What Is The Formula For Valuation Of A Business 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 where firms are focusing their attention and investment. There are many relevant explanations for this interest that we are analyzing in this short article. We will categorize the benefits of server visualization into two broad categories:

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

We will see that while the latter are the most important long-term benefits, the former are the ones that usually play a key role in the investment decision process because they are easier to measure and their value can be better understood.

Like all other investments those in server virtualization have their risks. Although we understand 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 main outcomes of the project is a dramatic reduction in the number of servers. Obviously there are real server projects (for example, desktop networking) that don’t focus on reducing the number of servers, but those that focus on server integration produce impressive reductions in the number of servers. With today’s technology it is common to see 30:1 (or more) mixing ratios. The net result is that large server farms consisting of hundreds of servers are replaced by fewer servers hosting hundreds of Virtual Machines (VMs).

We recently conducted for one of our clients an in-depth analysis based on the actual costs of the benefits of a server virtualization project. The most impressive result of this analysis is that the total savings due to the reduced HW server maintenance costs reduce all other project costs (including the purchase of new servers, project implementation) over a period of four years when the tax shield is taken into account. Let us make this point more clear. One of the reliable methods used to assess whether it makes sense to invest 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 reducing future costs and benefits in a way called opportunity cost of capital. In our project we have calculated the Present Value of the project over a period of four years, that is by taking into account the costs and benefits of the next four years. We also consider that future costs and benefits should be discounted; and if you invest your money in the project you will have a tax saving (tax shelter) which partially reduces your costs. Taking all of that into account we found that the HW maintenance savings are enough to make the Net Present Value positive.

Obviously this is surprising since all the other financial benefits can be summed up for the HW maintenance savings thus further improving the Net Present Value of the project. This is exactly what happens when we add the other main types of financial benefits:

  • Low maintenance
  • Energy conservation
  • Storage of SW licenses

These latter benefits have come largely in the sense that they are made under certain conditions. For example in a server virtualization project that is also a server consolidation project you may end up with reduced datacenter floor space usage but that doesn’t mean you have savings. If your datacenter activity level is close to maximum this can be a real, significant benefit that translates into significant savings; if not, its usefulness is disputed.

By the same token, while you will have a dramatic reduction in energy consumption, the IT department may not be interested in these savings for the simple reason that these costs are often not charged to the IT department. Although that may seem strange to a person, this is what we see most of the time in our clients.

The server virtualization project involves the cost of new SW licenses, for example, the Virtual Machine Monitor SW, but under certain conditions it can bring a significant reduction in the cost of SW licenses. In a server consolidation project without OS integration or application scenarios this reduction is clearly not due to the simplification of the SW stack but against certain features of the SW license rules. Licensing rules in virtualized settings are very complex and therefore it may happen that the net result is not a reduction in the cost of SW licenses but actually an increase in the cost of SW licenses. In our project there were significant savings in a specific set of critical SW applications. It is important to emphasize that these benefits were hidden in the sense that given the SW license contract the client could not get his money back for the SW licenses already paid for; however the client will be able to increase the number of distributed instances of the application at no additional cost.

Intangible benefits

Accountants classify assets into three broad categories: financial, tangible and intangible. The first category consists of cash, stocks, shares, etc. The second category consists of tangible assets such as buildings, plants, etc. The last category contains all other assets such as patents, business processes and so on. Obviously the last category is too broad to make analysis and prediction too challenging. At the bottom of this article you will find references where you can find additional analysis of intangible assets with a special focus on those who play a key role in the IT investment project. Now let’s focus on those assets that play a key role in a server virtualization project.

According to CIO research one of the top reasons for investing in server virtualization is increased flexibility. Server virtualization makes the process of deploying new OS instances much faster because you don’t need to buy a new server before deployment. That means that IT departments can respond very quickly to requests from businesses by adapting their infrastructure to new needs (for example, new marketing campaigns). This benefit is clearly important but very difficult to measure. Valuations are possible but very few IT departments would like to spend time on such valuations and very few CFOs can rely on the numbers obtained through this valuation process.

Being flexible

However benefits such as flexibility are more important than financial benefits in the long run. If IT assets are considered a strategic tool instead of a commodity it is important to pay close attention to the intangible benefits. Firms where IT is a strategic resource should focus on those assets that are not only valuable but difficult to imitate. In the server of the virtualization project assets such as servers, SW of virtualization, or more generally anything you can find on the market is not difficult to imitate and therefore offers little strategic advantage. In contrast to the business processes implemented by the IT department to effectively manage the server farm (for example, to prevent VM proliferation) into a complex combination of SW applications, application configuration, internally developed scripts, skills and knowledge is very difficult to imitate. These intangible assets can turn a virtual server farm into a solid strategic asset.

Dependence

Increased flexibility is certainly not the only intangible benefit offered by server virtualization projects. Another very important benefit is increased reliability. On a non-virtualized server the only technology you can buy to improve the reliability of your entire system is high availability. Unfortunately these groups are expensive, complicated to maintain and moreover to have full support the solution must be guaranteed by the SW vendor. Obviously that makes such an approach impractical for many applications. For years we have seen customers use Microsoft Teams only for critical systems such as DBMS and email servers; and no security at all for most other SW applications. Virtualization makes it a completely different approach. Protection can be provided at the Virtual Machine Monitor level rather than at the application level. This is less desirable because there is no protection in the event of an application failure or freeze when the host system is up and running. But on the other hand it is very easy to implement, application-agnostic technology that makes it easy to improve the reliability of all the servers in the server farm. This is not only important in the event of system failure, but perhaps even more important in planned absences.

A reliable test

Correct testing of a SW application (resp. a combination of applications) requires the availability of a system similar to the production system in which the application (resp. a combination of applications) will run. As every tester knows even a small difference can make the test unreliable. On a non-virtualized server farm testing is very expensive because you need to have each production system an exact copy of this system; and they are complicated because you want to keep simultaneously the production and testing procedures. This is more complex for mission critical applications that require High Availability clusters. Reliable testing requires your testing system to be in a High Availability Group as well which can be very expensive. With virtualization it is possible at any time to take a copy of the production instance and run the correct tests using that copy. This paves the way for the creation of virtual test farms that improve not only test reliability but the test process as a whole.

Conclusions

Server virtualization projects can bring significant financial and intangible benefits. Although the former are enough to justify the project, and are the ones that CFOs tend to focus on, the intangible benefits are the ones that are important for those companies that think of their IT infrastructure not as a commodity but as a strategic tool to improve business competitiveness.

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