In "Refresh Now!" I used cash flow (for the finance folks) and GAAP analysis (for the accountants) to prove that you could make a business case for replacing physical servers with VMs, even when those servers are not yet "due" for a refresh.

Sometimes, there is a disconnect between IT, finance, and accounting when it comes to spending money. To make it easier on the IT managers, the CFO gives them a budget to work within. Usually the budget is split between capital and operating buckets, which helps them manage balance sheets and cash flows better than a single, large bucket of money.

So, when talking to people working within a capital budget and operating budget, we can't use common financial measures such as NPV, ROI, payback period, or (my favorite), EVA. They need to justify their spending within the boundaries they are given, and it takes a higher level (e.g. CFO) decision to adjust those boundaries.

So, let's assume an IT manager at Acme, Inc. is operating under the following constraints:

• Capital budget is $2 million for 2008. $250,000 of that is meant to refresh 50 existing servers, and $125,000 is for 25 new servers (for new projects)
• Operating budget is $3 million for 2008. Of that, $200,000 is for power and cooling of the data center, and $300,000 is salary costs to manage the servers (our total server population is 200)

If we assume that all other elements of the capital and operating budgets stay the same, we can focus on the elements of the budget that are affected by server virtualization:

• We have a capital budget of $375,000 for the purpose of purchasing 75 new servers.
• We have an operating budget of $500,000 to keep all of our servers running

   

Working within these constraints, I can do the following:

• Instead of purchasing 75 servers, I am going to purchase 5 large (2-socket quad core) servers (with a VM-to-host ratio of roughly 15:1 – very, very conservative). Each costs $20,000, so my total server cost is $100,000 (from the capital budget)
• I'll need to purchase 5 licenses of VMware Infrastructure 3 (Enterprise Edition), at $5,750 list price each: total cost of $28,750 (ignoring discounts). Let's assume we already have the management infrastructure in place (e.g. Virtual Center)
• I'll also need some shared storage to really take advantage of virtualization. Let's say it's another $35,000 (about $15 per GB if we're using NAS or iSCSI)
• I would normally need more network ports for those extra 25 servers – with consolidation, I don't need them. That saves me $10,000.
• Therefore, my net capital cost is $100,000 + $28,750 + $35,000 - $10,000 = $153,750. That leaves over $150,000 in my capital budget to replace servers that aren't due for a refresh yet!

On to the operating budget…

• VMware support and subscription is roughly 25% of the original purchase cost – so, roughly $7,100 per year
• A normal server in the US costs $1000 in power and cooling expenses. ESX hosts are usually larger, so let's say it's $1500 per year. So, for the 75 servers in this study, we are saving (75 x 1000 – 5 * 1500 = ) $67,500 in energy costs
• My IT department tells me that the current staff can manage 20% more VMs than they can physical servers (template-based provisioning, more standardization, the use of snapshots, consolidated backups, cloned copies of production for testing, etc). Since I am adding (25/200=12%) more servers, then I am avoiding a 12% addition to the salary budget (or, 0.12 x 300,000 = $36,000)
• So, even though I am adding $7,100 in software maintenance, I am saving (36000+67500) $103,500 in operating costs
• Those savings are even higher if I pull in next year's servers into the refresh plan, since I can lower my energy costs and (possibly) my salary costs even more

So, in this simple case, I can refresh twice as many servers as I normally would with the same capital budget, and have a huge impact on the operating budget. Again, this is a simple case, but the assumptions are quite conservative.