiency advantages—all while lowering operating expenses. Optimizing the
data center can also help IT be viewed as an enabling internal partner, moving the
enterprise toward a highly efficient, software-defined infrastructure that enables
the business to better use the latest technologies to take advantage of future
opportunities.
• Can the business afford the incremental cost in a tight budgetary environment?
• What is the short term / long term financial impact and ROI related to these
efforts?
Sajid Khan These perspectives are of keen interest to key stakeholders in general
Global Enterprise Segment management, operations and finance and this paper examines the key financial
Marketing Manager considerations necessary to understanding the financial metrics and ROI of a
John Kuzma modernization effort. Further, this paper provides the building blocks necessary to
Senior Data Center Architect developing a clear and compelling financial business case that resonates with key
stakeholders who ultimately ratify data center modernization projects.
Isaac Priestley
Data Center Finance Manager
Building the Business Case for Data Center Modernization
Table of Contents Building the business case – Who are the Key Stakeholders
Building the business case. . . . . . . . 2 Strong financial business cases focus on key metrics and information of interest to
not only the chief information officer (CIO) but also the chief financial officer (CFO).
Building a Business Case – In fact, a May 2013 Gartner FEI CFO Technology Study, showed that a significant
A Best Practices Framework. . . . . . . 3 percentage of CFOs have direct responsibility for IT and are increasingly becoming
Terms and Definitions . . . . . . . . . . . . 4 key IT decision makers and influencers.
Developing your Financials . . . . . . . 4
Storage. . . . . . . . . . . . . . . . . . . . . . . . . . 6
Utility Expenses. . . . . . . . . . . . . . . . . . 7
Green IT Benefits. . . . . . . . . . . . . . . . . 8
Accounting: Depreciation
Expenses and Tax Implications. . . . 9
Putting It All Together . . . . . . . . . . . 10
Annual Operating
Expenses Impact. . . . . . . . . . . . . . . . 10
Capital Expenses Impact. . . . . . . . . 11
Tax Implications. . . . . . . . . . . . . . . . . 12 Figure 1. Where Does IT Report? Source: Gartner (May 2013, Survey Analysis: CFOs Top
Imperatives From the 2013 Gartner FEI CFO Technology Study)
Summarizing the Financials. . . . . . 12
This change is primarily due to the CFOs control of the budget and her critical
Additional Benefits of
insights over how business value can best be achieved. IT leaders can benefit from
Data Center Modernization. . . . . . . 13
this shift in organizational control by educating CFOs about the value of IT and
Get Started Today. . . . . . . . . . . . . . . 14 focusing the conversation on topics that have greater meaning to a CFO such as;
Appendix . . . . . . . . . . . . . . . . . . . . . . . 15 total cost of ownership (TCO), return on investment (ROI), net present value (NPV),
and payback periods rather than focusing solely on general performance, server
utilization, and power efficiency. Consolidating all of these topics is a developing
best practice for positioning your modernization project for success.
The conversation with the CFO is a key step towards showcasing the overall
business value of keeping IT environments current. However, IT leaders also need
to have cross-functional conversations to uncover line-of-business (LOB) needs
to better support IT infrastructure improvements. Understanding the perspectives
and insights of colleagues across the enterprise is essential to developing strategic
and insightful data center optimization plans – precisely what IT needs to expand
its value within the business.
While his maintenance efforts provided short-term relief in a very tough economic
environment, his environment has now fallen behind in performance and cost-
efficiency compared to the leading-edge hardware and software available
today. The IT director now needs to develop a financial business case to justify
modernizing his IT infrastructure.
3
Building the Business Case for Data Center Modernization
Utility expenses. Utility expenses for this discussion are calculated on estimates
Business innovation of server power usage, utility rates, utility growth rate, data center operating hours,
throttled to 26% data center cooling efficiency factors (PUE), and data center capacity costs. The
server power usage is based on an estimated server power in kilowatts both when
26%
CAPEX
the server is busy and idle. The utility rate is a cost per kilowatt hour for utility
power. Utility growth rate is a factor to estimate future utility rate increases year
over year in the form of kilowatt per hour. Data center cooling and PUE (Power
Usage Effectiveness) is a factor to estimate infrastructure cooling efficiency
and cost requirements. The default value for this discussion is set to a PUE of
74%
OPEX
2. A PUE of 2 means that your non-IT power (e.g. cooling, HVAC, lighting, etc.) is
equal to your IT power (e.g. server, storage, networking). Therefore total power
consumption is estimated at 2 times the IT power consumption. Data center
capacity costs (in $/kW) is for data center infrastructure capacity additions. This
74% captive in operations
is used for calculating the cost avoidance savings of not having to build new
and maintenance
server infrastructure to accommodate incremental growth if old servers were not
refreshed.
Source: Gartner, IT Metrics: Align IT Investment
Levels with Strategy Using Run, Grow, Transform
and Beyond (March 2012) Software Expenses are a sum of licensing, support, and validation. Licensing is
the cost per server to purchase new licenses needed for the environment or for
any incremental demand needed. Software support is the software maintenance
fee per server. Software validation is the cost per server for validating software
configurations on newly installed servers.
4
Building the Business Case for Data Center Modernization
Number of Servers 21
The Annual Server Maintenance Savings clearly illuminate the high cost of
maintaining an aging infrastructure. While this scenario looks at the annualized
savings from a server maintenance perspective, you can also expand the financial
review to include additional annual savings and benefit opportunities derived from
network and other related maintenance.
Additionally, ACME Company reduced its server inventory from 100 to 21. This
impacts the number of required resources and space necessary to support the
business, resulting in additional labor savings to maintain, replace or manage the
infrastructure. This information can be calculated in a similar way to the server
maintenance calculations above. The savings achieved with this change contributes
to your project ROI and to a lower TCO.
The TCO savings of a server refresh are compounded when you also consider
the impact annual software maintenance fees have on your total expenses. The
calculation needed for this input takes into account the proposed project life in
addition to the number of servers and the software maintenance fees.
5
Building the Business Case for Data Center Modernization
More complex software environment modeling and scenarios, such as; databases,
systems management software, application software or virtualization software,
can be developed using the Software Configuration Wizard contained within the
Performance Capability of servers Intel® Xeon® Processor-Based Server Refresh Savings Estimator.
>4 years old
Storage
4 % The next component of our TCO calculation is storage. Advances in storage
technology offer financial benefits that are easy to determine. Using the Server
Refresh Savings Estimator for our scenario, we’re able to determine that the 100
HDDs in the existing environment can be replaced by 21 – 200 GB SSD solution.
65%
EXISTING STORAGE ENVIRONMENT SCENARIO
6
Building the Business Case for Data Center Modernization
Utility Expenses
Infrastructure refreshes can also significantly lower data center utility expenses.
Utility expenses are examined because the information and results impact budgets
controlled by the CFO. The choices IT make directly impact power consumption
and a refreshed environment can lower overall utility expenses.
To address rising costs and performance issues, Intel IT began a data center
optimization program that included revising the server refresh strategy.
Since 2010, the strategy has created new business value in excess of USD
184 million, in part by moving to a proactive server refresh schedule, in
which existing servers are regularly upgraded to the latest generations of
Intel® Xeon® processors. This has resulted in:
7
Building the Business Case for Data Center Modernization
PUE 2
PUE 2
8
Building the Business Case for Data Center Modernization
For the last four years, ACME Company has been able to take advantage of a
depreciation expense associated with the original server and storage purchases.
During the fifth year, however, the assets are fully depreciated and the enterprise
is no longer able to take advantage of the depreciation expense. This impacts the
overall savings opportunity available to the organization and provides additional
support for an infrastructure refresh.
This figure doesn’t directly impact the TCO however it does help lower the
company’s overall tax burden. It’s an area of opportunity for the company to
explore with respect to the overall financial impact of the proposed project.
Network
and Server $239,900 $50,379 $189,521 (79%)
Maintenance
Utility
$100,417 $21,088 $79,330 (79%)
Expenses
Annual
Software $1,545,500 $1,062,495 $483,005 (31%)
Expenses
Tax
($923,533) ($491,646) ($431,887) (47%)
Implications
10
Building the Business Case for Data Center Modernization
11
Building the Business Case for Data Center Modernization
Tax Implication
12
Building the Business Case for Data Center Modernization
The financial benefits overview information becomes the heart of the financial
business case for discussions with your CFO and CIO. While the scenario depicted
in this paper has been simplified to provide the potential financial savings of an IT
modernization initiative via an infrastructure refresh, the information can be used
to help your IT build a data-driven financial discussion.
You are now ready to build your own business case. Here’s a recommended outline
of information to help guide the discussion with your key decision-makers and
project stakeholders. Download a sample presentation using the Intel® Xeon®
Processor-Based Server Refresh Savings Estimator at
http://estimator.intel.com/serverroi/
Executive
Return on Investment
Title Slide Summary Title
Investment (ROI) required
Slide
Name of your initiative. This section provides This section may This section may
Example: The Business the financial benefits contain a visual chart contain a table
Value of a Technology overview such as indicating the ROI and summarizing the
Refresh Initial Investment, Net investment breakeven technology scenario
Benefits, Return on point. you are proposing
Investment, Internal along with the costs for
Rate of Return, Payback hardware, software,
Period installation, and
disposal fees related to
implementing the new
environment.
Financial Financial
Next Steps /
Benefits Over Benefits by Other
Request
Time Category
This section focuses on This section focuses This section can include This section specifies
the annual cash flow on the savings other relevant factors the next steps and/or
details over the course improvements (by including benefits actions you are seeking
of the proposed project category of TCO) for Facilities, Green to achieve as a result of
life. gained by a refreshed IT, other business the discussion.
infrastructure and the benefits (power and
cumulative net financial performance)
benefit.
Beyond the performance benefits and cost savings, there is also a much larger
story behind the need for data center optimization. As is now widely discussed
within IT, the role of IT is changing rapidly. Shadow IT is emerging as lines of
business become increasingly tech-savvy and take IT decision-making upon
themselves. In fact, recent research by Vanson Bourne found that 35 percent of
IT spending is already occurring outside the IT department, and that number is
expected to grow to 44 percent by 2016.
For IT to remain relevant and trusted, its role needs to change from simply
being a provider of IT services to being a service broker or consultant to the
organization—a strategic expert that collaborates with stakeholders across the
business to achieve near- and long-term goals. Further, IT needs to introduce
innovative ideas that guide the business forward by reducing costs, enabling new
revenue opportunities, and improving support for new applications and other
business initiatives.
Data center modernization initiatives can help IT move into this new role. When
IT decision-makers build a solid financial case for revising the existing hardware
refresh cycle—showing how doing so can lower costs significantly while enabling
better performance and availability—it shows not only technology expertise
but also strategic acumen that is essential to the new and expanding role of IT in
enterprises today.
Additional Resources
Server Refresh Planning Guide
14
Building the Business Case for Data Center Modernization
Appendix
The following assumptions and data from the Intel® Xeon® Processor-Based Server
Refresh Savings Estimator were used to generate the financial tables for the ACME
Company scenarios listed in this paper. The data is presented for both the existing
environment and the new environment:
Existing Environment
Server 2P Intel® Processor-based servers
Server Age 5 years
Server Count 100
Costs to Estimated Server Price $6,792
Per Server
Implement new
environment Installation Migration $50
Costs Per Server
Storage Storage 100 2.5” HDD, 73 GB, 10K rpm HDD
with SATA HDD Storage Interface.
10% HDD capacity consumed. RAID 0
Configuration
Software Software Support Costs $15,455 software support costs per
server per year
Software validation $1,000 per server
Costs
Operating System Linux Premier Support
Annual Operating $1,399
System Support Fee
Database SQL Server 2012 Enterprise. $6,736
license fee.
Annual Database $1,757
Support Fee
Power Estimated Server Power .384
– Busy (Kilowatts)
Estimated Server power 0.110
– Idle (Kilowatts)
Utile Rate ($/kWh) 0.10
Utility Growth Rate (per 3%
year, in $
Operating Hours 24 X 7
Data Center Cooling 2.0
Efficiency Factor (PUE)
DC Capacity Cost ($/kW) $10,000
Hardware Server Warranty Period 3 Years (now expired)
Maintenance Server Maintenance $2,399. Costs are per server per year for
Costs Costs ($ per server per hardware and maintenance/support of
year) any “out-of-warranty” maintenance.
Network Maintenance $15
Costs ($ per server per
year)
Hardware 4 years
Depreciation
Cycle
15
Building the Business Case for Data Center Modernization
New Environment
16
Examining the High Cost of an Aging Infrastructure
Hardware 4 years
Depreciation
Cycle
Financial Discount Rate 10%
Parameters Marginal Tax Rate 35%
The TCO or other cost reduction scenarios described in this document are intended to enable you to get a better understanding of how the purchase of a given Intel product,
combined with a number of situation-specific variables, might affect your future cost and savings. Nothing in this document should be interpreted as either a promise of or
contract for a given level of costs.
This paper is for informational purposes only. THIS DOCUMENT IS PROVIDED ‘AS-IS’ WITH NO WARRANTIES WHATSOEVER, INCLUDING ANY WARRANTY OR
MERCHANTABILITY, NONINFRINGEMENT, FITNESS FOR ANY PARTICULAR PURPOSE OR ANY WARRANTY OTHERWISE ARISING OUT OF ANY PROPOSAL
SPECIFICATION OR SAMPLE. Intel disclaims all liability, including liability for infringement of any property rights relating to use of this information. No license, express or
implied by estoppel or otherwise to any intellectual property rights is granted herein.
Copyright © 2014 Intel Corporation. All rights reserved. Intel, the Intel logo, Xeon, are trademarks of Intel Corporation in the U.S. and/or other countries.
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