Calculating Virtualization and Cloud Costs: 4 Approaches

For IT departments wanting to do chargebacks or cost-justification, figuring virtualization and cloud services ROI is tricky, at best. Experts outline four methods you can use to break down costs and returns.

By Kevin Fogarty
Thu, May 19, 2011

CIO — Until recently, almost no IT industry vendor or analyst questioned the assumption that nearly all kinds of virtualization deliver quick, significant cost savings compared to computing only in the physical world.

Server virtualization, in particular, creates such a quick payoff during the early stages of a P2V migration that it often gets a pass on strict ROI/cost- justification as part of the approval process, according to Ian Song, research analyst in the System and Virtualization Software group at IDC. "People got a really good impression from server virtualization because the concept is simple and the payback is within something like six months because you can put four servers or more into one physical box and save the cost of all that hardware" he says. "Desktop virtualization, especially, but cloud and streaming apps and other models all tend to suffer by comparison."

Higher-than-expected costs, or lower returns, are major reasons for VM-stall — the slowing or stoppage in large virtual-server migrations, according to James Staten, principal analyst at Forrester Research (FORR).

Some cost surprises come from unrealistic expectations, some from the failure to adapt IT organizations or budgets to take greatest advantage of the new technology, Staten says.

But some suprises also come from the tendency of even financially savvy top IT managers to avoid reporting specific costs of virtualization or cloud projects to their bosses, according to a study funded by systems-automation vendor Apptio for the Worldwide Executive Council.

The study found that 64 percent of IT managers believe detailed tracking and analysis of virtualization costs will be important this year and 20 percent thought it would be critical.

However, 48 percent of respondents say they report the cost/benefit of cloud or virtualization projects as a single lump sum — the cost. Twenty-five percent track the cost, but say their numbers aren't accurate enough to use for budgeting or audits. Twenty percent don't report cloud or virtualization spending as separate items. Ten percent don't track the costs at all.

Eighty percent said more detailed reporting would be more important this year.

The biggest problem seems to be that most IT managers just don't know how they should measure or report the results of virtualization projects, Staten says.

They're able to get away with that because so few companies use chargeback to track IT spending by particular departments, let alone chargeback specifically for cloud or virtualization, according to Galen Schreck, vice president and principal analyst at Forrester.

Some are using "showback" — the same thing as chargeback except IT only reports what the cost of a business unit's virtual-IT use would have been, without actually charging for it.

Even given the willingness to do solid financial analyses, there is some debate about how, specifically, to charge for computing services abstracted from the hardware, storage and networks.

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