It’s a common scenario. To justify new projects, IT leaders apply concepts like ROI and TCO, knowing operational savings will be discounted as soft costs.
But what if your IT director said for every dollar saved in the data center, 60 cents was available for reinvestment? Or, for every 10 percent increase in asset utilization, an additional 13.33 percent in real value could be realized?
Cisco helps customers consider data center investments in terms of capital efficiency, a method for measuring the value of every dollar invested. Often used to analyze the expected versus actual return on capital, capital efficiency helps executives analyze the “effectiveness” of a given investment. Applied to the data center, it clearly demonstrates the real value of IT transformation.
“I jokingly call it a cocktail napkin conversation,” says Brian Clay, business development manager at Cisco. “For most companies, asset utilization is somewhere around 25 percent or less, yet advisory groups will tell you to target 75 percent utilization. Do the math and it shows data center assets are 50 percent underutilized on average.”
Return versus reinvest
Apply the concept of capital efficiency, calculating 25 percent actual utilization over 75 percent targeted utilization, and the result is a 33 percent efficiency rate. “That means for every dollar of data center budget, you are essentially realizing only 33 cents of value,” explains Clay. “There’s 60 cents or more that can be influenced in a more positive way.”
That is, for every investment that helps drive up asset utilization in the data center, the ratio of value to opportunity improves. Initially, savings are generated by smarter architecture spend, but as a data center transformation proceeds, operational changes drive additional savings as well.
Traditional ROI calculations focus on what IT gives back to the business once projects are executed. Capital efficiency is different. It attempts to drive projects forward by focusing on production and reinvested savings. It takes the traditional micro-level, project-by-project view of IT and turns it into a macro view of the data center that includes both infrastructure and operations.
“Initially some people take offense to the suggestion that a significant portion of data center budget is being wasted, but when we explain this notion of return versus reinvest, it really begins to resonate,” Clay says.
For one large healthcare organization in the southern United States, the message is loud and clear. About to embark on a new data center initiative, the health system needed to address three key decision points:
- Foundational architecture
- Method for service delivery
- Feasibility of having a new data center operational from day one
From a business perspective, the principal mandate was to “lower the base cost and spend to save,” says Clay. “They hoped to accomplish that through standardization, consolidation, and architectural integration in the new data center.”
By comparing the health system’s existing data center deployment to a denser architecture that included the Intel® Xeon® processor-based Cisco Unified Computing System™ (Cisco UCS®), Cisco demonstrated that in one year:
- Asset utilization would increase from less than 25 percent to 45 percent, pulling $68 million in real value out of an annual operating budget of $250 million.
- $60 million would be freed to reinvest in other IT initiatives.
The capital efficiency analysis also uncovered real savings on the operational side:
- The cost per node on the existing server platform hovered between $50,000 and $60,000. With the new platform, it’s under $20,000 per node.
- The build cost per row decreased from a maximum of 10 full-time employees in the existing environment to just 2.5 full-time employees with the new environment.
- Operational time savings were also demonstrated due to the dramatic decrease in touch points per server row, from as many as 1700 in the existing architecture to just 36.
“They had a backlog of more than 75 projects that were already funded by the business that IT couldn’t touch because they didn’t have the time. Now they can tackle them,” says Clay.
Thinking in terms of capital efficiency enables IT to be proactive versus reactive. After moving forward with a Cisco UCS® implementation in its new data center, the healthcare organization has freed money, time, and resources to retrofit other data centers as well as deploy orchestration and automation software.
“Every CFO understands the notion of efficient use of capital,” says Clay. “By taking a step back and really looking across their data center with that capital efficiency message in mind, they freed up funds to move ahead without increasing their budget.”