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How to count the cost of storage

Ezine

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More than one way to count the costs
Just as there are many metrics that go into cost analysis, there are many different (and equally valid) ways to add them up. Businesses are typically concerned with two types of cost analysis: cash outlay and balance sheet impact.

Let's look at these in terms of a car purchase. A cash analysis would begin with the cost of the vehicle and the sum of the finance charges and fees. That's how much money is required to take ownership of the asset. Then you might determine your operating costs by calculating the cost of fuel, insurance and taxes, and maybe some factor for wear and tear. A cash analysis for storage is similar. Calculate the total hardware, software and installation cost, and add in finance charges to determine the cost of acquisition. Then calculate the cost of ownership by adding in items like data center, personnel and consumables for your estimated ownership period.

A cash analysis is useful to compare competing systems, but it has little to do with financial realities. Using the car purchase analogy again, think of a balance sheet (or P&L) impact assessment as a comparison of leases and monthly payments. How much will this car (or storage system) cost next month? Most durable equipment is either leased, financed or depreciated. The end result, and method of calculation, is similar: Add up the acquisition cost and fees for a given period and divide it evenly. Depreciation of a purchased asset is generally

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straightforward, while leases can be maddeningly complex. But again, there's more than the acquisition cost to consider. The periodic cost of ownership must also be taken into account for an accurate cost assessment.

One surprising aspect of cost analysis is that the cash and P&L analyses don't necessarily equate. It's likely that some items will be used beyond their depreciation threshold, effectively creating "free" equipment and causing the P&L to look awfully attractive. On the other hand, vendors can often sweeten an acquisition deal to swing the cash analysis in their favor.

Cost avoidance vs. savings
I began this column by talking about the great pressure to save money. But how can we save money when the total cost is rising? There are two ways to save money: cost avoidance and cost savings. The former means that you avoided an expenditure that seemed inevitable. A true cost savings would require overall costs to drop, a much more difficult proposition as data demands expand. Luckily, even a documented cost avoidance will be sufficient to show that we in the storage realm are doing our jobs.

How will you count the costs? If you're trying to compare devices to each other, I suggest performing a cash analysis over your expected period of ownership. The result will be a statement like "It will cost X to buy this device and run it for five years, while that one will cost Y." Choosing the less-expensive option will count as cost avoidance because you had to buy one of them.

On the other hand, if you've been asked to come up with a chargeback metric for storage, it's preferable to use the P&L impact method. Consider only the actual costs of delivering storage, including the depreciation or lease cost, allocated-in personnel and data center costs, and other bills that are assigned to the storage part of IT. Add up the actual cost of delivering storage in general and divide it by the total amount of storage provided to come up with a fair allocation of cost.

No matter where your cost analysis leads you, don't rely on "industry-standard numbers." In my years of performing cost analyses for a broad array of companies, I've found that there's no standard for the cost of running storage. Stick with your actual costs. Get out your hardware, software and maintenance invoices, chargeback reports and time sheets and add everything together. Nothing will impress the bean counters like a real accounting of actual company data.

This was first published in August 2006

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