Analysis of cost savings of server virtualization

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This short paper discusses technical and financial advantages of server virtualization. The concepts in the paper are illustrated by two case studies which analyze the net present value of virtualization projects based on potential power savings.

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Analysis of cost savings of server virtualization

  1. 1. Pessoa Analysis of Cost Benefits of Server Virtualization Short Paper Analysis of Cost Benefits of Server Virtualization Prepared by: Glaucio Pessoa, PE, PMP® 0|Page
  2. 2. Pessoa Analysis of Cost Benefits of Server Virtualization Analysis of Cost Benefits of Server Virtualization By Gláucio T. Pessoa, P.E., PMP® Executive Summary Over the past few years, virtualization has gained attention in information systems. Basically, server virtualization implies the implementation of servers in software. Virtualization offers the benefits of infrastructure simplification, operational flexibility, improved resource availability, enhanced availability, and streamlined security and management. One can translate those five technical benefits into cost savings. This essay analyzes two case scenarios which use virtualization to yield power consumption reduction. Based on the data provided, assumptions made, and calculations performed, the conclusion is that power savings from virtualization might be significant. However, one might need to justify virtualization investments based on other cost benefits in addition to savings in power requirements. Introduction Over the past few years, virtualization has been one of the biggest buzz words in information systems. From 2007 through 2009, the investment adoption trend in virtualization went from 30% to 45%. Moreover, in 2009, 37% of small organizations, 48% of medium organizations, and 47% of large organizations made investments in virtual data centers (“Storage Virtualization”, 2009). Claims of cost savings by implementing virtual information systems have been high. Figure 1 displays the percentage of businesses that claimed a positive ROI due to 1|Page
  3. 3. Pessoa Analysis of Cost Benefits of Server Virtualization virtualizing storage in 2009. The pie chart indicates that 78% of the analyzed businesses reported gains. In this short paper, we will expand on and analyze two possible applications: replacement of physical servers in a small/medium size office; and consolidation of equipment in a data center. The essay starts with a brief introduction to the topic and the presentation of some of the potential benefits of virtualization. Fundamentals of Virtualization According to Gilmore (2008), virtualization is the process of consolidating dedicated hardware for hosts (servers) to share resources thus reducing costs. Basically, this consolidation consists of transforming hardware into software. One can explain this transformation as the creation of a group of virtual machines. Virtual machines are independent servers (computers) which are not physical and tangible, but instead fully based on software. Virtual machines have the same functionalities of the latter, but only exist virtually. One needs to set up a physical server as host to several virtual machines. Each virtual machine behaves exactly like a physical server, therefore, they interfaceand interact seamlessly with other physical and virtual servers. In a virtual server environment, there is allocation of the resources of the host physical machine to the virtual serverin a dynamic and transparent manner. In this context, resources are the physical main modules of a computer: memory, disk space, network 2|Page
  4. 4. Analysis of Cost Benefits of Server Virtualization Pessoa capabilities, etc. One of the perks of virtualization is the fact that each virtual machine operates as if it had a fixed portion of those resources, even though the resources are shared in real-time (Gilmore, 2008). Benefits of Virtualization Sutherland (2011) describes virtualization as a mature technology with proven results. He indicates that timing is perfect for companies that wish to adopt this framework due to the pool of knowledge which is now available and the number of established software solution providers. Amidst economic uncertainties, firms are progressively adopting virtualization and reaping the benefits of better efficiency and cost savings. According to Sutherland (2011), virtualization brings five major advantages: Infrastructure simplification –Virtualization cuts on the number of necessary servers and associated infrastructure thus lessening the expenditures with real-estate, power, and cooling requirements Improved resource utilization – Virtualization replaces the decades old paradigm of “one server to one application”. It allows for an ever increasing ratio of the number of virtual machines per physical host. Resources such as computing power, memory, disk space, and network interfaces are allocated to each virtual machine on an “as needed” basis 3|Page
  5. 5. Pessoa Analysis of Cost Benefits of Server Virtualization Enhanced availability – Mission critical software applications have low tolerance to downtime. Virtualization allows for whole clusters of virtual machines to be backup or even moved. Since all operations are performed in software, there is a reduction in recovery time thus improving business continuity Operational flexibility – Virtualization allows firms to rapidly install software and configure hosts. Since resources are assigned dynamically, responses to the new demands of the business can be implemented in reasonable timeframes. As long as there is capacity in the existing infrastructure, there are no delays associated with ordering and placing new equipment Streamlined security and management – It is possible to better perform concomitant configuration, security management, and back up of multiple hosts, since they are resideas part of the same physical machine The five points listed above are pluses in their own rights, however, for a manager they all translate into potential cost savings. Infrastructure simplification reduces equipment demands, therefore it lowers maintenance, administration, and personnel costs. Improvements in resource utilization lead to a more efficient use of resources thus guaranteeing better return on investment for physical servers. Enhanced availabilityreduces costs incurred due to downtime plus improves customer experience, which positively impacts revenues. Operational flexibility also reduces downtime and cuts down on expansion expenses. 4|Page
  6. 6. Pessoa Analysis of Cost Benefits of Server Virtualization Simplification of security and management creates the proper condition for savings since less time is invested in performance monitoring. At this point one might believe that virtualization is the “Holy grail” of computing. However, virtualization is not a “silver bullet”, since it is not the response to all software and hardware challenges and opportunities. Proper research and planning is necessary to determine if there are truly payoffs to switching to a virtual environment. Sutherland (2011) defines this as a two stage process: Discovery – This is the first step which entails identifying the components that make up the data center; e.g. servers, switches, network interconnectivity, etc. After those elements have been classified, one also needs to conduct a performance analysis to determine current and forecasted needs Planning – After one has mapped the physical environment, one is ready to determine what portions can be virtualized. At this point, managers are ready to perform a capital budgeting analysis to determine whether or not virtualizing the data center makes financial sense The five benefits described above make a strong case for virtualization. However, truly financial benefits must be realized to justify moving into a virtual environment. The next 5|Page
  7. 7. Analysis of Cost Benefits of Server Virtualization Pessoa section of this paper will review two case studies that illustrate how reduction in power requirements can be translated into cost savings. Virtualization case studies Case Study 1 – Small/mid-side office with single data closet setup Guster, Hemminger, and Krzenski (2009) conducted an analysis of the cost reduction associated with virtualizing a small/mid-size office set up with nine servers with very specific functionalities. Basically, they portrayed a set up with primary and secondary servers, one web server, one e-mail server, and five other servers with networking and security roles. This is a common set up which is similar to what might be employed for basic daily activities. For the study, the team implemented both the physical and the virtual setups and conducted measurements over a span of nine days. Two parameters were logged: the power requirements for running the servers; and the power requirements for cooling the servers. The results pointed to an 80% reduction in the power for both operating and cooling the servers, which in this simple scenario, were translated to $900 in annual savings (Guster et al., 2009). Would those savings be sufficient to justify a transition from nine physical servers to nine virtual servers integrated into one physical machine? To answer that question, one would need to first incorporate some additional assumptions into the analysis: 6|Page
  8. 8. Analysis of Cost Benefits of Server Virtualization Pessoa Costs for software licenses would remain the same whether one migrates or not to the virtual machine configuration Server software and hardware admin costs would remain the same Cost for acquiring a new physical server: $12,000.00 Cost to migrate the nine physical serversto a single virtual server: 3 business days x 8 man-hours x $150/man-hour = $3,600.00 Useful life of server: 10 years Server will be replaced in year 5 Depreciation schedule for sever: straight-line Salvage value of server at end of useful life (10 years): $500.00 Sale price of server at the end of 5 years: $7,000.00 Salvage of value of each existing server: $500.00 Tax rate: 34% Nominal rate of return: 10% Inflation rate: 3% In the proposed scenario, there will be incremental cash inflows of $900 from years 1 through 5. There will be a cash inflow of 9 x $250 for the salvage value of the existing servers. The new server will be salvaged at $6,250 at the end of year 5. Based on the assumptions above, there will be a cost of $12,000 plus $3,6000 to buy the physical host and setup the virtual machines. Table 1 is the worksheet of incremental cash flows for the replacement of the physical server with virtual servers. Please notice that the calculated net present value (NPV) of the cash flows of the migration to virtual servers is -$3,713.99 and the projected internal rate of return is -1.88%. 7|Page
  9. 9. Pessoa Analysis of Cost Benefits of Server Virtualization Let us modify this scenario by assuming that the current nine physical servers will be replaced with nine new physical machines. In this updated setting, we will assume that there will be no energy savings since we would not be reducing the number of physical servers. However, there would be an initial investment of $108,000 (9 x$12,000) since we would be ordering more hardware. The revenue from selling the machines at the end of 5 years would be $63,000.Table 2 is the worksheet of incremental cash flows for installing new physical servers. The calculated NPV and IRR for the revised scenario are -$50,425.74 and -6.89%, respectively. Based on the computed NPV and IRR values for both options, we deduct that a replacement of the physical servers with a virtual environment would significantly reduce the impact of the initial investment in the NPV. Therefore, all things being equal, given the opportunity to replace the hardware, virtualization makes more financial sense in a simple scenario such as this one. One important point that one must recognize is that in this case study, even though virtualization was financially advantageous when compared to purchasing new hardware, it would still yield a negative NPV. Therefore, power savings alone cannot be the only driver for going with a virtual solution. One must look at the prospect of savings in other areas such as cost benefits associated with security, flexibility, availability, plus cost reduction due to better utilizing other resources, e.g. floor space and network infrastructure. The next case study takes this analysis to the next level as it explores potential cost savings in a large computing environment. 8|Page
  10. 10. Pessoa Analysis of Cost Benefits of Server Virtualization Case Study 2– Server consolidation in a data center Uddin, Rahman, and Alsaqour (2012) propose the use of virtual hosts to consolidate physical servers in data centers. This approach is based on the fact that servers on average have poor utilization rates, i.e. they do not fully utilize dedicated resources such as CPU, memory, disk space, etc. This is exacerbated by the fact that in data centers the number of servers range from hundreds to thousands. Koomey (2007) points to a study that indicates that data centers account to 1.2% of the total electricity consumption in the U.S., or an estimate of a whopping 9,477,000 kW. Brown (2008) mentions a report from the Environment Protection Agency which not only corroborates those findings, but also indicates that data center energy demands double every five years. Even though data centers are populated with many individual and specialized elements such as data storage devices, servers, cooling equipment, networking hardware, generators, etc. servers are the biggest energy consumers since they perform most of the processing functions (Koomey, 2008). The approach proposed by Uddin et al. (2012), calls for categorizing servers based on three categories: Innovation servers – Servers used to develop new software Production servers – Servers that run revenue producing applications Mission critical servers – Servers with high impact to revenues and/or client relationships 9|Page
  11. 11. Pessoa Analysis of Cost Benefits of Server Virtualization In their paper, Uddin et al. (2012) propose the consolidation of servers into virtual machines using a ratio of 15 to 1 for innovation servers, 10 to 1 for production servers, and 5 to 1 for mission critical servers. For a data center made of 1,000 servers, this represents are reduction in 92% in the number of servers, and power consumption reduction of 150,460 Watts. To analyze the potential cost benefits of this approach, let us use the same assumptions stated for Case Study 1, plus the following additional suppositions: Price per kilowatt-hour: $0.12 Estimated Annual savings: $0.12 x 24 hours x 365 days x 150.460 kW = $158,163.55 No new servers will be acquired, since existing capacity will be re-utilized Freed up servers will be turned down; 75% of freed up servers will be sold at the estimated salvage value of $500 Table 3 shows the worksheet of incremental cash flows for this scenario. Please notice that based on assumptions provided above, the calculated NPV is $53,602.89, the estimated IRR is 11.95%, and the profitability index and payback period are 1.39 and 3.61 years, respectively. Based on the listed computed metrics alone, one might conclude that power savings from consolidation method being investigated would suffice to increase the value of the firm. However, if one takes a closer look into Table 3, one verifies that $223,245.00 in savings came from the sale of the decommissioned servers. Figure 2 represents the 10 | P a g e
  12. 12. Pessoa Analysis of Cost Benefits of Server Virtualization NPV based on percentage of unused equipmentsold. The graph indicates that the breakeven point is when there is a sale of 57% of the hosts released after consolidation. Here again, just like in the first case study, we see that although virtualization produces substantial power savings, those savings alone might not be sufficient to justify migration to a virtual server environment. Conclusions This short paper focused on the cost benefits of server virtualization, and it analyzed two distinct case scenarios based on two different sizes of data centers. The approaches to virtualization in both cases were similar, but not the same. The paper presents calculations based on the data provided and a set of assumptions. In both scenarios, it has been shown that virtualization can potentially produce savings in power thus reducing operating costs. However, the computationsalso infer that cost savings from power consumption diminution alone might not justify investments in virtualization. Firms that plan to invest in virtual data centers must also look into other benefits such as sales of unused equipment after consolidation to augment the financial value from virtualization projects. To further expand the work on this topic, one would have to refine the case scenarios to include other potential sources of savings, such as savings associated with better utilizing networking resources and physical space, plus cost decreases from streamlining administration and security functions. Other possible subjects for review would be cost benefits of desktop virtualization and virtualization in mobile devices; i.e. smartphones and tablets. 11 | P a g e
  13. 13. Pessoa Analysis of Cost Benefits of Server Virtualization References Brown, R. (2008). Report to congress on server and data center energy efficiency.Public law. pp. 109-431. Gilmore, A. (2008, November). Virtualization 2.0.Certification Magazine, pp. 42-43. Guster, D., Hemminger, C., &Krzenski, S. (2009). Using Virtuzation to Reduce Data Center Infrastructure and Promote Green Computing, International Journal of Business Research, 9(6), pp. 133-140. Koomey, J. G. (2007).Estimating total power consumption by servers in the US and the world. Retrieved from High-Performance Building for High-Tech Industries website: http://hightech.lbl.gov/documents/data_centers/svrpwrusecompletefinal.pdf Koomey, J. G. (2008). Worldwide electricity used in data centers. Environmental Research Letters,3. pp. 034008-034015.doi:10.1088/1748-9326/3/3/034008 Storage Virtualization Shows Promise, but Many on Fence.(2009, December).Computer Economics, 31(12), pp. 1-9. Sutherland, C. (2011). Benefits of Server Virtualization, Banking New York, 20, pp. 2430. Uddin, M., Rahman, A. A., &Alsaqour, R. (2012), Server Virtualization: Building Energy Efficient and High Performance Data Centers to Save Total Cost of Ownership. International Review on Modelling and Simulations, 5(6). pp. 2618-2626. 12 | P a g e
  14. 14. Pessoa Analysis of Cost Benefits of Server Virtualization Appendix A Tables and figures Figure 1.Percentage of virtualization adopters who report positive, break-even, and negative returns on investment (ROI).Adapted from “Storage Virtualization Shows Promise, but Many on Fence”.(2009, December).Computer Economics, 31(12), pp. 19.Copyright 2009 by Computer Economics, Inc. 13 | P a g e
  15. 15. Pessoa Analysis of Cost Benefits of Server Virtualization $150,000 NPV vs. Percentage of Servers Sold $100,000 $50,000 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100 $0 NPV ($50,000) ($100,000) ($150,000) ($200,000) Figure 2.Plot of the net present value (NPV) as a function of the percentage of freed up servers being sold after consolidation. 14 | P a g e
  16. 16. Pessoa Analysis of Cost Benefits of Server Virtualization Table 1. Worksheet of incremental Cash Flows for implementing the nine basic virtual servers for a small/medium size business Data Purchase Price of server Useful life of server Sale price of server in 5 years Nominal rate of return Tax rate $12,000.00 10 years $7,000.00 10.0% 34.0% Investments 1 2 3 4 Acquisition of new server Accumulated depreciation Adjusted basis of machine after depreciation Virtual machine setup cost Year 0 ($12,000.00) Setup cost of virtual machines Server will be replaced in Salvage value of each existing server Inflation rate Real rate of return $3,600.00 5 years $500.00 3.0% 6.8% Year 1 Year 2 Year 3 Year 4 $1,150.00 $10,850.00 $2,300.00 $9,700.00 $3,450.00 $8,550.00 $4,600.00 $7,400.00 Year 5 $6,745.00 $5,750.00 $6,250.00 ($3,600.00) Income 5 6 7 8 9 10 Revenues from sale of existing servers Savings in power consumption Depreciation Income before taxes Tax at 34% Net income Incremental cash flows 11 Savings in operating costs 12 Sales revenue 13 Taxes 14 Cash flows from operations (lines 11 + 12 +13) 15 Cash flows investments(lines 1 + 4) 16 Total incremental cash flows of project NPV of project ($3,713.99) $4,500.00 $900.00 $900.00 $900.00 $900.00 $900.00 ($1,150.00) ($1,150.00) ($1,150.00) ($1,150.00) ($1,150.00) $4,500.00 ($250.00) ($250.00) ($250.00) ($250.00) ($250.00) ($1,530.00) $85.00 $85.00 $85.00 $85.00 $85.00 $2,970.00 ($165.00) ($165.00) ($165.00) ($165.00) ($165.00) $900.00 $900.00 $900.00 $900.00 $900.00 $4,500.00 ($1,530.00) $2,970.00 ($15,600.00) ($12,630.00) $85.00 $985.00 $0.00 $985.00 $85.00 $985.00 $0.00 $985.00 $85.00 $985.00 $0.00 $985.00 $85.00 $985.00 $0.00 $985.00 $85.00 $985.00 $6,745.00 $7,730.00 IRR of project -1.88% Note: NPV calculations are based on the real rate of return.Revenues from the sale of the server in year 5 are based on sale price minus taxes on the difference between sales price and salvage value. 15 | P a g e
  17. 17. Pessoa Analysis of Cost Benefits of Server Virtualization Table 2. Worksheet of incremental Cash Flows for implementing the nine basic physical servers for a small/medium size business Data Purchase Price per server Useful life of servers Sale price per server in 5 years Nominal rate of return Tax rate $12,000.00 10 years $7,000.00 10.0% 34.0% Investments 1 2 3 4 Acquisition of new servers Accumulated depreciation Adjusted basis of machine after depreciation Virtual machine setup cost Year 0 ($108,000.00) Setup cost of physical machines Servers will be replaced in Salvage value of each existing server Inflation rate Real rate of return Year 1 Year 2 Year 3 $3,600.00 5 years $500.00 3.0% 6.8% Year 4 Year 5 $60,705.00 $10,350.00 $20,700.00 $31,050.00 $41,400.00 $51,750.00 $97,650.00 $87,300.00 $76,950.00 $66,600.00 $56,250.00 ($3,600.00) Income 5 6 7 8 9 10 Revenues from sale of existing servers Savings in power consumption Depreciation Income before taxes Tax at 34% Net income Incremental cash flows 11 Savings in operating costs 12 Sales revenue 13 Taxes 14 Cash flows from operations (lines 11 + 12 +13) $4,500.00 $0.00 $0.00 $0.00 $0.00 $0.00 ($10,350.00) ($10,350.00) ($10,350.00) ($10,350.00) ($10,350.00) $4,500.00 ($10,350.00) ($10,350.00) ($10,350.00) ($10,350.00) ($10,350.00) ($1,530.00) $3,519.00 $3,519.00 $3,519.00 $3,519.00 $3,519.00 $2,970.00 ($6,831.00) ($6,831.00) ($6,831.00) ($6,831.00) ($6,831.00) $0.00 $0.00 $0.00 $0.00 $3,519.00 $3,519.00 $3,519.00 $3,519.00 $3,519.00 $3,519.00 $3,519.00 $3,519.00 $3,519.00 $3,519.00 Cash flows frominvestments (lines 1 + 4) Total incremental cash flows of project ($111,600.00) ($108,630.00) $0.00 $3,519.00 $0.00 $3,519.00 $0.00 $3,519.00 $0.00 $60,705.00 $3,519.00 $64,224.00 NPV of project 15 16 $0.00 $4,500.00 ($1,530.00) $2,970.00 IRR of project -6.89% ($50,425.74) Note: NPV calculations are based on the real rate of return. Revenues from the sale of the servers in year 5 are based on sale price minus taxes on the difference between sales price and salvage value. 16 | P a g e
  18. 18. Pessoa Analysis of Cost Benefits of Server Virtualization Table 3.Worksheet of incremental Cash Flows for consolidating 92% of the capacity in a data center with 1,000 servers Data Set up cost per server Nominal rate of return Tax rate Number of servers to be sold Estimated annual savings $600.00 10.0% 34.0% 677 $158,163.55 Investments 1 Total number of servers (virtual & Physical) Inflation rate Real rate of return Salvage price per physical server Year 0 ($600,000.00) Total server set up cost Year 1 $ 1000 3.0% 6.8% 500.00 Year 2 Year 3 Year 4 Year 5 $158,163.55 $158,163.55 ($53,775.61) $104,387.94 $158,163.55 $158,163.55 ($53,775.61) $104,387.94 $158,163.55 $158,163.55 ($53,775.61) $104,387.94 $158,163.55 $158,163.55 ($53,775.61) $104,387.94 Income 2 3 4 5 6 Revenues from the sale of the freed up servers Savings in power consumption Income before taxes Tax at 34% Net income Incremental cash flows 7 Revenues from the sale of the freed up servers 8 Savings in operating costs 9 Server setup cost 10 Taxes 11 Cash flows from operations (lines 7 + 9 + 10) 12 Cash flows from investments(line 8) 13 Total incremental cash flows of project NPV of project Profitability Index $53,602.89 1.39 $338,250.00 $338,250.00 ($115,005.00) $223,245.00 $158,163.55 $158,163.55 ($53,775.61) $104,387.94 $338,250.00 $158,163.55 $158,163.55 $158,163.55 $158,163.55 $158,163.55 ($600,000.00) ($115,005.00) $223,245.00 ($600,000.00) ($376,755.00) IRR of project Payback period ($53,775.61) ($53,775.61) ($53,775.61) ($53,775.61) ($53,775.61) $104,387.94 $104,387.94 $104,387.94 $104,387.94 $104,387.94 $104,387.94 $104,387.94 $104,387.94 $104,387.94 $104,387.94 11.95% 3.61 Years Note: NPV calculations are based on the real rate of return. 17 | P a g e

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