VKernel Whitepaper
Virtual Machines Are Not Free
The need for cost visibility and chargeback
By Alex Bakman
Alex is founder and CEO of VKernel, a software company dedicated to developing best-of-breed virtual appliances
that enhance performance, lower costs, and simplify management of virtual environments of all sizes. Alex is a
recognized expert in computer security, virtualization, and systems management. He holds many US and
international patents and is a frequent speaker at VMWorld, ISACA, TechEd, ITSMF and ITExpo. A serial
entrepreneur and visionary, Alex founded Ecora Software and CleverSoft, a software company acquired by Candle
Corporation.
Organizations are rapidly consolidating multiple physical servers to virtual environments. There is no
debating the cost savings and operational benefits of virtualization. The issues that are now arising as
virtualization continues to proliferate are rooted in management and how organizations can gain cost
visibility and recover the costs of their virtualization projects. As a result, corporate finance and IT
functionalities are moving ever closer together.
In many organizations, the IT department has always been and will continue to be a cost center and an
ongoing expense on the balance sheet. Most IT departments simply cannot justify making massive
investments in new virtualized data centers without recovering costs from its business units – a reason
why chargeback is one of the hottest virtualization topics today.
What organizations quickly realize is that virtualization projects are not inexpensive endeavors. In fact,
they can be quite costly with the need for new server hardware, software, such as VMware, network
storage systems, people, processes, training, and more. However, because of increased IT efficiencies,
the ease of adding new virtual machines, and the fact that departments no longer need to purchase their
own physical servers, there is a perception that virtualization does not cost them anything and adding
new virtual machines is free. Adding a new virtual machine is not free, but how does the IT group convey
that to the business units it serves?
Based on process savings, physical space reduction, hardware consolidation, and energy efficiencies, a
server virtualization project can produce a manageable return on investment (ROI) if the value of the
project can be correctly measured. To gain cost visibility and implement a proper chargeback process in
a virtual server environment, IT must be able to accurately determine which business groups are using
what shared resources (such as CPU, memory, storage, and network) and be able to associate a dollar
value to that usage. Driving to a measurable ROI is the success factor that IT will be measured.
Chargeback Is Changing
The concept of chargeback is not new. It was actually pioneered in the “old” mainframe computing data
center when organizations were spending millions of dollars on mainframe systems which were shared by
multiple departments within an organization. In a client-server environment, there have also been
processes in place based on traditional tools for implementing chargeback procedures in the physical
data center. With virtualization, simply stating that the virtual infrastructure costs a specific dollar amount
is insufficient as server resources are now shared once again. Other major challenges are the dynamic
nature of a virtual infrastructure, constant configuration changes, and resource allocation adjustments.
Traditional general-ledger-like accounting approaches were not architected to work in a virtual
environment.

● Dedicated Application Servers ● Shared Environment/Servers
● Owned by Business Units ● Servers Owned by IT
● Static Environment ● No Boundaries/Dynamic Movement
While most organizations recognize the need for chargeback, they simply do not know where to start.
There is a lot of confusion in the marketplace as traditional tool vendors attempt to market their wares as
being virtualization capable. In addition, there are more and more methodologies for doing chargeback in
a virtual infrastructure being rolled out – leading to even more confusion.
In a dynamic virtual environment where virtual machines automatically move (VMware VMotion) from one
host to another, a physical server is no longer a relevant boundary. Resource pools and clusters
determine where and how resources will be used. Thus, organizations must look at chargeback
methodologies that measure resource consumption, regardless of where the host resources are drawn.
One method for chargeback for virtual data centers that is garnering interest is the fixed-plus-overage
model. Most organizations have calculated what a virtual machine costs as they continue to virtualize.
While this information alone is not enough to properly chargeback business groups, it is an important first
step. To continually ensure the proper allocation of resources so IT can recover the associated costs, IT
must be able to measure actual resource (CPU, memory, storage, and network) usage. This usage
information coupled with what it costs to add a new virtual machine enables IT to accurately charge
business groups for the actual costs of their virtual machines.
How Does the Fixed-Plus-Overage Model Work?
Every host (the physical server) represents a fixed cost that can be divided out per virtual machine (10
virtual machines divided by the cost of the server equals $X). Now, there may be other fixed costs tied to
each virtual machine as well, such as the cost of the storage attached network (SAN), licenses, support
and maintenance, and environmental and space expenditures. So, the easy part is establishing what the
fixed costs per virtual machine. These are known commodities and most companies have a pretty good
estimate of that number. The tricky part is continually measuring the unknown or the actual resource
consumption of all shared resources. This is a process that pragmatically cannot be tackled manually.

When multiple business units have virtual machines deployed on a single host, resources for that host are
shared. For example, the marketing department has a virtual machine on the same host that the finance
and human resources departments have virtual machines installed. Now, how does the IT group properly
measure the usage by department for each shared resource? It is not fair to simply divide the allocated
resources by three as one department may use more resources than the others.
In the fixed-plus-overage model, IT can set the fixed price and using the measured resource usage
(MRU) approach calculate the amount of resource overage (or underage) per department. Think of it as
utility meters on a house measuring how much gas, electric, and water a residence is consuming. Now,
each virtual machine is essentially fitted with a utility meter to automatically and accurately measure
shared resource usage per virtual machine. IT can see exactly how much resources are being consumed
by each department and more effectively chargeback for the usage. So, if the finance department is
using more resources than allocated, it will be charged differently than the marketing and human
resources departments.
More than just cost recovery
While cost recovery is usually the major driver for implementing a chargeback process, it is not the only
issue that can be solved. Having the cost data as discussed above enables IT to gain cost visibility and
also properly allocate the resources required to service each business unit based on the resources that
are actually being used. This is important in further planning the virtual infrastructure as IT can make
more informed decisions on additional purchases and upgrades to help optimize the infrastructure. IT
also now has the fiscal information to present to corporate finance to justify these decisions.
The ultimate goal is to lower and control costs with intelligent planning to drive a quicker time to ROI.
Success of a virtualization project will be based on that time to ROI. With a chargeback process in place,
departments will learn that there is a cost associated with adding virtual machines. This should also help
address the virtual machine sprawl “epidemic” that is spreading like wildfire. While virtual machines aren’t
free, inter-organizational departments will see significant cost and time savings benefits from virtualized
environments over deploying more physical servers.