Introduction A TECHNOLOGY COST MODEL FOR SERVER INFRASTRUCTU(2)

Introduction A TECHNOLOGY COST MODEL FOR SERVER INFRASTRUCTURE MANAGEMENT

Next, ABC examines the processes or steps required to complete the business activity. In this example, the steps required to buy or sell stock. The next step in ABC is to identify the resources and measure the utilized capacity of each resource. The stock trade takes two types of resources – the trader, and one or more computers. For this example, we assume a buy and sell transaction are essentially the same. ABC determines that it takes the trader 2-minutes to take and place an order. If there are 8-working hours in a day, that translates into 480 minutes per trader. This means one trader can place a maximum of 240 trades per day at 100% full capacity. Say the trader works 240 days per year, and costs the company $200,000 per year in total compensation. If the rate charged by the trader is $6.00 per trade, then at full 100% capacity, the total revenue potential for this one trader is $345,600 per year. At 50% capacity, the trader brings in $172,800 per year in revenue, at about $100,000 in cost, which represents a profit of $72,800. At this point ABC has effectively developed a cost model for the buying and selling of stock. This model computes the cost per trade for the company (based on the time analysis of this single trader) and finds that the cost per trade is $3.47. Now with this analysis ABC can create a summary report that gives a business manager a great deal of useful information to evaluate costs relative to revenue for each product sold – in this case the buying and selling of stock. It also identifies specific cost drivers, and it provides insight into what cost drivers could be optimized to improve overall profitability of the business. In this example, suppose through the analysis of the steps taken to execute a trade, it is determined that some steps in the process could be eliminated, which reduces the time it takes to place an order by 1 minute. This would shrink the cost per trade down to $1.73!

Along with the value of identifying cost drivers and measuring the cost and profitability margins associated with delivering a product or service, the cost per trade model can also be useful in planning business strategy and growth.

If we can measure resource utilization based on current business volume, we can determine how much additional growth in new business could be satisfied with current resources. Any gap between the planned increase in new business volume, and the available capacity to handle future growth, estimates how much additional capacity is required. So, ABC predicts business cost and profitability associated with business growth. The ABC example above analyzed the activity costs associated with the utilization of just one resource, the stock trader. It did not consider the activity costs related to the trader’s workstation, and other IT resources critical to fulfilling the stock transaction.

A goal of the bank’s pilot project is to produce a cost model capable of doing the same thing demonstrated in the example above, but to do it for company servers. The idea is to apply the basic principles of ABC to the bank’s server infrastructure and derive a cost per transaction for each product, or service offered by each line of business across the bank. This information can then feed up to a larger ABC initiative that will report the costs per transaction for all technology, and non-technology resources.

Pilot Approach

The approach taken to generate a technology cost model is the same basic approach outlined in the example above.

The basic steps are:

1. For each line of business identify a product, or

service.

2. For each product, or service identify the software

application that supports the product.

3. Map the server to the application.

4. Instrument the server for system capacity data

collection. Measure and record server CPU utilization.

5. Convert CPU utilization to CPU run time.

6. Obtain business transaction volume for the

application.

7. Compute CPU cost per transaction.

8. Obtain server hosting charge.

9. Compute $ cost per transaction.

10. Create Server Capacity Utilization Report for

executive management.

Technology Cost Model

ABC maps business activities to processes; then maps processes to resources; and finally maps resources to costs. An important outcome from the ABC process is the derivation of a cost per transaction metric. With this metric, all dollar costs related to a server can be expressed in terms of its utilized and marketable capacity.