The Total Economic Impact of NetApp Solutions for Cloud Service Providers

A Forrester Total Economic Impact™ Study Prepared For NetApp

The Total Economic Impact Of NetApp Solutions For
Cloud Service Providers
A Total Economic Impact Analysis

Project Director: Bob Cormier, Vice President and Principal Consultant
April 2012

Forrester Consulting
The Total Economic Impact Of NetApp Solutions For Cloud Service Providers

TABLE OF CONTENTS
Executive Summary ................................................................................................................................................................................. 2

Disclosures ........................................................................................................................................................................................... 4

TEI Framework And Methodology...................................................................................................................................................... 4

Analysis ...................................................................................................................................................................................................... 6

Interview Highlights .......................................................................................................................................................................... 6

Composite Service Provider Description — The Organization ................................................................................................ 6

Costs: Initial Startup Investments ................................................................................................................................................... 8

Costs: Ongoing Annual Investments............................................................................................................................................ 11

Taking Advantage Of NetApp Efficiencies ....................................................................................................................................... 12

Revenues, Costs, And Gross Margin .................................................................................................................................................. 16

Flexibility............................................................................................................................................................................................ 18

Risk...................................................................................................................................................................................................... 18

Financial Summary................................................................................................................................................................................ 20

Study Conclusions ................................................................................................................................................................................. 20

Appendix A: About NetApp Solutions For Cloud Service Providers: Overview ...................................................................... 22

Appendix B: Total Economic Impact™ Overview ............................................................................................................................ 23

Appendix C: About The Project Director ......................................................................................................................................... 24

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Executive Summary
In late 2011, NetApp commissioned Forrester Consulting to examine the total economic impact and business case
justification for independent service providers to build and deliver storage-as-a-service (StaaS) to their customers using
NetApp solutions. The purpose of this study is to give service providers a framework to evaluate the potential financial
impact on their businesses if they build their cloud service offering on the NetApp platform.

Forrester found that the service providers successfully and profitably developed and marketed products and services on
the NetApp platform and used this as an opportunity to gain access to new customers and incremental revenue
opportunities.

For this study, Forrester interviewed six cloud service providers that have developed and sold cloud services built on the
NetApp platform. Based on the data gathered from these service providers, we constructed a framework for evaluating
the potential revenues, expenses, and gross profits associated with developing and selling a cloud-based StaaS offering.

From the interviews, we learned that the service providers were able to take advantage of and gain economic benefits
from the following NetApp features, functionality, and business practices (see Appendix A for NetApp solution
descriptions):

 Scalability. The NetApp platform could scale easily, allowing the cloud service provider to start small and grow
to support large and varied StaaS opportunities.

 Satisfaction of data security concerns. NetApp allowed service providers to sell and operate separate instances
for multiple customers that had data security concerns.

 NetApp technology. A variety of NetApp technologies provide economic benefit to service providers. Storage
efficiency capabilities such as deduplication, thin provisioning, Snapshot, and FlexClone minimize storage costs
(see Table 7). Unified storage and multitenancy also increase efficiencies. Integrated data protection and data
mobility give predictable service across a range of service-level agreements (SLAs). Features like SnapLock, a data
permanence capability, can also be monetized. Application programming interfaces (APIs) allow further
innovation and reduced management costs.

 NetApp partnerships. Working with a variety of leaders such as VMware, Microsoft, and Cisco Systems allows
key technologies in a service-oriented infrastructure to function well together.

 Business model. NetApp has no proprietary branded cloud services to compete against those of service
providers. Rather, NetApp’s focus is on being the storage and data management supplier of choice and helping its
service provider partners market and sell their services.

From our interviews, we created a composite service provider Organization, which is based on characteristics of the
interviewed service providers (see the Composite Service Provider Description — The Organization section.)

Table 1 represents a three-year summary of risk-adjusted revenues, costs, gross profit margin, and cumulative gross-
profit-margin percent that our Organization experienced investing in NetApp solutions for cloud service providers.

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Table 1
Revenue, Costs, And Gross Profit Over Three Years — The Organization (Risk-Adjusted)

Initial Year 1 Year 2 Year 3 Total

Total StaaS revenue $0 $1,041,120 $3,149,280 $5,602,410 $9,792,810

Total costs $1,782,831 $779,210 $1,030,889 $1,089,769 $4,682,699

Gross profit margin -$1,782,831 $261,910 $2,118,391 $4,512,641 $5,110,111

Cumulative gross profit N/A -146.1% 14.3% 52.2% 52.2%
margin %

Source: Forrester Research, Inc.

The three-year risk-adjusted gross profit (revenues less costs) of $5,110,111 is attributed to the Organization’s
investment in NetApp solutions for cloud service providers (see details below in the Costs, Benefits, Flexibility, and Risk
sections).

The risk adjustments made for the composite Organization are based on data and characteristics obtained during the
customer interview process. Forrester risk-adjusts revenues to take into account the potential uncertainty that exists
with an investment including underutilized infrastructure due to customers not renewing StaaS contracts at a
predictable rate (Forrester assumes an annual 20% attrition rate in this analysis). The risk-adjusted value is meant to
provide a conservative estimate, incorporating the previously mentioned risk factors. For this study, Forrester applied a
10% risk adjustment — i.e., a reduction of 10% — to all revenues to reflect the risks. For a more in-depth explanation
of risk and the risk adjustments used in this study, please see the Risk section.

In this study, we will address the following financial topics using the composite Organization, which is representative of
the service providers we interviewed:

 Initial startup investments required to enter the StaaS services business using NetApp solutions.

 Representative StaaS end user contract (revenue, costs, and gross profit margin) reported by interviewed service
providers.

 Ongoing investments to maintain and grow a StaaS services business using NetApp solutions.

 Benefits attributed to utilizing the NetApp storage efficiency portfolio including deduplication, thin provisioning,
Snapshot, and FlexClone.

 Three-year financial projections — investments, revenues, and gross profit margin (risk-adjusted and non-risk-
adjusted).

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Disclosures
The reader should be aware of the following:

 The study is commissioned by NetApp and delivered by the Forrester Consulting group.

 Forrester makes no assumptions as to the potential return on investment that other service providers will receive.
Forrester strongly advises readers to use their own estimates within the framework provided in this study to
determine the appropriateness of an investment in NetApp solutions for cloud service providers.

 NetApp reviewed and provided feedback to Forrester, but Forrester maintained editorial control over the study
and its findings and did not accept changes to the study that contradicted Forrester’s findings or obscured the
meaning of the study.

 Forrester does not endorse NetApp or its storage solutions.

 The study is not a direct or implied market or competitive comparison.

TEI Framework And Methodology

Introduction
Based on the information gathered from the service provider interviews, Forrester has constructed a Total Economic
Impact™ framework for prospective service providers that wish to develop cloud-based products and services based on
the NetApp platform. The objective of the framework is to identify the revenue, expense, flexibility, and risk factors that
affect the investment decision over a three-year period.

Approach And Methodology
Forrester took a multistep approach to evaluate the business case for NetApp solutions for cloud service providers (see
Figure 1). Specifically, we:

 Interviewed NetApp marketing personnel as well as Forrester analysts to gather data relative to NetApp solutions
for cloud service providers and the marketplace in general.

 Interviewed six service providers that have developed and are selling cloud services on the NetApp platform, to
obtain data with respect to revenues, costs, and risks.

 Designed a composite Organization (service provider) based on common characteristics of the interviewed
service providers.

 Constructed a financial model representative of the interviews using the TEI methodology. The financial model is
populated with average expense and revenue data obtained from the interviews as applied to NetApp solutions
for cloud service providers.

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Figure 1
TEI Approach

Create Construct financial
Perform due Conduct Write TEI
composite model using TEI
diligence interviews case study
Organization framework


Forrester employed four fundamental elements of TEI in modeling the NetApp solutions for cloud service providers:

1. Costs.

2. Revenues.

3. Flexibility.

4. Risk and risk mitigation.

Please see Appendix B for additional information on the TEI methodology.

Framework Assumptions
Table 2 provides the framework assumptions that Forrester used in this analysis.

Table 2
Framework Assumptions

General assumptions Value

Length of analysis Three years

Annual fully loaded cost of a storage $110,000
administrator, project manager, and
marketing staff

Hourly fully loaded average cost of a $53
storage administrator, project
manager, and marketing staff


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Analysis

Interview Highlights
Forrester derived its conclusions in large part from information received in a series of in-depth interviews with
executives and personnel at six service providers currently using NetApp-based cloud solutions. The following is a brief
description of each of the interviewed service providers, all of which were promised anonymity:

 A North American service provider supplying cloud-based infrastructure-as-a-service (IaaS) and software-
as-a-service (SaaS). It targets customers in the midmarket-to-enterprise range for the following services: disaster
recovery (DR), backup and recovery, archival, test and development, and Exchange-as-a-service. This 50-person
company has been using NetApp solutions for cloud service provision since 2008.

 A European-based service provider operating eight data centers globally. It provides data protection services
to organizations in government, healthcare, financial services, manufacturing, industry, and other sectors. Cloud-
based services include: IaaS, DR, backup and recovery, archival, Exchange-as-a-service, business continuity, and
failover as a service. This 60-person company has 6 petabytes of data stored on NetApp hardware, and it’s using
NetApp storage efficiency tools to optimize utilization and efficiency.

 A Japan-based service provider of high-value solution services, including Internet access, outsourcing, and
systems integration. Its cloud-based services include SaaS, platform-as-a-service (PaaS), IaaS, StaaS, and
application hosting. This 500-person service provider has been delivering cloud services on the NetApp platform
for more than 12 months.

 A North-American-based service provider offering its customers an advanced cloud infrastructure. Providing
managed service offerings that deliver scale, security, and reliability to enterprises and governments around the
world. It has 900 employees and a global network of data centers providing cloud-based services including
primary IaaS, with StaaS, DR, backup and recovery, archival and eDiscovery, test and development, and cloud
storage.

 A US-based global service provider with core products such as managed hosting, cloud hosting, and email
and application hosting. It has more than 3,000 employees serving about 100,000 cloud computing customers
with revenues of almost $1 billion. It has been delivering backup and recovery as well as desktop and
infrastructure cloud services on the NetApp platform for more than three years.

 A European-based global IT solutions and managed services provider including cloud services. It employs
more than 1,500 people worldwide meeting the IaaS and StaaS needs of more than 5,000 corporate and public-
sector customers. It specializes in the area of advanced technologies and services with annual revenues exceeding
$1 billion. It has been delivering cloud services on the NetApp platform for more than 12 months.

Composite Service Provider Description — The Organization
In this TEI study, Forrester has created a composite cloud service provider Organization to illustrate the quantifiable
revenues and costs, risks, and flexibility of developing and running capacity-optimized StaaS products and services on

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the NetApp platform. The composite cloud service provider Organization is representative of the six NetApp cloud
service providers interviewed by Forrester for this study.

Background: Pre-NetApp Business Environment
The composite Organization is a 10-year-old company. Prior to developing capacity-optimized StaaS cloud services on
NetApp, its primary product was system integration and dedicated hosting of applications and infrastructure that were
sold using a traditional license-based model. The primary market for these services was mainly medium-sized and large
enterprises, and that market will remain the same for its cloud-based products and services.

The Organization’s total annual revenues were $500 million. Its primary revenue source was managed services sales and
maintenance fees. Other revenue sources include professional services engagements. Professional services engagements
were required to integrate the products with its customers’ broader IT environment.

Reasons For Pursuing A Cloud-Based Product Strategy
To grow the Organization’s revenues, management realized that it needed a product that would allow it to reach
completely new markets. Its larger competitor had a strong presence outside of the Organization’s local market, making
it difficult to break into different geographies with its on-premises product. At the same time, management believed
that these same competitors were so large that they had lost some of their nimbleness, particularly when it came to
pursuing smaller market segments. Management, noting an increasing interest among its customers and prospects for
applications, infrastructure, and services that are delivered from the cloud, decided to pursue a cloud-based StaaS
strategy. In particular, management believed that a cloud-based strategy would allow it to do the following:

 Reach new market segments and geographies.

 Achieve competitive differentiation relative to the Organization’s larger competitors.

 Allow the business to scale rapidly without incurring the overhead costs associated with traditional hosted
solutions.

 Make it easy for prospects to try out its solution.

 Make it easier to sell a service by dramatically reducing the upfront costs for the customer.

 Create a profitable cloud-based StaaS product and services business.

Reasons For Choosing NetApp
The Organization had experience in system integration of hosted infrastructure and applications. It had learned that
this approach would not work well for its proposed products because the hosting costs did not scale linearly with the
number of customers. The Organization was interested in an infrastructure solution that allows for cost-effectively
deploying a portfolio of customer-facing services over time with significant economies of scale. The Organization
reviewed other StaaS offerings and decided to use NetApp. Its reasons for choosing NetApp were similar to the six
interviewed service providers and included the following:

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 The NetApp platform could scale easily, allowing the cloud service provider to start small and scale to support
large use cases.

 NetApp solutions allowed the Organization to address the cost challenges associated with hosted solutions.

 NetApp allowed the Organization to sell and operate separate instances for those customers that had data security
concerns.

 NetApp’s technology: Unified storage, storage efficiency, and multitenancy minimize cost. Integrated data
protection and data mobility give predictable service across a range of SLAs. Unique capabilities such as
Snapshot, FlexClone, and SnapLock can be monetized. APIs allow further innovation.

 NetApp partnerships: Working with a variety of leaders such as VMware, Microsoft, and Cisco allows key
technologies in a service-oriented infrastructure to function seamlessly together.

 Business model: NetApp has no proprietary branded services to compete against service providers. Rather,
NetApp’s focus is on being the storage and data management supplier of choice.

The Organization has decided to design workload offerings to meet customer performance requirements at minimal
cost by combining SATA drives with FlashCache.

In designing a reference architecture for a storage service, our Organization had two basic goals.

1. To ultimately offer a broad range of services built on a simple and scalable StaaS foundation.

2. To build an infrastructure that is cost-efficient, allowing the service provider to offer its customers
reasonable and competitive prices for services while maintaining an acceptable gross profit margin.

The Organization understands that the best way to achieve a cost-efficient cloud-based storage infrastructure is to
specifically configure infrastructure components to meet common workloads and drive that infrastructure to the
highest possible levels of utilization.

Costs: Initial Startup Investments
From our interviews with existing service providers, Forrester has outlined in Table 3 the initial startup costs for the
Organization. These costs will also support the first three StaaS contracts sold by the Organization in Year 1.

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Table 3
Startup Investments And Costs — Composite Service Provider Organization (Will Support First Three StaaS
Contracts)

Investment cost category Descriptions/Assumptions Expense

Storage startup costs — NetApp hardware (*) Two FAS6240 capacity systems: SATA (48 TB raw) $339,892

Storage startup costs — NetApp software (*) Two software licenses $698,850

Storage startup costs — NetApp service (*) SupportEdge Premium 4-hour on-site — 36 months $319,848

Training costs — NetApp NetApp Data ONTAP and software applications $10,000

Subtotal — NetApp startup costs $1,368,590

Three FTEs full-time for two months (storage
administrator, product manager, and project manager)
Product development costs to incorporate StaaS
— for example, tasks include initial tying into level 1 $55,000
into existing hosting environment
help desk and billing systems and systems
management integration.

Trade publications, search advertising, and email
Initial marketing and advertising costs $30,000
marketing

Bandwidth costs (data center to data Each service provider should assess its own bandwidth
$0
center/Internet to data center) capacity needs.

Each service provider should assess its own data center
Expand data center $0
capacity needs.

Total startup investment and costs $1,453,590

*See Table 4 for initial hardware, software, and services configuration details. NetApp pricing is based on normal and average discounts off
NetApp’s list price as of January 2012.

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Table 4
Capacity-Optimized Startup System — NetApp Hardware, Software, And Services

NetApp product Description

Hardware — NetApp FAS6240 StaaS FAS6240 capacity-optimized system configuration includes: 2x
Disk Shelves, 24x2.0 TB, 7.2k, SATA; FAS6240 HA SYS With SAS CNTRL
and IO expander; 2x 512 GB FlashCache Modules; cabinet and
miscellaneous cables.

Software — Complete BNDL, This includes: ISCSI, FCP, CIFS, NFS, SnapRestore, SnapVault,
6240A,-C SnapMirror, FlexClone, SnapDrive for Windows, SnapDrive for UNIX,
SnapManager for Microsoft Exchange, SQL, SharePoint, Oracle, SAP,
VI, Hyper-V, and SMBR.

Software — Data ONTAP Essentials, This includes: HTTP, one protocol of choice, deduplication (ASIS),
6240,-C NearStore, SyncMirror, DSM/MPIO, MultiStore, and FlexCache —
System Manager.

Service — SupportEdge Premium This includes: 4-hour on-site for 36 months.


Capacity-Optimized System
The capacity-optimized system is a configuration designed specifically for capacity-oriented workloads, where the
capacity requirements of the workload exceed the performance requirements. In this configuration, achieving
maximum storage density and price per GB/TB efficiency is the primary architectural objective.

The capacity system is a FAS6240AE with SATA drives. The default configuration is the 6240AE controller with the
complete software bundle and FlashCache Modules. The default configuration provides ~49.4 TB of usable capacity
storage (based on the use of 2 TB SATA drives).

Usable capacity can be increased by adding additional shelves of SATA disks. Each shelf of SATA disks adds ~30.7 TB
usable capacity (based on 2 TB disks). The maximum usable capacity for our capacity-oriented storage system is
~1833.5 TB (again based on 2 TB disks) (see Table 5).

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Table 5
Capacity-Optimized Startup Summary

Item Capacity

Default number of shelves 2

Default usable capacity ~49.4 TB

Maximum number of shelves 60

Usable capacity increment (one shelf) ~30.7 TB

System capacity maximum ~1833.5 TB


The usable capacity of ~30.7 TB does not take storage efficiencies such as deduplication and thin provisioning into
account, which can save 25% to 70% of storage depending on the data set or alternatively provide approximately two
times the effective storage sold to StaaS customers.

Costs: Ongoing Annual Investments
Forrester assumes that the Organization will invest to support the StaaS contracts reflected in Table 6. We have also
included a 20% annual nonrenewal rate for previous years’ ending contracts.

Table 6
StaaS Contracts Over Three Years — The Organization

Initial Year 1 Year 2 Year 3

StaaS contracts (assumes 20% annual 0 16 12.8 10.24
nonrenewal rate)

StaaS contracts (assumes 20% annual 0 0 16 12.8
nonrenewal rate)

StaaS contracts (assumes 20% annual 0 0 0 19
nonrenewal rate)

Ending cumulative StaaS contracts 0 16 29 42

Net incremental contracts per year 0 16 13 13


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The costs represented in Table 10 support the above contract levels.

Taking Advantage Of NetApp Efficiencies
Along with NetApp, we configured and priced the various investments needed to support 13 StaaS contracts using
NetApp FAS6240 under two different scenarios (see Table 7):

 Using NetApp to deliver services to 13 customer contracts without taking advantage of NetApp efficiencies.

 Delivering services to 13 customer contracts and taking advantage of NetApp efficiency features and tools
including deduplication, thin provisioning, Snapshot, and FlexClone. Forrester assumes an average annual 50%
data growth for StaaS customers, with a corresponding 30% storage growth with NetApp efficiency features and
tools.

Over the estimated three-year life of 13 customer contracts, the Organization will save $1,284,234 in disk capacity,
software, and maintenance by taking advantage of NetApp efficiency features and tools, and SATA drives as follows:

 $150,129 in savings from using deduplication.

 $218,700 in savings from using thin provisioning.

 $139,980 in savings from using FlexClone.

 $54,611 in savings from using Snapshot.

 $621,084 in savings from using lower cost SATA drives (vs. SAS drives).

 $99,730 in savings from reduced NetApp maintenance.

In addition, there are savings in power and cooling, data center space, and labor also reflected in Table 7 below.

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Table 7
Investments Over Three Years; Financial Comparison Of FAS6240; Pre- And Post-NetApp Efficiencies; 13 StaaS
Customer Contracts

Cost/benefit item Pre-NetApp Using NetApp Savings with
efficiencies efficiency tools NetApp tools with
(over three years) using SAS with SATA SATA

Cost to purchase NetApp controllers $589,430 $589,430 $0

Cost to purchase NetApp disk capacity
(hardware and software) $1,195,983 $483,065 $712,918

Maintenance cost — NetApp $273,403 $173,673 $99,730

Total capital costs: controllers, disks,
software, and maintenance $2,058,816 $1,246,168 $812,648

Presales cost (one-time selling, scoping,
and pricing StaaS contract at $11,000 per
contract) $143,000 $143,000 $0

Custom design and implementation
services costs per new contact ($2,500
one-time) $32,500 $32,500 $0

Initial customer setup costs (labor):
$2,400 per contract (one-time) $31,200 $31,200 $0

Power and cooling costs (over three
years) $95,067 $27,411 $67,656

Data center space cost (over three years) $35,245 $7,509 $27,736

Labor cost — project and storage
administration (three years) from both
managing less storage and the use of
OnCommand software tools $285,487 $131,783 $153,704

Total operating costs $622,499 $373,403 $249,096

Total capital and operating costs $2,681,315 $1,619,571 $1,061,744

Savings using NetApp efficiency tools
with SATA drives $1,061,744


NetApp Solutions For Cloud Service Providers
A goal of this case study is to assist a prospective service provider in understanding what it takes to deliver transactional
SAN or NAS StaaS to its customers. The NetApp platform is designed to deliver a wide variety of storage offerings

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intended to support an even wider variety of applications and use cases. A full range of both SAN and NAS storage
access protocols are covered including NFS, CIFS, FCP, and iSCSI. Multiple data protection offerings are also available,
from a simple local snapshot to off-site backup and DR.

It is anticipated that these StaaS contracts will be used in conjunction with a co-location, hosted infrastructure or
virtualized infrastructure as a service to provide storage resources to customers using those other services. This storage
service could also be used to provide storage resources for other IT-as-a-service solutions (such as a VDI or SaaS
offerings).

The solution is built on NetApp Data ONTAP (7-mode) using FAS6240 controllers. All storage equipment is
configured using high-availability (HA) pairs. It will be assumed that any application or user utilizing this storage is
looking for highly available storage.

The solution is designed with the ability to support multiple customers/tenants from the same physical infrastructure.
This allows service providers to provide high-quality, high-value services while keeping infrastructure costs low,
ensuring lower prices and higher margins. NetApp MultiStore and other security/networking best practices will be used
to securely separate one tenant’s data from another.

NetApp features (such as storage efficiency technologies, integrated data protection, and others) are included in the
NetApp platform (and pricing) and should be used within the StaaS service to reduce costs, increase the functionality of
the service, or both.

Table 8 represents the revenue, costs, and gross profit associated with the average StaaS contract (as part of its IaaS
contract). When we could identify direct costs associated with the contract, we included them. In other cases, we
allocated costs — i.e., the costs associated with the NetApp FAS6240, power, cooling, data center, as well as storage and
project administration labor.

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Table 8
Average StaaS Contract — Revenues, Costs, And Gross Profit Over Three Years — The Organization


Revenue: custom design and
implementation services per new
contact ($4,300 for each contract, one-
time) $4,300 $0 $0 $0 $4,300

Revenue: annual StaaS contract fees
starting at $10,000 per month and
growing 2.44% monthly (30% annually) $0 $68,000* $183,000 $245,000 $496,000

Total StaaS revenue $4,300 $68,000* $183,000 $245,000 $500,300

Allocated cost: one-thirteenth share of
the NetApp FAS6240 hardware, software,
and maintenance $45,341 $25,326 $11,234 $13,958 $95,859

Cost: presales (one-time selling, scoping,
and pricing) $11,000 $0 $0 $0 $11,000

Cost: custom design and implementation
services costs per new contact $2,500 $0 $0 $0 $2,500

Cost: initial customer setup costs (labor):
$2,400 per new contract $2,400 $0 $0 $0 $2,400

Allocated cost: share of the power and
cooling costs $0 $507 $683 $919 $2,108

Allocated cost: share of the data center
space cost $0 $139 $187 $252 $578

Allocated cost: labor cost — project and
storage administration $0 $2,437 $3,282 $4,418 $10,137

Total costs $61,241 $28,409 $15,385 $19,547 $124,582

Gross profit -$56,941 $39,591 $167,615 $225,453 $375,718

Cumulative gross profit margin % -1,324.2% -25.5% 58.9% 75.1% 75.1%

*50% of revenues in Year 1 assume average StaaS contract starts midyear.

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Revenues, Costs, And Gross Margin
Table 9 represents a three-year summary of revenues that our Organization experienced investing in NetApp solutions
for cloud service providers.

Table 9
Revenues Over Three Years — The Organization (Non-Risk Adjusted)


StaaS contracts (assumes 20% annual 0 16 12.8 10.24 0
nonrenewal rate)

StaaS contracts (assumes 20% annual 0 0 16 12.8
nonrenewal rate)

StaaS contracts (assumes 20% annual 0 0 0 19
nonrenewal rate)

Ending cumulative StaaS contracts 0 16 29 42

Revenue per contract (assumes 50% midyear) $0 $68,000 $183,000 $245,000

Revenue per contract (assumes 50% midyear) $0 $0 $68,000 $183,000

Revenue per contract (assumes 50% midyear) $0 $0 $0 $68,000

Revenue: annual StaaS contract fees start at $0 $1,088,000 $3,430,400 $6,143,200 $10,661,600
$10,000 per month and grow 2.44% monthly
(30% annually).

Revenue: custom design and implementation $0 $68,800 $68,800 $81,700 $219,300
services revenue per new contract ($4,300 for
each contract one-time)



Table 10 represents a three-year summary of costs that our Organization experienced from investing in NetApp
solutions for cloud service providers.

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Table 10
Costs Over Three Years — The Organization


NetApp startup investment (hardware, software, $1,453,590 $0 $0 $0 $1,453,590
services, training) and product development,
marketing, and advertising (from Table 3)

Costs to support Year 1 contracts: incremental $329,241 $146,240 $181,457 $225,007 $881,945
NetApp investment per 13 contract bundles
(hardware, software, and maintenance) assuming
use-of-NetApp efficiencies

Costs to support Year 2 contracts: incremental $0 $329,241 $146,240 $181,457 $656,938

Costs to support Year 3 contracts: incremental $0 $0 $329,241 $146,240 $475,481

Subtotal cost (hardware, software, and $1,782,831 $475,481 $656,938 $552,704 $3,467,954
maintenance)

Presales (one-time selling, scoping, and pricing $0 $176,000 $176,000 $209,000 $561,000
project at $11,000 per new contract)

Design and implementation services costs per new $0 $40,000 $40,000 $47,500 $127,500
contact ($2,500 one-time)

Initial customer setup costs (labor): $2,400 per new $0 $38,400 $38,400 $45,600 $122,400
contract (one-time)

Power and cooling costs $0 $8,111 $19,657 $38,635 $66,403

Data center space cost $0 $2,222 $5,386 $10,584 $18,192

Labor cost — project and storage administration $0 $38,997 $94,508 $185,746 $319,251

Total costs $1,782,831 $779,210 $1,030,889 $1,089,769 $4,682,699


Table 11 represents a three-year summary of revenues, costs, gross profit margin, and gross-profit-margin percent that
our Organization experienced from investing in NetApp solutions for cloud service providers.

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Table 11
Summary: Revenues, Costs, And Gross Profit Margin Over Three Years — The Organization (Non-Risk-Adjusted)



Total costs $1,782,831 $779,210 $1,030,889 $1,089,769 $4,682,699

Gross profit margin -$1,782,831 $377,590 $2,468,311 $5,135,131 $6,198,201

Cumulative gross profit margin % N/A -121.5% 22.8% 57.0% 57.0%


Revenue And Margins
The service providers we interviewed collected revenues ranging from $600,000 to $3 million in a nine- to 12-month
period after launching their NetApp StaaS services, and thereafter they experienced revenue growth rates ranging from
50% to 250%. The service providers were managing their NetApp StaaS solutions with a goal of profitable growth. The
gross profit margins that the service providers were experiencing at the time were variable, averaged 30% to 50%, and
were adjusted for consistency to include the costs of NetApp solutions and the cost of sales (see Table 10).

Flexibility
Flexibility, as defined by TEI, represents investing in capacity or agility now that can be later turned into business
benefits for some future additional investment. The value of flexibility is clearly unique to each service provider, and the
willingness to measure its value varies from organization to organization.

For this study, we were not able to calculate the value of any flexibility benefits. However, we believe that NetApp
solutions for cloud service providers will offer the Organization a platform upon which it can incrementally grow its
business in other areas after it has made the initial investment. Specifically, as reported by the interviewed service
providers, the Organization may be able to leverage its knowledge around developing cloud products and services on
NetApp’s platform to create future cloud-based products and services as well as the resulting incremental revenues and
gross profits.

The value of the option (when calculated) is based on the Black-Scholes option pricing formula. (For additional
information regarding the flexibility calculation, please see Appendix B.)

Risk
Forrester defines two types of risk associated with this analysis: external risk and internal risk. External — or “business”
— risk arises from forces or circumstances over which the service providers have limited control. Internal — or
“execution” — risk refers to the risk over which the service provider has some control.

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Both business and execution risk can affect the potential expenses and revenues a service provider may experience. Risk
also accounts for the variance or uncertainty in data that we gather during the interview process. The greater the
variance or uncertainty is, the wider the potential range of outcomes is for expense and revenue estimates.

Quantitatively capturing business risk and execution risk and directly adjusting the financial estimates results in a more
meaningful and accurate projection of the financial results. In general, risks affect expenses by raising the original
estimates, and they affect revenues by reducing the original estimates. The risk-adjusted numbers should be taken as
“realistic” expectations, as they represent the expected values considering risk.

The following internal or execution risks were considered in this study:

 Lack of organizational discipline in creating processes and procedures to best take advantage of the benefits of
building on the NetApp platform.

 The initial investment needed to develop, market, and deliver StaaS cloud services will be variable from one
service provider to another. A readiness assessment should be completed to determine the spare capacity of the
existing computing infrastructure. Also, assess the experience and bandwidth of IT, development, marketing, and
sales resources to deliver a launch-ready StaaS product. Most of the interviewed service providers reported
adequate infrastructure and labor capacities prior to entering the StaaS marketplace. We encourage service
providers to examine their existing capacities before deciding to invest in NetApp solutions for cloud service
providers.

 Operations expense may be variable. IaaS and StaaS operating expenses are driven by resource consumption,
including compute time, storage needs, database needs, bandwidth, and the number of users. Service providers
can control this expense by optimizing their products and services for resource usage by taking advantage of the
following features or functionality:

o RAID-DP versus RAID 10.

o Deduplication.

o Thin provisioning.

o Snapshot backups versus traditional/tape backups.

o Storage — integrated replication versus software replication.

o Array-based cloning used for provisioning.

o Use of SATA for primary and secondary.

We identified the following business or external risks:

 The inability of an organization to find, train, and retain administrators of the NetApp Data ONTAP operating
system as well as other related NetApp products and solutions.

 Revenues are variable, subject to sales and marketing effectiveness and external competition.

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 Customer renewal rates will be variable so we have risk-adjusted annual revenues to reflect a 20% annual attrition
rate (80% renewal rate).

We identified risk mitigation benefits as follows:

 The scalability of NetApp’s solutions means that the incremental storage hardware required to support each new
contract can be purchased “just in time,” reducing the risk of overinvesting in hardware.

 The interviewed service providers reported average favorable annual renewal rates of 70% to 90%.

For this study, Forrester has risk-adjusted revenues by 10% (downward) to take into account the potential uncertainty
of StaaS customers not renewing at a predictable rate.

Financial Summary
Table 12 represents a three-year summary of risk-adjusted revenues, costs, gross profit margin, and gross-profit-margin
percent that our Organization experienced from investing in NetApp solutions for cloud service providers.

Table 12
Revenue, Costs, And Gross Profit Over Three Years — The Organization (Risk-Adjusted Revenue Downward By 10%)


Total StaaS revenue $0 1,041,120 3,149,280 5,602,410 9,792,810

Total costs $1,782,831 $779,210 $1,030,889 $1,089,769 $4,682,699

Gross profit margin -$1,782,831 261,910 2,118,391 4,512,641 5,110,111

Cumulative gross profit margin % N/A -146.1% 14.3% 52.2% 52.2%


Study Conclusions
As the data in this study indicates, an investment in NetApp solutions for cloud service providers has the potential to
result in incremental revenue and significant profits. In addition, the favorable risk-adjusted revenues and gross
profits raise confidence that the investment is likely to succeed, as the risks that may threaten the project have already
been taken into consideration and quantified. In this study, risks adjustments have been modeled conservatively in the
hopes of showing worst-case expectations.

Service providers that are likely to achieve similar results have the following characteristics:

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 Have an appreciation for both the technical and business benefits of NetApp’s unified architecture.

 Seek to market StaaS as a solution (not a technology).

 Are willing to use storage efficiency technologies such as deduplication and thin provisioning.

 Will design StaaS products that take advantage of multitenancy — the ability to host multiple customers on a
shared infrastructure.

 Appreciate the benefits of not having to compete with NetApp for the same business, given that NetApp is not a
cloud service provider.

 Will take advantage of NetApp’s co-marketing and co-selling programs including the fact that NetApp account
managers earn commission by referring business to cloud service provider partners.

For our service provider Organization, investing in NetApp solutions for cloud service providers carried a low to
moderate level of risk and has the potential to incrementally grow revenues with resulting significant profits.

We make no assumptions regarding the effects of investing in NetApp solution at other service providers. This study
examines the potential impact attributable to the six customers that participated in our examination and applies the
common costs and benefits to a representative Organization. The underlying objective of this document is to provide
guidance to decision-makers seeking to identify areas where value can potentially be created based on investing in
NetApp’s solutions for cloud service providers.

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Appendix A: About NetApp Solutions For Cloud Service Providers: Overview
According to NetApp, its solutions for cloud service providers help capture new markets and revenue streams and
accelerate the development and delivery of differentiated and profitable cloud services. To that end, NetApp believes
the following nine areas constitute its core value and should be considered to be key buying criteria for service
providers when evaluating any storage vendor solution in their cloud requests for proposals (RFPs).

Unified Architecture
A flexible architecture that supports many applications, diverse workloads, and changing requirements is highly
advantageous for a service provider seeking to offer a portfolio of services with minimal cost. An architecture that
supports multiple protocols, including NFS, CIFS, iSCSI, Fibre Channel, and FCoE, ensures a flexible foundation to
meet any need. But multiprotocol is just one aspect of a standardized architecture. A unified set of tools and processes
greatly reduces complexity and drives down costs. One architecture allows you to leverage your current infrastructure
for future services to efficiently grow your business.

Scale Up And Scale Out
A storage infrastructure has to be able to scale on the fly as your business grows and your data increases. A storage
architecture should deliver extreme efficiency that increases with scale and remains flexible no matter how big you get.
The ability to scale instantly in multiple dimensions — performance, capacity, and operations — is essential to meeting
service levels and minimizing cost for end users.

Storage Efficiency
Storage efficiency isn’t just a single feature. It’s an approach to building and managing a storage architecture, and it
requires solutions with a combination of capabilities that maximize your operational, organizational, and business
efficiency. Highly efficient solutions enable you to store the most data for the lowest cost; significantly reduce data
center space requirements and power and cooling costs; and complete tasks in less time with fewer people. All of this, of
course, has a positive impact on your bottom line.

Secure Multitenancy
Solutions that provide secure end-to-end multitenancy across applications and data help service providers realize the
full financial benefit of scale, while offering end users the cost benefits of a shared infrastructure with the security of a
dedicated environment.

Integrated Data Protection
Enterprise data protection is a key concern for end users contemplating cloud services. High availability, enterprise-
strength security, disk-based backup and recovery, archive, compliance, and disaster recovery are important options
that can all be monetized by a service provider. Your storage should integrate all of these capabilities for you. It’s
important not only how a solution delivers data protection but also how it automates this key capability. True
integrated data protection enables administrators to “set it and forget it” so that critical business information is
safeguarded no matter what happens or how large you scale.

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Nonstop Operations
Keeping your business running 24x7 without disruption is essential. Behind the scenes, teams that can perform
necessary functions with speed and ease can respond faster to business demands. Capacity and performance expansion,
load balancing, testing, upgrades, and all other IT tasks should be quick, seamless, and completely transparent to end
users.

Service Automation And Analytics
As you move from supporting terabytes to petabytes, automation becomes more and more critical. You need to reduce
the time it takes to perform routine administrative tasks — even as your infrastructure grows — and you need to
manage more terabytes without adding more staff. Policy-based automation and analytics are required to speed
deployment and provide near-real-time monitoring and alerts to safeguard availability and performance guarantees.

Intelligent Caching
Buying lots of fast solid-state storage isn’t always the best way to increase performance. Storage systems that utilize
sophisticated intelligent caching can give you faster performance at a lower cost. A highly optimized approach to
caching helps eliminate the need for separate HDD and SSD storage tiers. Smart solutions with built-in intelligent
caching will help your business reduce both capital and operating expenses while enhancing performance for end users.

Tested Integrations
Storage is just one component within your cloud service. However, choosing a storage platform that has tested
integrations with the leading vendors that comprise other pieces of your cloud service can lower risk and save you time
in deploying your service, while ensuring that you leverage best-of-breed components. Look for a storage vendor that
can show you partnership and integrations with leading cloud vendors like Cisco, VMware, Microsoft, and others.

Appendix B: Total Economic Impact™ Overview
Total Economic Impact is a methodology developed by Forrester Research that enhances a company’s technology
decision-making processes and assists vendors in communicating the value proposition of their products and services
to clients. The TEI methodology helps companies demonstrate, justify, and realize the tangible value of IT initiatives to
both senior management and other key business stakeholders.

The TEI methodology consists of four components to evaluate investment value: benefits, costs, risks, and flexibility.

Benefits
Benefits represent the value delivered to the user organization — IT and/or business units — by the proposed product
or project. Often, product or project justification exercises focus just on IT cost and cost reduction, leaving little room
to analyze the effect of the technology on the entire organization. The TEI methodology and the resulting financial
model place equal weight on the measure of benefits and the measure of costs, allowing for a full examination of the
effect of the technology on the entire organization. Calculation of benefit estimates involves a clear dialogue with the
user organization to understand the specific value that is created. In addition, Forrester also requires that there be a

Page 23


clear line of accountability established between the measurement and justification of benefit estimates after the project
has been completed. This ensures that benefit estimates tie back directly to the bottom line.

Costs
Costs represent the investment necessary to capture the value, or benefits, of the proposed project. IT or the business
units may incur costs in the form of fully burdened labor, subcontractors, or materials. Costs consider all of the
investments and expenses necessary to deliver the proposed value. In addition, the cost category within TEI captures
any incremental costs over the existing environment for ongoing costs associated with the solution. All costs must be
tied to the benefits that are created.

Risk
Risk measures the uncertainty of benefit and cost estimates contained within the investment. Uncertainty is measured
in two ways: 1) the likelihood that the cost and benefit estimates will meet the original projections, and 2) the likelihood
that the estimates will be measured and tracked over time. TEI applies a probability density function known as
“triangular distribution” to the values entered. At minimum, three values are calculated to estimate the underlying
range around each cost and benefit.

Flexibility
Within the TEI methodology, direct benefits represent one part of the investment value. While direct benefits can
typically be the primary way to justify a project, Forrester believes that organizations should be able to measure the
strategic value of an investment. Flexibility represents the value that can be obtained for some future additional
investment building on top of the initial investment already made. For instance, an investment in an enterprisewide
upgrade of an office productivity suite can potentially increase standardization (to increase efficiency) and reduce
licensing costs. However, an embedded collaboration feature may translate to greater worker productivity if activated.
The collaboration can only be used with additional investment in training at some future point in time. However,
having the ability to capture that benefit has a present value that can be estimated. The flexibility component of TEI
captures that value.

Appendix C: About The Project Director
Bob Cormier
Vice President, Principal Consultant
Bob is a vice president and principal consultant for Forrester’s Total Economic Impact™ (TEI)
service. He is a leading expert on deriving business value from technology investments,
specializing in advising clients on the TEI framework — services that help organizations
understand the overall financial value of IT strategies and investments. He serves the following
client role:

 Technology vendor sales enablement professionals. Bob works with these professionals
in their efforts to clearly articulate the unique value proposition of their solutions to prospects and customers
using Forrester’s TEI methodology.

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Bob has authored numerous TEI case studies for Forrester’s vendor clients. He has also delivered his acclaimed
Justifying Technology Investments (JTI) workshop to more than 800 participants representing 400 organizations.

Bob has more than 25 years experience in the IT and consulting industries. Prior to joining Forrester, he held senior-
level positions at two leading eBusiness consulting firms, ZEFER and Cambridge Technology Partners. Bob has
successfully led company efforts to optimize financial, operational, and resource planning activities, incorporating
leading-edge professional service automation (PSA) applications and enterprise resource planning (ERP) systems. He
has also held senior financial management positions at Digital Equipment and Anixter International.

During his career, Bob has consulted with global users and vendors of IT and has been a frequent speaker at
conferences, events, and seminars.

Education
Bob earned an M.B.A. from Bentley University and a B.S. in business from The University of New Hampshire. As an
adjunct professor, he has taught finance and economics courses for more than 10 years at Southern New Hampshire
University and Daniel Webster College.

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The Total Economic Impact of NetApp Solutions for Cloud Service Providers

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