You Can’t Handle the Truth

The next time your IT staff comes to you with a server or storage purchase order and says, “And the price is $1 million,” put on your Jack Nicholson mask, do your best “A Few Good Men” impersonation,” and growl, “Is that the truth? I don’t think so because, you can’t handle the truth.”

The truth is the cost of that hardware is not $1 million. Oh, sure, it’s the one time purchase price, but just like application software, that’s just the beginning of the cost.

Many years ago, while I was at Oracle, with the assistance of Gartner and IDC we came up with a quick way for CFOs to estimate the cost to manage business applications. We surveyed a number of customers and estimated the cost to manage application software to be four times the purchase price of the software per year.  In fact even Microsoft said,  “the initial purchase is usually only 5% of the total cost of owning and maintaining a program” [The Wall Street Journal, Microsoft Wages Campaign Against Using Free Software, December 9, 2002].

Why? Because the human labor that will be necessary to manage the security, availability, performance, and change in the application (and all of the underlying software and hardware infrastructure) will quadruple the purchase price every year. In fact since the cost of application software continues to go down and the cost of labor seems to be going up on a global scale the rule of thumb may be an underestimate today.  And the same can be said for true cost of computers and storage.

Why? Start with the cost of managing the security of the data center. I’m not just talking about the guard dogs out front (the cost of Kibble n’ Bits), but also making sure the building access system, the power and cooling systems, and the internal network are not full of viruses and have the latest vendor-released software patches. Then consider the software products you’ll have to purchase and the expertise you’ll need to retain to manage the availability of the network, not to mention your disaster recovery and redundancy expenses for your new servers and storage.

Of course, you’ll need new performance experts to do daily, monthly, or yearly capacity planning to insure the performance not only of your servers, but also, as you add boxes and expand your data center, experts to address the questions of power, cooling, and network bandwidth.

Finally, managing servers and storage would be easy if nothing ever changed. But everything always does. So you’ll need to factor in the cost of project managers, change management, and asset management that you’ll need to employ as the hardware you just bought becomes obsolete. And these costs will be minimal compared to what you’ll have to spend if you acquire a new organization and have to merge their data center with yours.

I think it’s safe to say that the cost to manage the compute and storage is at least two times the purchase price of that hardware per year.  In other words, that $1 million is not just the tip of the iceberg; it’s the tip of the tip. In just four short years, you’ll spend $16 million managing the security, availability, performance, and change in that server and storage.  f you don’t believe me, just look at how much headcount you carry managing the stuff you bought over the last 20 years.

So what should you do?  If you’re going to be a provider of compute & storage cloud services to your internal business then first, make sure you’ve allocated the budget to managing the compute & storage. Second, if your compute & storage cloud service is specialized for your industry or geography consider being a producer and provide these services to others.  It will improve both the cost and the quality, as your specialization will increase repetition and automation – thereby decreasing cost and increasing reliability.

Or, don’t write the check, and send your IT team to look for compute & storage cloud service providers who can deliver on what you need.  Make sure they know the security, availability, performance and change management features they need.  And ask the cloud service providers to show you how few good men they use to provide the service – only then will you know how to get both high quality and low cost in purchasing your next set of servers and storage.

Timothy Chou, Cloud Computing Expert

About the Author: Timothy Chou started the first class on cloud computing at Stanford University. Based on his lectures he authored “Cloud: Seven Clear Business Models”. He has delivered keynote speeches and taught executive seminars on the subject in Europe, Asia and Latin America. In addition he’s spent over 25 years in industry including serving as the President of Oracle On Demand. Today is on the board of a select number of public and private companies.

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