Analyze the Financials
When evaluating RFP responses for selection, the financial or cost proposal should not be used as the primary decision-making criterion, but at a minimum you should conduct an analysis of the financial proposal to assess the following:
Feasibility for the vendor to actually provide the requested services
At the cost provided by the vendor, can the company actually provide the services that you requested? For example, if the vendor bids $1 million and you know that when you use the AWS TCO calculator, it will actually cost $2 million just to provide the AWS portion of the RFP, that should be a sign of a problem.
Is the cost for the services within your organization’s budget?
Are there any costs missing from the proposal that were required by the RFP?
For example, if the bid contains only the AWS costs and does not include the migration professional services costs, then you should disqualify the proposal.
In evaluating the financial proposal, it may help to use criteria such as the following:
Define a total number of possible points for the financial proposal
Give the lowest bidder the total number of possible points for the financial proposal
Prorate the points for all other bidders based on how the cost compares to the lowest bidder
For example, if the lowest bidder is $1 million and the total number of possible points is 100, the lowest bidder would get 100 points, and a bidder with 50% higher cost would only get 50 points (100 times 50%).
Analysis of Costs and Benefits of Cloud Computing
by Albana Madhi (Kacollja), Gjergji Shqau, and Aldi LekajAbstract: This article incorporates a theoretical and practical approach to cost-benefit analysis to help company managers to decide whether to adopt cloud computing. Cost-benefit analysis is divided into six distinct sections to determine what costs and benefits are economically significant for the case study analyzed.Based on the allocation sections, TEI (total economic impact) is applied. This methodology was chosen because it gives a general view of the impact and benefits in information technology to cloud computing adoption not only through the analysis of costs and benefits but also giving appropriate weight to existing information technology resources.The article deals with analysis, forecasts, and implementation of cloud computing, showing financial benefits acquired from “green IT” as a consequence from this technology. Through a detailed analysis of the cloud computing phenomenon and its connection with green IT, this article conducts a cost-benefit analysis as a case study using an Internet and communications services company. The aim is to show the potential benefits of the transition to cloud computing, benefits expressed in increased efficiency of the use of technological resources, or even increased environmental benefits.1. Approach and Methodology
Specifically, we followed these steps:
Interviewed marketing staff, sales and product managers, human resources managers.
Interviewed 13 PRIMO Communications engineers working in various areas of the organization.
Built an organization model based on features extracted from the interviews.
Built a financial model using the TEI method. The financial model was populated with data about the costs and benefits that emerged after interviews.
Following the methodology ,we analyzed four essential elements:
cost
benefits to the entire organization
strategic opportunities for flexibility
risk
Since large undertakings have a sophisticated investment analysis, particularly with regard to IT, TEI methodology provides a picture of the whole economic impact.2. Purpose of This Article
The project examines what will happen from the cost-benefit point of view in the case of transition services for PRIMO Communications from on-site compared with use of Amazon cloud services (AWS, Amazon Web Services) for the data center.3. Important Information
We have built a general picture for the total economic impact (TIE) of this change from an on-site data center to Amazon cloud service. Our hypothesis is that benefits of the shift to cloud computing data center will reduce the total operational cost. Many of the benefits of this transition are not easily translated into numerical values.However, there are three main areas where operational costs will undergo reduction:
cost savings of hardware devices
savings from energy consumption based on the loan of equipment to AWS
savings in staff costs
Engineering staff productivity will increase due to higher efficiency of systems and time management. The value and quality of products and services offered will generate increased consumer satisfaction.Although the results of cost-benefit analysis were positive, environmental benefits are difficult to define and to determine if they play a decisive role in the choice of cloud computing. This relates to the fact that many of the biggest providers of cloud computing build huge data centers and use energy in order to increase their effectiveness. They do not take into account that they are destroying renewable energy. Secondly, the current legislation in force, including the developed countries of the most experienced in this field, do not give priority to environmental protection.4. Project Description
A cost-benefit analysis in cloud computing transition was done for the company PRIMO Communications. The project analyzes the positive sides but also the risks if the company uses the services offered by Amazon.PRIMO Communications offers a package of services in Internet, telephone, and television. Since the number of users of these services is always growing, there is a constant need for capacity to offer quality and consistency.5. Action Plan
The action plan for the transition to the cloud is organized as follows.
Analyses will be supported on Amazon Web Services (AWS).
Source for the transition to the cloud will be built on VPC (Virtual Private Cloud Amazon).
IT staff will create a template Amazon Machine Image (AMI) for operating systems currently in use (middleware, libraries, relevant configuration data).
6. Benefits of Cloud Technology
The main economic benefit of technology cloud comes from the type of payment. This is a kind of payment, based on use, usually known as the conversion of capital costs (CAPEX) to operating costs (OPEX). The payment model we use differs from the usual rent because the latter is a charge made for a certain period of use of computer resources in this case, even though they cannot be used at this time. The payment model we use is completely independent of the period of use but appears only in case of use of those resources.7. Financial Benefits
Buying a computer or an application capacity (SaaS) is delivered as a cloud service technology known as operating expense (OPEX) that may increase or decrease depending on the request during an interval of time. The same solution in a data center in an organization is a sunk cost known as capital cost (CAPEX) and presented in the balance sheet as assets and amortized over the longer term.Transformation of capital costs in operating expenses makes financial decisions easier and less riskier. This is summarized in the table below.Comparison of CAPEX and OPEXFactorTraditional TechnologyCloud Technology1-Type of expenseCapital expense (CAPEX)
Operational expenses (OPEX)Just (OPEX)2-The flow of cash0Payments for offered service3-IncomeMaintenance expenses
Amortization of capital expendituresMaintenance payments4-BalanceLong-term assets
1-Hardware
2-SoftwareNot recorded in the balance
1-Hardware
2-Software8. Cloud Computing Costs
A comparison between cloud computing and a data center is difficult because of the hidden and indirect costs that appear in a data center firm (in-house).There are many arguments and counterarguments regarding the total cost (TCO) between the types of cloud computing technology and in-house because the costs are specific and depend on the type of business.9. Financial Analysis
Cash flows that are used in financial analysis start with an initial investment column reflecting costs incurred at time 0 or at the beginning of year 1. These costs are not discounted. Calculations for the present value (PV) were performed for each total cost and benefit. Present value calculations that are shown in the table are summarized and include the amount of inflows and outflows, with a discount rate every year. The table below lists the main assumptions used for measurements.The table provides approximate estimates of rates of annual use of data center processing nodes during the year. A use of 100% means that the server is using 8736 hours each year. This was measured by 24 hours * 7 days * 52 weeks. Some types cannot be shared servers in use, which means that their use is only intended for a single user. These are mainly small computers. Shared servers can be used by several users at the same time.The Percentages of Annual Use of Processing NodesRefType of ServersTypical TasksTypical Usage ModelNumber of Hours Per YearAnnual Percentage of UseA11SmallFor the daily office tasks8 hrs * 5 days * 47 weeks188021%A12SmallFor software testing purposes8 hrs * 5 days * 47 weeks188021%A13MediumFor different customers24 hrs * 7 days * 52 weeks8736100%A14BigFor larger software development, documentation10 hrs * 5 days * 47 weeks235027%A15Very bigServers for the main services in the company24 hrs * 7 days * 52 weeks8736100%10. Costs for the Staff
When companies own and operate servers in their offices, they need to hire full-time personnel to select, acquire, set, support, and manage them. Server administrators perform a variety of tasks, including updating the server, returns, movement, incident management and problem management, and monitoring of salespeople. The table below gives a forecast of annual salary for this staff, which will consist of an IT manager, two system administrators, and four developers.Annual Cost of Staff SalariesRefMeasurement UnitBasic CostNumberDecreasing rateSalaryB4IT manager’s salary140,0001100%140,000B5System administrator’s salary110,0002100%220,000B6Developer’s salary70,000420%56,000Total416,00011. The Costs of the Data Center
The data center consists of only one main equipment room. We only included cost estimates that were visible and important. Ancillary costs such as architecture costs, cabling, real estate companies, the building management, security, etc., are not very easily seen, and maintaining and operating an infrastructure includes the cost other than those listed below, but we will assume that the following proposed assessment is reliable enough.Number of ComputersType of ServerHardware SpecificationsEquivalent to AWS SpecificationsNumber of ComputersSmall serverPlatform 32-bit, 2 GHz CPU, 2 GB memory , 160 GB discSmall instance 1.7 GB of memory, 1 EC2 compute unit (1 virtual core with 1 EC2 compute unit), 160 GB storage, 32-bit platform3Medium serverPlatform 64-bit, 1 quad-core2 GHz CPU, memory 8 G RAM,500 GB discLarge instance 7.5 GB of memory, 4 EC2 compute units (2 virtual cores with 2 EC2 compute units each), 850 GB storage, 64-bit platform5Big serverPlatform 64-bit, 2 quad-core2 GHz CPUs, Memory 15 GB ,850 GB discExtra-large instance 15 GB of memory, 8 EC2 compute units (4 virtual cores with 2 EC2 compute units each), 1690 GB storage, 64-bit platform6Huge serverPlatform 64-bit, 4 quad-core2 GHz CPUs, Memory 32 GB,1 TB diskHigh-memory double extra-large instance 34.2 GB of memory, 13 EC2 compute units (4 virtual cores), 850 GB of local instance storage, 64-bit platform4Total18Cost of hardware is based on the total cost of acquisition, operation, and substrate that comprises the data center servers, network equipment, and hardware maintenance. Costs that include operating system software and application licenses and lease of the building costs are not calculated in the financial analysis. This is because these costs are unchanged in terms of passing the assets of the company to the Amazon cloud. When calculating the financial impact of a data center, the cost of replacing computers that is included in depreciation costs should be considered. As such, the initial cost of buying the hardware will be amortized over the useful life of the asset. In this case, it is about three years (A4). Therefore, using a fair depreciation, expenses for servers are minus the initial purchase at the end of life of dividing this value received for life. For simplicity, we will assume a value equal to zero rescue. Consequently, the annual cost of servers is calculated as follows:Annual server cost = (total number of servers * by cost per server) / A4Network Equipment CostServers allow network devices to connect to each other and to the Internet. Network devices include firewalls, routers, switches, and intrusion detection systems and other equipment. We have assumed costs for equipment equal to 20 percent (A5) of the original value of the cost of amortizing the right server for three years of useful life (A4). The annual costs of network equipment is calculated by:Annual cost of network equipment = (total cost per server * by server * A5) / A412. Equipment Maintenance Cost
Servers and network devices are typically purchased with an annual contract maintenance plan for equipment repair in case of hardware defects. The annual maintenance cost is expressed as a percentage of the original purchase cost of servers and network devices, approximately 10 percent (A6). The annual cost of maintenance for servers and network equipment is calculated as follows:
Annual cost of hardware maintenance (hardware annual maintenance cost) = annual cost of maintenance of the servers (annual maintenance cost of servers) + annual maintenance cost of the network equipment (annual maintenance cost of network hardware), where:
Annual cost of maintenance of servers = total number of servers * cost per server * A6
Annual cost of maintenance of network equipment = total cost per server * server * A5 * A6
Servers Operating Costs and Energy Costs for Cooling the ServersData center servers not only consume energy, but also transform energy into heat that must be removed from to avoid overheating equipment. A study carried out by the Green Grid estimated that most data center PUE ratio (power usage effectiveness) have a value between 1.3 and 3.0. In this calculation, we assumed a PUE of 2.5 (A3) as a conservative value. The reality may be even worse than this value because few measures are taken for increasing efficiency. The following equation was used to calculate the full power of estimating the energy demand of server multiplying it with PUE. Total energy use is multiplied by the average cost of electricity per kW/hour to assess the total annual cost of power.
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