# Posts Tagged 'Math'

December 24, 2009

## The Power of Christmas

Putting up Christmas lights this year was a serious beating. I kept blowing breakers due to the amount of lights I put up in response to my wife’s request for ‘more lights!’ It seems like every year things get bigger and bigger (like most things in America – trucks, combo meals, taxes, and the deficit). The problem is there is only so much power in convenient areas of my house and those locations don’t have enough power to run my lights because they are shared with things inside the house. My front porch outlet ties in with my garage outlets so every time we open up the garage door, the breaker blows and the Christmas lights on the front of the house go out. I got tired of resetting breakers and I ended up running 2x 20amp 110v dedicated feeds to my roof and to the front yard.

As I was putting the lights up, I found myself doing power calculations in my head. I multiplied the amount of lights I put up by the watts each bulb consumes to get the total watts. Then I took the total watts and put it into this conversion tool (http://www.mhi-inc.com/Converter/watt_calculator.htm) to calculate what they use in a Kilowatt hour. I have timers setup to turn on the lights from 6pm to 11pm (CST) so that is 5 hours a day. I plan to run them from December 8th through January 3rd which is 27 days totaling 135 hours of run time. Take the Kilowatt hour the lights generate times the hours of operation and you get the total Kilowatt hours used for the holiday season. I was then curious how much this was going to cost me (I am a cheap bastard) so I took out my electric bill (TXU, yes I am paying too much) and took what they charge me for a Kilowatt hour and got the dollar figure it costs to run the lights. I was surprised it is not as much as I thought considering how much light my house now generates. It lights up the neighborhood like the Griswold’s house in Christmas Vacation <http://www.imdb.com/title/tt0097958/> . I would not be surprised if you can now see my house from the space shuttle.

I don’t envy Softlayer’s operation guys because they do these types of power calculations (albeit on a much grander scale) on a daily basis. They have to figure out what types of servers with different components (CPU, drives, memory, raid cards) can go into a single rack to insure that power strips are not blown. Some people don’t understand that you can’t just fill a rack up with 44 1U (or 22 2U) servers and turn them on. You have to carefully plan down to the watt how many of each type of server can go into a rack without overloading circuits. You also have to take into account customer upgrades and make sure there is enough headroom for power spikes upon booting. The math involved in my yearly Christmas light escapade made my head hurt; I can’t imagine what Robert and Brad go though. Hats go off to them. My head would have exploded by now….

Here is the math (rounded):

15 ½ stands of C9 Christmas lights each with 25 bulbs = 385 bulbs
385 7 watt bulbs = 2695 watts
2695 watts = 2.695 Kilowatt hours (from http://www.mhi-inc.com/Converter/watt_calculator.htm)
2.695 Kilowatt hours multiplied by (5 hours a day for 27 days = 135) = 364 total Kilowatt hours
364 total Kilowatt hours times \$0.12 = \$44

So lighting my house for one month actually uses significantly more electricity than running a server in a SoftLayer data center for the same period of time.

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July 15, 2009

## Subjecting Subjectivity To Math

I recently read an article about an endeavor that is currently being undertaken to develop a “Speech Analysis Algorithm Crafted to Detect and Help Dissatisfied Customers”. In short, a team of engineers are hoping to create software that will recognize when a caller is becoming stressed and immediately phone a manager to alert them of a developing situation. Wow! It is rare that you would see math and science applied to something that is so subjective. After all, math is used to quantify and measure things all based on a known or a baseline. In this particular effort, I would surmise that the team of engineer’s most difficult task will be to determine how to establish a unique baseline for each unique call and caller. Once upon a time as a student of Electrical Engineering, I took on my share of convolution integrals and that’s a path that I do not care to venture down again. I’ve also taken on my share of convoluted customer calls in a past life and witnessed our frontline assisting customers in complex situations here at SoftLayer.

Until there is such an application that can detect and address a conversation that may be heading in the wrong direction, we have to rely on good ole’ training and experience. With each call and query, the baseline is reset. I’d even go further to say that with each exchange; the baseline is reset as our Customer Service Agents seek information to get to the root of the issue. It’s not hard to imagine the frustration that can build in a back-and-forth conversation as two people look to come to a solution or an amiable conclusion just as it is understandable that sometimes, a customer may simply need to vent. How do you calculate and anticipate those scenarios?

I wish much success to the team involved in the customer service speech analysis program. And programmatically speaking, I see many CASE, SWITCH, FOR, WHILE, BREAK, CONTINUE, IF, ELSE, ELSE IF, NEXT statements in your future. Good Luck!

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April 28, 2008

## Everybody Knows Sevens and Nines Don't Figure

Through the virtue of me having young parents, at age nine my own son Taylor has the fortune of not just having grandparents, but great grandparents alive and well. On my mother’s side in particular, I have a grandfather (after who I am named), who is still quite the traveler at age 72. While he lives in Ohio he frequently “pops in” on my son and me. Despite his inability to call and let me know he is coming or how long he will stay, once I get over the initial shock of discovering he is waiting in the driveway for me to come home from work and welcome him into my home, we usually do have a nice visit. (Though he has yet to convince me to give him his own garage door opener despite asking on more than one occasion!)

My son especially likes having his great-grandfather around. My grandfather, as I am sure do most grandfathers, has seventy plus years worth of stories and opinions and riddles he has collected over a remarkably varied life. And if there is one thing that my grandfather is not, it is shy; so my son finds his great grandpa immensely entertaining--as did I at age nine. (Although between you and me I really thought by the time I was nine I had stopped falling for the old pull-my-finger trick that still sends my grandfather and my son into fits of laughter visit after visit.)

The last time my grandfather came out to visit, Taylor had a lot of homework. So after dinner my grandfather settled onto the couch to watch wrestling, (pronounced WRAST’lin), and Taylor and I went about trying to do his homework. The assignment was geared at reinforcing multiplication tables. Something my son struggled with for a bit. So we were working on it for a while. Long enough that my grandfather decided either the school was passing out too much homework, or I was explaining it wrong. So like any concerned great grandparent would do my grandfather clicked off the TV, walked into the kitchen, and pulled up a chair intent on showing us the error of our ways.

Grandpa asked Taylor to explain the assignment--which my son did. Without warning Grandpa then plucked the page and pencil from my son’s hands and proceeded to stare over a multiplication problem for some time. The page stared back at him.

128 x 69 =

Taylor and I watched with growing fascination as grandpa proceeded to scribble nearly as many figures on the page as there were problems. At last he grunted and wrote his answer.

8960

Now I am by no means a mathematical giant, but something seemed a bit peculiar about his answer. So I did a quick computation and came up with 8,832. And while I was still trying to politely figure out how to tell my grandpa “thanks but no thanks”, my son didn’t show any such discretion.

“That’s wrong Great Grandpa!” he exclaimed.

My grandfather took the page back, made some more of his calculations in the margin, then looked up in all seriousness and said to my son:

“Taylor, you are old enough to know the truth.”

I have to tell you at this moment I was pretty shocked. While I was not sure what great personal revelation my grandfather intended to make, I was sure it was to be a difficult one. Every father and grandfather and great grandfather wants the children in his life to see him as a giant, a genius, a god. I could only imagine how difficult this was going to be for my grandfather to explain to my son that times had changed, things had changed, and maybe he wasn’t as sharp as he once was. My grandfather said none of those things. Instead he continued:

“Taylor, your teachers and your school and your principal aren’t going to tell you this, but the truth is when it comes to arithmetic, and I mean real world arithmetic, not the stuff they have picked out for you and put into those books, well the truth is 7’s and 9’s don’t figure. The answer to your homework will never come out right because one of the numbers ends with a 9. So I did the only thing you can do, in real life I mean, I rounded the 9 up to a 10. Sure you can round a 7 or 9 down as well if you want to low-ball it, but I figured this would be easier for you to follow.”

I stared for a moment, incredulous, not sure if my son was believing this, if my grandfather was believing it. I had no earthly idea what to say. Then I thought about my grandfather who in his day had worked as a machinist, who built the die and tool that was used to punch the first removable soda-pop top. Remember, (or maybe you don’t), those first aluminum soda cans that had the tab you just pulled off of the can entirely and chucked it onto the ground? Obviously that was before “give a hoot—don’t pollute” and those pull tabs littered highways everywhere until someone got the idea to make the tab a part of the larger can. Still, discounting the negative environmental aspect, in its day the pop-top was an ingenious piece of engineering. A technological leap and my grandfather was a part of it.

Then I considered how much computers have changed, from the time when I was an 11 year old boy banging out BASIC on my TRS-80, to now when the processor in my wristwatch has more memory and operating capacity than some of the machines that were remarkably once labeled “personal computers”. Day in and day out at the office, I see the technological envelope pushed here at SoftLayer. We offer our customers the latest and greatest from integrated remote out of band management, to high speed fault tolerant digital backups. I am an integral part of one of the most exciting and talked about technology ventures in the history of webhosting. Yet will there come a day when I am sitting at the table with my own son’s children wondering how it happened that I can’t manage to come up with the correct answer for an elementary school problem?

“Well for now,” I said trying to sound authoritative, “I guess we better do it the way your teacher wants—the way the book explains it. You have quite a while to go before you are out in the real-world and by then I bet you have figured out how things work all on your own.” Taylor shrugged and wrote down 8,832. Grandpa started to speak, hesitated, and then held up his index finger. “Does this look crooked to you Taylor?” he asked. “Say maybe you could help me straighten it out by giving it a little pull?” Laughter ensued.

-William

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November 16, 2007

## The Value of a Customer

For the two people who actually read my posts, you know that I blogged about how I look at the value of a server. Basically, it should be valued by the cash flow it produces. Without a customer to use the server, the cash flow it generates is negative, i.e., less than \$0 due to the costs of keeping it racked up, powered up, and connected.

So, how do you place a value on a customer? Customers and servers are not a one-to-one connection because many customers have more than one server. They also buy more than just servers, such as additional software and/or backup services.

Like most of us in the industry, I spend a few minutes each day scrolling through the customer forums, both ours and 3rd party sites – you probably know which ones :). I look at the customer comments and sometimes I wonder if the folks in our industry understand the value of these customers judging from the way some customers are treated.

Granted, some customers are abusive and need to be fired, so to speak. Others appear to be high value customers with multiple servers and solid business models where someone has dropped the ball and caused them to seek greener hosting pastures. If companies understood the dollar figure valuation of each customer, they might think twice about their next course of action with a particular customer.

To value a customer, I look at the statistical expectation of how long that customer will stay with the company, how much the customer currently buys with us, the statistical expectation of how much additional business they will place with us, the gross profit generated by the customer, and that old stand-by -- the minimum acceptable rate of return for an investor in the company. From these data points, I do a simple Present Value calculation and arrive at the value of the customer, which is the amount of cash that would have to be invested to yield the economic equivalent of the expected gross profit that the customer will produce. I'd give you a sample calculation, but a) it would make this post even more boring, and 2) some things we like to keep secret :).

This is important because it can make the growth of a hosting company less "slippery" -- sort of like when Eric takes off from a red light in this:

For example, if you sell 100 new servers but customers release 90 back to you during the same period, your growth doesn't have the traction it would have if only 10 servers were released back to you. By retaining valuable customers, you don't spin your wheels as much. Spinning the tires at a hosting company is not nearly as much fun as watching Eric drive.

-Gary

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October 12, 2007

## The True Value of a Hosted Server

Now that I've ranted on a few accounting shortfalls for the hosting industry I'm going to rant once more. I think that the way hosting companies must book the value of their assets per accounting rules shortchanges hosting companies. Some basic rules of finance clearly show the likelihood that significant value is missing on the financial statements.

Let's consider a mythical server that costs the company \$10,000 to buy and the company depreciates it evenly over 3 years. After year one, the value on the financials is \$6,667. After year two, its book value is \$3,333 and finally \$0 after three years. Suppose that the company deploys the server for five years. In reality, after three years, the server's true value is certainly above \$0, and the hosting company is shortchanged by not being able to reflect this value on its financial statements. Multiply this effect by thousands of deployed servers and you can see that there is significant value in hosting companies that just isn't found on the financial statements.

So how should we reflect the value of a server? I would propose the use of a "capitalization rate" or "cap rate". This is a common method of appraising real estate and the formula is simple: take the projected net cash flow over the next 12 months and divide by the cap rate, and that's the value. So, what would happen if we applied this to a server?

Looking at our mythical \$10,000 server above, for simplicity's sake, let's ignore any allocations of the switches, routers, generators, HVAC, etc., needed to operate it. Let's also assume it produces net cash flow of \$100 per month and will do so for 60 months. Its 12 month projected net cash flow is \$1,200. We would divide this by the cap rate to find its value.

Naturally, the next question is "what do we use for the cap rate?" For a given investment, the cap rate is the lowest return that an investor will accept for the given risk of that investment. In our server's case, the \$10,000 investment produces a return of \$1,200 per year. How much would an investor need to invest in lower risk alternatives to get the same return? For a risk-free investment of the same 5 year duration such as a 5 year Treasury Note at 4.25%, you would have to invest \$28,235.29 to get \$1,200 per year in return. If we use 4.25% as the cap rate in our scenario, the value of the server becomes \$28,235.29. However, investors in hosting companies generally look for returns far above 4.25% and these returns are not without risk, so this is not the appropriate cap rate. For simplicity's sake, let's assume that the hosting company investor's minimum acceptable rate for the investment is 10%. In other words, if his investment in the hosting company was expected to return less than 10%, the investor has other lower risk options to invest and get a 10% return and he would not invest in the hosting company.

So if we use 10% for the cap rate in our mythical server scenario, the true value of the server is \$12,000 (\$1,200 / 10% = \$12,000). As long as the 12 month projected net cash flow stays above \$1,200 then that value holds constant. Check out the graph below to compare the value of this server from both the cap rate perspective and the accounting rules perspective over the five year life.

From month 36 to month 49, there’s a \$12,000 difference in value between the two methods. If a hosting company has a thousand servers like this, that’s \$12 million in value that isn’t reflected in the company’s financial statements. That’s huge.

-Gary

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