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|Cost benefit analysis for storage solutions|
The first step in the budgeting process is to perform a cost-benefit analysis of individual storage projects, assessing the required capital and resource investment, along with the expected benefits. This analysis should be calculated over a three or five year analysis period. Key financial metrics include:
Return on Investment (ROI)-the ratio of the project's net benefits divided by the costs
Net Present Value (NPV) Savings-the net savings of the project brought into today's dollar terms
Internal Rate of Return (IRR)-the effective interest rate return the project's cash flows will deliver
Payback Period-how quickly the project's benefits exceed the costs, achieving cash flow positive
Initial and Cumulative Investment-the level of required commitment the company must make with regard to resources and capital
Project Risk-the schedule, budget and resources risk for achieving a successful project and predicted costs/returns
Traditional cost-benefit analysis has proved its worth for decades in corporate decision-making, but IT projects are substantially different than other capital investments. On average, technology investments have not always been as successful as other company investments because many IT projects are mandatory or strategic in nature-whereby traditional financial analysis can often overlook or discount the projects value to the company.
In a Y2K survey on IT projects by the Standish Group, only 28% of IT projects - a dismal one in four - could be considered a success: completed on time, within budget and meeting expected features and functionality. The number of successful projects exceeded the number of canceled projects by a mere 5%.
Because IT projects are inherently risky, a risk analysis should be used to discount the business case.
Also, not every IT project is justified based on quantifiable benefits. Often, IT projects are partially justified on their capability to deliver intangible or strategic benefits that are difficult-if not impossible-to quantify into absolute monetary terms.
The impact of projects that deliver branding, competitive, organizational and strategic advantage is measurable with key performance indicators (KPIs). These KPIs can include capability and maturity scores, customer satisfaction ratings, market share and position and quality rankings. By quantifying the intangible benefits, the project's strategic impact on the company can be predicted and later measured for success.
Strategically, you'd be wise to compare internal spending plans to those of peers - this competitive benchmark can be extremely advantageous in making the case for new investment.
Making the business case
With fierce internal competition for funding, even the most valuable IT projects will be evaluated alongside other non-IT company initiatives. The best investments balance high returns with low investment requirements and risk.
The key is to sell a project's strengths, both in what it delivers and how it calibrates bottom-line value. There are three things to keep in mind when making the case for any new spending:
- Show how the project will improve the overall value of IT.
- Identify whether this investment enable staff to do more with less.
- Effectively communicate the financial impact of project plans and the decision-making criteria on project selections to all stakeholders.
In a tight market, this requires a mixture of bottom-line ROI analysis and a forest-level view of how proposed storage spending will fit into the overall IT portfolio.
The key to communicating the business case for your projects is using time-tested financial metrics that the CFO will recognize. Which metrics you emphasize depends on the nature of your project-what's the main business goal? All projects should be grouped into one of four funding buckets:
- Reducing IT costs
- Improving business efficiency
- Driving strategic advantage
- Mandatory projects
The following examples illustrate the merits of typical kinds of projects for each category above, with formulas for determining potential cost savings. In some cases, projects simply hold the budget steady under increasing demands. Projects that drive productivity, reallocate IT operations and labor resources to more strategic projects and reduce capital spending on IT infrastructure fall into this category.
Increasing administrative productivity. Consolidating direct-attached storage to either a SAN or a NAS solution helps reduce the storage administration workload, as well as capital spending on storage growth and backup system upgrades.
Storage Administration Productivity= (current storage administrator FTEs x burdened annual salary of storage administrators) x productivity improvement from new solution
Avoiding additional storage investments. Storage Resource Management (SRM) initiatives can free valuable storage capacity, automate key administrative tasks, reduce storage growth needs and implement policies to assure resource availability.
Storage Purchase Avoidance=(current storage x expected growth) x expected savings with new solution
Reducing IT operations expenses. One example of such a project is a conversion to managed storage services. They provide completely managed storage capacity on a demand basis, delivering predictable growth pricing, best practices management and elimination of in-house resources for the management and support of the storage infrastructure.
IT Operation Savings=Storage growth costs + Storage Administration Staff Costs x % outsourced + Support Costs x % outsourced
Improving operating efficiency
These projects enhance users' productivity by eliminating storage-related downtime and help business units reduce operating costs and mitigate expenses on capital equipment, supplies or other services.
Reducing downtime. Consolidation, mirroring and snapshots, managed services or best practices implementations help to improve availability-reducing unplanned or scheduled downtime and resultant lost productivity. Incremental benefits here can be considerable.
Downtime Risk Avoidance=(current downtime hours per year - expected downtime hours with new solution) x typical number of users affected per outage x burdened user salary per hour
Reducing risk of data loss. Improved backup coverage and better restores increase the reliability of client or server data, either eliminating or reducing the potential recovery time for lost data, with the attendant lost productivity.
Reduced Data Loss/Recovery Risk=(data not effectively protected each year x risk percentage of data loss in a given year x value of data or cost of recovery) x reduction in risk from new solution
Driving strategic advantage
These initiatives help improve or protect a company's sales and revenue, and can pose the biggest challenge in the funding process. Storage-related projects can enable new business or service opportunities, protect mission-critical data from loss and guard against unplanned outages affecting revenue-generating applications.
Avoiding the risk of downtime. Achieving 99.999% availability for an e-business site through enterprise networked storage, remote mirroring and snapshot projects protects business transactions and eliminates the potential for lost sales and revenue-not to mention customer loyalty. The cost of downtime will vary depending on the application (see "Application downtime costs vary").
This was first published in November 2002