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.

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There are four basic approaches, according to analyses and recommendations from Apptio, by Andi Mann, former analyst at Enterprise Management Associates, who is currently VP of virtualization product marketing at CA Technologies, and by Gerod Carfantan, a solution development manager at VMware who blogs about cost and performance analysis at

1. Activity-based costing: This is essentially consumption-based costing, in which total IT costs are divided according to the volume of transactions, number of servers, number of users or other standard measures of the volume of IT's work as consumed by a particular business unit.

This method works if the analysis and tracking is clear even in a virtualized environment and there is a way to account for unused capacity. What business unit pays for virtual machines dedicated to applications that no one seems to be using? Pure cost-per-minute costing is attractive from an external service provider, but is only possible because other customers pay for that capacity when you're not using it.

2. Tiered pricing: Branch offices that don't need huge storage, high bandwidth or additional support could pay a lower "base rate" than larger, more resource-intensive business units.

Those that handle most of their own support, can provision and manage their own servers and manage other tasks that would otherwise fall to IT might enjoy rebates or discounts on the base cost.

3. Service costs vs infrastructure costs: One way to account for unused capacity is to separate "base" costs like WAN bandwidth or data- center real estate from the applications, network-access or other services a business unit uses. Base cost to the business unit would remain relatively stable, while service costs would vary according to consumption.

Virtual server density — the cost of all the infrastructure required to operate the virtual infrastructure — licenses, servers, storage, bandwidth, IT salaries, real estate, utilities, etc. — can be totaled and divided according to the number of virtual servers a business unit requires.

Or, costs can be divided according to the requirements of the application; all the same elements go into it as into virtual-server density calculations, but costs are divided according to the resources required by a specific application. Costs to a business unit are determined according to whether it is the only one using that application, or according to its proportional use compared to other business units.

4. Weighting: Direct or indirect weighting is a way of dividing costs according to an external calculation of the demands from a particular business unit. This can involve calculating a department's IT cost according to the percentage of the company's total operating budget required, for example, or total headcount.

Which method is right for you? The approach that works for a specific company will vary according to its particular culture and accounting structures, Staten says.

Getting the costs straight is more than just an accounting game, however.

Until business units know what IT resources they're using and have the ability to change usage based on their own needs, they won't see nearly the direct, tangible benefit of the flexible capacity of either virtualization or cloud computing, according to Gary Chen, research analyst covering server virtualization at IDC.

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Copyright © 2011 IDG Communications, Inc.

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