Financial modeling in the era of hyperconvergence and cloud
IT balances on the line between cost center and business enabler. Whichever way it is viewed, IT has become an essential component of every significant business. Enabling the business requires optimizing IT. This in turn means buying the right products and services as part of an overarching IT strategy.
Not long ago, the purchasing process was much simpler as organizations could often get by with comparing attributes and acquisition costs of competing products. But today there are both public cloud and myriad on-premises hyperconverged alternatives. It is more important than ever to have a sound financial analysis as the underpinning for making the optimal IT purchase decision.
A financial modeling framework is the best approach for attacking this complex evaluation. A well-designed financial analysis considers not only the various capital and operating expenses, but also incorporates factors such as a multi-year time period, projected growth rates and anticipated improvements in technology. It enables IT leaders to more accurately assess various options within the context of overall IT and, even more importantly, business objectives.
The strategic perspective enabled through financial modeling reveals both costs and benefits that might otherwise be overlooked. It also establishes a baseline against which the IT organization can measure the financial aspects of its success, helping to build credibility and achieve funding for future initiatives.
ROI vs. TCO
ROI and TCO are the two most common tools for quantifying different options in the IT industry. Whichever tool is used, I generally recommend that the analysis be performed on a cash flow basis over a period of (typically) five years. This clearly delineates the cash impact to the organization of each alternative.
Return on Investment (ROI) measures the projected gain or loss over a number of years relative to the investment. An advantage of ROI is the ability to easily incorporate business value such as increased revenues or cash flow as part of the results. ROI is a common metric used across most industries, and is a great tool for comparing costs and benefits of different solutions – for example, purchasing a truck vs. buying new factory equipment.
In the technology industry, ROI analyses are commonly utilized when an organization is considering implementing a new project or technology. The ROI identifies the real costs associated with the project, the opportunity costs exposed by the project, and the overall return.
The following chart shows the projected 5-year ROI of converting 15,000 PC/laptop users at St. Luke’s Health System Boise to VDI in conjunction with its five-year refresh rate. As the chart indicates, St. Luke’s has not only saved millions of dollars, but its refresh budget more than covers the entire cost of the VDI initiative including Nutanix, Citrix software, services, and thin-clients, etc. This is why the payback period is only 4.6 months.
Relying upon the Internal Rate of Return (IRR) as a stand-alone metric can be misleading at times, but when combined with the ROI (as shown in the chart), it can give another indication of how the IT project stacks up from a financial aspect relative to other opportunities. And while IT staffing costs are very significant for many organizations, we break them out (as we did for St. Luke’s) in order for the client to easily determine where the savings are coming from.
Total Cost of Ownership (TCO) measures the lifecycle costs of two (or more) alternatives. Popularized by Gartner, TCO is a common tool in the technology industry utilized to compare two or more solutions – typically within the context of an approved project or existing technology. The TCO projects both capital and operating costs of each alternative.
The following chart shows the five-year summarized TCO projections for Fairway Mortgage (Irving, Texas) in comparing Vblock vs. Nutanix. Fairway has since moved all important production and disaster recovery workloads to Nutanix, reporting “We have obtained about 15 to 20% improvements in performance.” Fairway now has over 100 Nutanix nodes.
“The Nutanix systems have required almost no support so far. We got the arrays up in less than a week, and the environment is extremely self-supporting.”
-Bob Orkis, CIO. Fairway Independent Mortgage. 04/17/2015
A Financial Modeling Engagement
Internal approaches for estimating the financial impact of different purchase options often fail to keep pace with the realities of technology. The pay-as-you-grow economics of hyperconvergence, for example, mandates a consideration of increased workload densities per node as product is purchased over a number of years.
Evaluations of public cloud options often fail to recognize the different categories of workloads and how they impact monthly charges. Similarly, IT decision-makers often overlook the significant public cloud cost impact required for bandwidth, adequate performance, Input/Output Operations Per Second (IOPS), and myriad add-on options. The pennies charged per hour can quickly add up to a $100K monthly cloud provider bill.
I recommend that IT organizations contract with professional consultants who have extensive experience in utilizing ROI and TCO methodologies. This can be a dedicated financial modeling consultancy (I used to run one such business), a channel partner or, in some cases a technology manufacturer.
A manufacturer is, of course, perceived as the most biased of the three options. This perception is not helped by the TCO tools that most manufacturers (including Nutanix) seem to have available for enticing prospective prospects to its products/services. By necessity, these types of tools are both simple and generic and provide only rough estimates of potential costs and savings.
An organization serious about optimizing its IT strategy should invest the time to undergo a financial modeling engagement. Whether this engagement is strictly internal or enlists the assistance of a third-party, it is imperative that the methodology be comprehensive, transparent and easy to follow.
Nutanix Client Strategy Team
The Client Strategy team at Nutanix performs in-depth financial modeling engagements for select clients and prospects without charge. All members of the team have extensive financial modeling experience.
While we work for Nutanix, we approach our engagements with the same rigor and discipline as nonmanufacturer consultants. We provide a very transparent analysis that enables easy verification of the results. The analysis reports range between 20–25 pages and are suitable for presentation to CFOs and other senior management as well as to Boards of Directors.
If you are interested in consulting with us for a financial modeling engagement for your organization, please contact your Nutanix rep or email me: firstname.lastname@example.org.