Posts Tagged 'Capital'

October 27, 2010

Oh No CoLo, Go Go Godzilla (Apologies to Blue Oyster Cult)

A traditional Co-location has certain advantages and for some customers it makes a great deal of sense. At least it does at first blush. Take a look:

  • Colo is cheaper than doing it yourself as physical infrastructure costs are shared across a number of customers.
  • The hardware is yours, not the co-location company’s. This means you can scale in the manner you please versus what suits the business model of the co-location company. The potential downside is that this assumes you were smart enough to pre-buy the space to grow into…
  • The software is yours, too. You are not limited to the management suite provided by the co-location company. Use what you wish.
  • Colo centers are usually more robust than a typical business environment. They deploy more physical security in an environment that is designed to properly manage power (multiple generators on-site for example) and the risks associated with fire and other natural disasters.
  • Upgrade paths are determined by you versus the hosting provider.

But what about the cost side of the equation? What does that look like? It goes without saying that it is (usually) cheaper to use a provider like SoftLayer to host your gear, but by how much? We have built a relatively simple model to get at some of these answers.

Assumptions:

  • A mix of 75 small servers (Xeon 5503, 2 GB RAM, 250 GB SATA) and 75 large servers (Xeon 5520, 3 GB RAM, 250 GB SATA)
  • Colo pricing was based on $100 per U per month, or $2,500 per 40U rack per month cost. Colo capex assumed the same base configuration but at current market prices.
  • We assumed a $199 price point for SoftLayer’s small servers and $359 for large servers
  • Bandwidth consumption of 2500 GB per server per month (this is about 50% of what we see in house). A price of $50 per Mbps was used.
  • A refresh schedule of 50% at 36 months, 25% at 48 months and 25% at 60 months

So what do the numbers tell us? Well, I think it paints a pretty compelling picture for SoftLayer. The 60 month Total Cash Outlay (TCO) for Colocation is 131% of the SoftLayer cost.

Total Cash Outlay

  Collocation Softlayer
Initial Capital Expenditure (Cash Outlay) $341,700 $0
Monthly Recurring Charges $64,778 $60,450
60 Month TCO $4,740,917 $3,627,000

In addition to the total cash outlay, we can add in a bunch of additional “hassle costs” – the hassle of driving to the DC in the middle of the night for an emergency, the hassle of doing your own software patching, setting up your own monitoring, waiting on hardware delivery (and you are not going to be first in line given your volumes are likely to be low compared to SoftLayer), the hassle of booking assets to the balance sheet, depreciation entries, salvage accounting entries, actual equipment disposal, downtime while you perform upgrades – ugh, the list is almost endless.

The argument for a SoftLayer solution is pretty strong based on the numbers alone. And I think that they ought to be persuasive enough for most to rethink a colocation decision. That said colocation decisions are not made from a cost perspective alone.

For example:

  • Issues around data integrity and security often drive companies to adopt a corporate philosophy that dictates co-location (or an on premise solution) over an outsourced solution. There is a deemed corporate need to have data / applications running over their own iron. Indeed, for many, colocation represents a significant and progressive decision.
  • Many companies have infrastructure in place and a decision will not be made to veer from the current solution until a technology refresh is in order. Never mind that fact that a transition to an outsourced solution (and this is the case when lots of things are outsourced, not just infrastructure) can generate significant internal anxiety.

Many outsourcing adoption models seem to show a similar trend. To a degree much of this becomes a market evolution consideration.

  1. Adoption is very slow to start. Companies do not understand the new model and as a result do not trust vendor promises of cost savings and service delivery. To be fair to customers, service delivery for many solutions is poor at the beginning and cost savings often disappear as a result.
  2. The vendor population responds to initial concerns regarding service delivery and perceptions around cost savings. Innovation drives significant improvements from a product and service delivery perspective. The solution now seems more viable and adoption picks up.
  3. For some services (payroll is a good example), the cost savings of outsourcing the solution are realized across the marketplace with excellent service delivery and support being commonplace. We are close to mass market adoption, but some companies will opt to keep things in house regardless.

So where are we on the evolutionary curve? That is a difficult question to answer as there are numerous things to consider dependent upon where you want to look.

For most SMBs, outsourcing functions like HR/Payroll or their IT infrastructure is a no brainer – capital is not as readily available and existing staff is likely overburdened making sure everything else works. At the end of the day, the desire is to focus on running their business, not the technology that enables it. The decision is relatively easy to make.

As we go further up the food chain, the decision matrix gets infinitely more complex driven by an increase in geographic reach (local – national – international), an increase in the complexity of requirements, an increase in the number (and complexity) of systems being used and typically large IT organization that can be a terrific driving (or drowning?) force in the organization. The end result is that decisions to outsource anything are not easy to reach. Outsourcing occurs in pockets and SoftLayer certainly sees some of this where enterprise customers use us for a few things versus everything.

At the end of the day, the hosting market will continue to be multifaceted. All businesses are not alike and different needs (real or otherwise) will drive different business decisions. While I believe colocation will remain a viable solution, I believe that it will be less important in the future. The advantages presented by companies like SoftLayer only get more powerful over time, and we are going to be ready.

-Mike

October 12, 2010

What Does it Cost (Part 1)

The Overview
I normally like to have a little fun in the blogs that I write and maybe even take the occasional jab at our CFO Mike Jones (all kidding aside about pink shirts and what not he is a really great guy). This blog is intended to have more of a educational goal, and since there is a lot to take into consideration I won’t be able to make any pink shirt cracks, and the reason for this is because I’ve had a lot of conversations over the past year or two in which the question that always comes up is “How does SoftLayer compare to colocation and what is the better move for me?” We’ll look into this further throughout the blog series.

I was fortunate enough to be invited to attend the Network World IT Roadmaps events in both New York and Atlanta earlier this year. Now what motivated me to put fingers to keyboard here is the perspective I gained from many people that I talked to during and after the conference. I consider myself to be fortunate to attend because it is rare that SLales staff is able to join in on the marketing campaign and work with people more on a face to face basis. Normally SoftLayer Sales member cannot really help our customers if we are not at our desk to take their calls, chats, emails, or tickets. I enjoy attending events like these because it seems that you can learn so much more speaking with someone face to face as opposed to just over a phone call or email.

Since this was not my first go around with the Network World events I was more familiar with the setup and I was able to take more in from the people speaking at the event. There are some common themes that can affect business from the technology side of things, and if you want to have growth you must invest into your own infrastructure and your own technology. If you are a small mom and pop shop that is fine with maintaining the status quo it may not be as vital for you, but then again you wouldn’t be reading this blog post now would you? The themes I saw (broken down into more simple context) were based around some basic principles.

  • A company is a grouping of people working for a common goal. Your people are your most valuable asset and it is important to put them in positions where they can be successful and ultimately you will be successful as well.
  • The Wayne Gretzky quotes of “A good hockey player plays where the puck is. A great hockey player plays where the puck is going to be”, and following that up with “I skate to where the puck is going to be, not where it has been” these have a common sense idea that if you are not looking to the future and figure out what is coming next then you will always be trying to catch up. If you are not innovating or growing then ultimately you are dying.
  • How can I get more? We are constantly pressured to do more with less, or at least get more out of what we already have. This is probably the biggest and most frequent question we all get no matter what our business model is and what we try to achieve.

There are, of course, many other themes than the ones I have just listed and more specific ones too. Even though I certainly took much more away these were some of the main takeaways that brought me back to an always evolving answer to the same question that every speaker seemed to dance around - “What does it cost?”

No matter how big you are or how much budget you have in place there will always be different options presented to you on how to build up your infrastructure. I have no doubt that you have asked yourself the question of what will it cost in relation to many things and possibly asked yourself in many different ways. Making comparisons to figure out what is the cost and what will give me the best possible results is the end goal we are trying to reach. But how can we get there? It can be very difficult to compare data centers to each other in an apple to apples fashion. There are simply too many variables to note in making this all come forth full stream. My goal is to try and help us all tackle this broad issue, and hopefully it will lead to more discussion about pros and cons so that it can be easier to determine the best course of action in future planning.

There are a lot of things to consider in the cost of running a data center. It seems like a never ending list of essential things that cost both money and time (which in some cases can be more valuable). In this series of blogs we’ll break specifics parts of a data center down into the basics of several areas that you’d need to consider. Once we get into the basics we’ll want to look back to ask “what does it take to run a data center?” Most often people only look at the most tangible items with the easiest metrics to apply which essentially comes down to the server hardware, power, space, and bandwidth. Sometimes these are the only things that people look at in making this decision.

Depending who you are and what you want to get out of your data center this could be close to what you’d need to consider, but for 99% of the population who has any business with a data center this only covers the basics. As a society convenience plays an ever increasing role in what we look for and in addition to this 99% looking for data center infrastructure crave things like uptime, speed, reliability, and space/opportunity for scalability and expansion. Each of these things are more than just desires, they are verified needs.

So in getting to the meat of what this blog is about I’ll quickly discuss the different things that add to the total cost beyond the obvious things of Hardware, Space, Power, and Bandwidth. I know this is already pretty long for a blog so I am turning this into a short series and I will follow up with addition blogs to go into more depth about each portion and how they can relate to each other. I will work to add insight from other customers who have asked this of themselves before in addition to giving my own experiences on this topic.

Opportunity Costs
I consider the idea of Opportunity Costs to be amongst the highest and least quantifiable aspect in running a data center. This isn’t something that will have its own blog post because of its broad nature, so instead I’ll simply tie the idea of Opportunity Cost into each other blog and how it relates to the overall discussion.

There is often a simple truth to knowing or stating that if we choose option “A” it will negate the value, relevance, and in many cases the existence of any other previously viable options. Nearly all Opportunity Costs relates back to What Does it Cost by determining what is potentially to be either gained or lost with that decision. This idea can be further broken down into risk vs. reward, and a simple business decision in knowing that if you wish to take on less risk, you’ll need to pay more for it or get less in return. The same can be said for intangibles other than risk like convenience, reliability, and speed.

Human Resource costs
Earlier, I mentioned that one of the main topics of discussion that guest speakers emphasized was that Our people are our biggest assets, but at the same time they can also easily be one of our biggest costs. I think that a lot of businesses can agree with this statement, however, the impact from how we develop our infrastructure does not often take our people and associated costs into account. Every business should have a growth model the cost of growth (or your growing pains) is often overlooked in the planning stages. We’ll look at specific situations and take into account amount of people needed running everything yourself and what that will wind up costing from just the HR standpoint.

This can get more into what is the cost of adding one more qualified employee. This is one of the biggest aspects often overlooked, because it not only takes new people you would need to hire, but how it can monopolize time and production you would get otherwise from people you already have on staff.

The value of "On-Demand" and the cost of not having it.
Have you ever heard the phrase “time is money”? What does this mean to you? What can this mean in a data center? Here we’ll focus the conversation on efficiency and the compare certain costs and benefits between different ways about achieving our goals.

We can take a look at standard processes that we may have to go through if we wish to add capacity as well as integrating new solutions with existing ones. Time has a huge value in today’s business world, and we’ll determine how having on demand infrastructure has the ability to positively impact the bottom line immensely. Having necessary tools in a truly on-demand and versatile environment will be a major point of focus in everything moving forward, and it is an important intangible factor that we should not lose sight of.

Cost of Uptime/ Redundancy
Uptime is one of the most common themes near the top of everyone’s list for data center management. We can all agree that uptime is important, but how important is it to us each individually? We will look at scenarios where if a catastrophic event were to happen we should ask ourselves what it would cost not only in terms of monetary value, but also what would that mean long term and on a strategic level.

Downtime will eventually happen in all things, but if you can plan around this to have redundancy or failover then you can alleviate this risk. So we must again ask ourselves “what will this cost?” Simply put Redundancy can and will be expensive. Generally it will cost much more than just the sum of its parts and it is easy to over look certain aspects of where you may have a “single point of failure”. At the same time we should consider what will the cost be for each additional level of redundancy that we incorporate?

Contracts
In this blog we will relate focus heavily on two main ideas: The value of time in making long term decisions and Opportunity Cost. We’ll be able to look at what having long term commitments really cost in ways that include scalability, large capital costs, accounting on physical resources and their benefits as well as limitations. Once we have this established we can also more easily determine how this can affect your decision making and your ongoing ability to do the right thing for your business.

Accounting
Different accounting practices can make a great difference in your bottom line. Carrying on additional debt, taxes, and taking depreciation can have a lot of costs that go beyond the normal operating costs. For this section I’ll warrant the help of some of our experts who have already previously run several scenarios and may be a bit more qualified than I am to speak on such matters.

In the end this study can make it easier to compare and see if SoftLayer is the right solution for you or someone you may know. I can say that SoftLayer will not be the entire solution for some companies compared to doing things yourself, however, we do make sound business sense in about 95% of cases at some capacity if not full capacity.

-Doug

Categories: 
May 2, 2008

Outsource IT – The Numbers Back it Up

With Skinman blogging about outsourcing (here, here, and here) along with Michael Miller blogging about the ease of leasing vs. buying, I had to jump in to say that the numbers show that their thinking is right on track.

Using database driving financial modeling software, I modeled a small internet-based business doing their IT infrastructure in-house versus using SoftLayer to handle the infrastructure for them. The benefits of using SoftLayer are eye-popping.

Here are the basic assumptions of the mythical company. There are 8 employees, 2 of which are founders who took out second mortgages on their houses to launch the business. First year sales are about $1.5 million. Business needs require 12 servers in two different geographic locations, housed in climate controlled rooms. Pricing out the servers and networking gear on Dell and eBay worked out to $71,509. This gear was financed with part of the proceeds from the second mortgages, booked to the balance sheet and depreciated. After three years, it was disposed of and upgraded with new gear costing $125,000.

Using SoftLayer changes several of these assumptions. By letting SoftLayer handle infrastructure, one less employee was required. There was no capital outlay for the needed 12 servers and networking gear. SoftLayer got the servers running in a couple of hours with no setup fees for a manageable monthly charge. This allowed less debt to start the business, and there were no long term contracts with SoftLayer if the business idea didn’t work out. There was no need to book the assets to the balance sheet, depreciate them, and upgrading them after three years involved a simple phone call so SoftLayer. No disposing of old gear or balance sheet write offs were necessary.

Consequently, this improved all the most important financial statement measures besides revenue, which remained the same in each scenario. Gross profit, EBITDA, EBIT, and Net Income all improved dramatically from using SoftLayer. Balance sheet credit worthiness, measured by things like equity and the Current Ratio among other things, dramatically improve. Finally, cash balances and cash flow almost double by using SoftLayer. Just compare the highlighted fields in this spreadsheet.

As they say, “your mileage may vary.” But odds are that you can significantly improve your financial performance by using SoftLayer to eliminate operating costs, depreciation, debt financing, and upgrade logistics related to your IT infrastructure needs.

-Gary

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