Had Net Fixed Assets Of Last Year-End And This Year-End Benefits of Server Virtualization

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Benefits of Server Virtualization

Server virtualization has been around for the past few years and is still a major IT trend that businesses are focusing their attention and investment on. There are many good explanations for this interest, which we analyze in this short article. We will classify the benefits of server virtualization into two broad categories:

  • financial benefits (eg reduced server HW maintenance costs);
  • intangible benefits (eg increased flexibility).

We will see that while the latter are the most important long-term benefits, it is the former that usually play a major role in the investment decision-making process, as they are easier to quantify and therefore their value can be better understood.

Like any other investment, server virtualization has its risks. Although we acknowledge their existence and importance, we will not analyze them in this article.

Financial benefits

Most server virtualization projects are also server consolidation projects in the sense that one of the primary outcomes of the project is an impressive reduction in the number of servers. It is clear that there are server virtualization projects (eg desktop virtualization) that do not aim to reduce the number of servers, but those that focus on server consolidation lead to impressive reductions in the number of servers. With current technologies, it is common to see consolidation ratios of 30:1 (or even higher). The end result is that large server farms consisting of hundreds of servers have been replaced by very few servers hosting hundreds of virtual machines (VMs).

We recently did an in-depth, real-world cost-benefit analysis of a server virtualization project for one of our clients. The most impressive result of the analysis is that the net savings due to reduced server HW maintenance costs offset all other project costs (including purchasing new servers, project implementation) over a four-year time horizon when considered the tax shield. Let us further clarify this point. One of the most reliable criteria used to assess whether it makes sense to invest money in a project is the calculation of the project’s net present value. Net present value is a simple formula that takes into account the simple fact that $1 now is worth more than $1 in one year by discounting future costs and benefits through what is called the opportunity cost of capital. In our project, we calculated the net present value of the project for a four-year time horizon, namely by considering the costs and benefits of the next four years. We also took into account the fact that future costs and benefits must be discounted; and that if you invest your money in a project, you will have tax savings (tax shield) that partially offset your costs. Taking all of this into account, we realized that the HW maintenance savings were enough to make the net present value positive.

Obviously, this is striking because all other financial benefits can be summed up as the HW maintenance savings, thus further improving the net present value of the project. This is exactly what happened when we added the other main categories of financial benefits:

  • Saving floor space
  • Economy of energy consumption
  • Savings on SW licenses

The latter benefits are largely latent in the sense that they accrue under specific circumstances. For example, in a server virtualization project that is also a server consolidation project, you may end up with a significant reduction in data center footprint, but that doesn’t necessarily mean you have any savings. If the occupancy rate of your data center is close to the maximum, this can become a real, very important benefit that translates into significant savings; if not, its usefulness is debatable.

By the same token, while you’ll likely have an impressive reduction in energy use, the IT department may not care about these savings for the very simple reason that these costs are often not charged to the IT department. Although this may seem strange to some, this is what we see most of the time with our clients.

A server virtualization project involves new software license costs, for example for the virtual machine monitor software, but in some circumstances it can also provide a significant reduction in software license costs. In a pure server consolidation project without consolidation of operating systems or application instances, this reduction is clearly not due to the simplification of the software stack, but rather to the specific characteristics of the software licensing rules. Licensing rules in virtualized settings are particularly complex, and therefore it may happen that the end result is not a reduction in software license costs, but in fact an increase in software license costs. In our project, there were, on the contrary, significant savings for a specific set of important SW applications. It is important to emphasize that these benefits are latent in the sense that, given the SW license agreement, the customer cannot get their money back for the SW licenses already paid for; however, the customer will be able to increase the number of deployed application instances at no additional cost.

Intangible benefits

Accountants classify assets into three broad categories: financial, tangible and intangible. The first category contains cash, stocks, shares, etc. The second category contains assets that can be touched such as buildings, plants, etc. The last category contains all other assets such as patents, business processes, etc. Obviously, the latter category is so broad that it makes analysis and evaluation very challenging. At the bottom of this article, you will find references on where to find additional analysis of intangible assets with a special focus on those that play a major role in an IT investment project. Let us now focus on those assets that play a major role in a server virtualization project.

According to CIO surveys, one of the most important reasons to invest in server virtualization is increased flexibility. Server virtualization makes the process of deploying new operating system instances extremely fast because you no longer need to procure a new server before deployment. This means that IT departments can respond much faster to requests coming from lines of business by adapting their infrastructure to new needs (eg new marketing campaigns). This benefit is clearly important, but very difficult to quantify. Evaluation is possible, but very few IT departments would want to spend time on such quantification, and very few CFOs would rely on the numbers obtained through this evaluation process.

Flexibility

However, benefits such as flexibility are far more important than financial benefits in the long run. If IT assets are considered a strategic resource rather than a commodity, it is important to pay close attention to the intangible benefits. Firms for whom IT is a strategic resource should focus on those assets that are not only valuable but also difficult to imitate. In a server virtualization project, assets such as servers, virtualization software, or more generally anything you can buy on the market, are not difficult to imitate and therefore provide little strategic benefit. On the contrary, the business processes implemented by the IT department to effectively manage the virtualized server group (eg to prevent VM growth), representing a complex combination of SW applications, application configurations, internally developed scripts, skills and knowledge, are much more difficult to imitate. These intangible assets can turn a virtualized server farm into a strategic company asset.

Reliability

Increased flexibility, of course, is not the only intangible benefit provided by server virtualization projects. Another very important advantage is increased reliability. On a non-virtualized server, the only technology you can buy to improve the reliability of your system is generally a high-availability cluster. Unfortunately, these clusters are expensive, complex to maintain, and in addition, to have full support, their entire solution must be certified by the SW vendor. Obviously, this makes such an approach unviable for many applications. For years, we have seen customers deploying Microsoft Clusters only for critical applications such as DBMS and email servers; and there is no protection at all for most of the other SW applications. Virtualization makes a completely different approach possible. Security can be delivered at the virtual machine monitor level rather than the application level. This is a little less attractive because there is no protection in case of application crash or freeze when the hosting OS is up and running. But on the other hand, it is a very easy-to-deploy, application-agnostic technology that makes it possible to improve the reliability of all servers in a server group. This is important not only in the event of a system failure, but perhaps even more important in planned outages.

Reliable testing

Accurate testing of a SW application (or combination of applications) requires the availability of a system that is identical to the production system on which the application (or combination of applications) will run. As any tester knows, even small differences can make a test unreliable. In a non-virtualized server farm, testing is very expensive because you must have for each production system an exact copy of that system; and complex because you need to keep production and test systems in sync. This is even more complicated for critical applications requiring high-availability clusters. Reliable testing requires your test system to also be on a high-availability cluster, which can be prohibitively expensive. With virtualization, it is possible to take a copy of the production instance at any time and run accurate tests using that copy. This paves the way for the creation of virtualized test server farms, which improves not only the reliability of the tests, but also the overall efficiency of the test process.

Conclusions

Server virtualization projects can provide significant financial and intangible benefits. While the former are enough to justify the project and are what CFOs most often focus on, it’s the intangible benefits that really matter to those businesses that think of their IT infrastructure not as a commodity, but as a strategic resource for improving business competitiveness.

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