Analysis of cost savings of server virtualization

Analysis of Cost Benefits of Server Virtualization Pessoa

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Analysis of Cost Benefits of Server Virtualization

Short Paper

Prepared by: Glaucio Pessoa, PE, PMP®


Analysis of Cost Benefits of Server Virtualization

By Gláucio T. Pessoa, P.E., PMP®

Executive Summary

Over the past few years, virtualization has gained attention in information systems.

Basically, server virtualization implies the implementation of servers in software.

Virtualization offers the benefits of infrastructure simplification, operational flexibility,

improved resource availability, enhanced availability, and streamlined security and

management. One can translate those five technical benefits into cost savings. This

essay analyzes two case scenarios which use virtualization to yield power consumption

reduction. Based on the data provided, assumptions made, and calculations performed,

the conclusion is that power savings from virtualization might be significant. However,

one might need to justify virtualization investments based on other cost benefits in

addition to savings in power requirements.

Introduction

Over the past few years, virtualization has been one of the biggest buzz words in

information systems. From 2007 through 2009, the investment adoption trend in

virtualization went from 30% to 45%. Moreover, in 2009, 37% of small organizations,

48% of medium organizations, and 47% of large organizations made investments in

virtual data centers (“Storage Virtualization”, 2009).

Claims of cost savings by implementing virtual information systems have been high.

Figure 1 displays the percentage of businesses that claimed a positive ROI due to

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virtualizing storage in 2009. The pie chart indicates that 78% of the analyzed

businesses reported gains.

In this short paper, we will expand on and analyze two possible applications:

replacement of physical servers in a small/medium size office; and consolidation of

equipment in a data center. The essay starts with a brief introduction to the topic and

the presentation of some of the potential benefits of virtualization.

Fundamentals of Virtualization

According to Gilmore (2008), virtualization is the process of consolidating dedicated

hardware for hosts (servers) to share resources thus reducing costs. Basically, this

consolidation consists of transforming hardware into software. One can explain this

transformation as the creation of a group of virtual machines.

Virtual machines are independent servers (computers) which are not physical and

tangible, but instead fully based on software. Virtual machines have the same

functionalities of the latter, but only exist virtually. One needs to set up a physical

server as host to several virtual machines. Each virtual machine behaves exactly like a

physical server, therefore, they interface and interact seamlessly with other physical and

virtual servers.

In a virtual server environment, there is allocation of the resources of the host physical

machine to the virtual server in a dynamic and transparent manner. In this context,

resources are the physical main modules of a computer: memory, disk space, network

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capabilities, etc. One of the perks of virtualization is the fact that each virtual machine

operates as if it had a fixed portion of those resources, even though the resources are

shared in real-time (Gilmore, 2008).

Benefits of Virtualization

Sutherland (2011) describes virtualization as a mature technology with proven results.

He indicates that timing is perfect for companies that wish to adopt this framework due

to the pool of knowledge which is now available and the number of established software

solution providers. Amidst economic uncertainties, firms are progressively adopting

virtualization and reaping the benefits of better efficiency and cost savings.

According to Sutherland (2011), virtualization brings five major advantages:

Infrastructure simplification –Virtualization cuts on the number of

necessary servers and associated infrastructure thus lessening the

expenditures with real-estate, power, and cooling requirements

Improved resource utilization – Virtualization replaces the decades old

paradigm of “one server to one application”. It allows for an ever increasing

ratio of the number of virtual machines per physical host. Resources such as

computing power, memory, disk space, and network interfaces are allocated

to each virtual machine on an “as needed” basis

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Enhanced availability – Mission critical software applications have low

tolerance to downtime. Virtualization allows for whole clusters of virtual

machines to be backup or even moved. Since all operations are performed in

software, there is a reduction in recovery time thus improving business

continuity

Operational flexibility – Virtualization allows firms to rapidly install software

and configure hosts. Since resources are assigned dynamically, responses to

the new demands of the business can be implemented in reasonable

timeframes. As long as there is capacity in the existing infrastructure, there

are no delays associated with ordering and placing new equipment

Streamlined security and management – It is possible to better perform

concomitant configuration, security management, and back up of multiple

hosts, since they are reside as part of the same physical machine

The five points listed above are pluses in their own rights, however, for a

manager they all translate into potential cost savings. Infrastructure simplification

reduces equipment demands, therefore it lowers maintenance, administration,

and personnel costs. Improvements in resource utilization lead to a more efficient

use of resources thus guaranteeing better return on investment for physical

servers. Enhanced availability reduces costs incurred due to downtime plus

improves customer experience, which positively impacts revenues. Operational

flexibility also reduces downtime and cuts down on expansion expenses.

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Simplification of security and management creates the proper condition for

savings since less time is invested in performance monitoring.

At this point one might believe that virtualization is the “Holy grail” of

computing. However, virtualization is not a “silver bullet”, since it is not the

response to all software and hardware challenges and opportunities. Proper

research and planning is necessary to determine if there are truly payoffs to

switching to a virtual environment. Sutherland (2011) defines this as a two stage

process:

Discovery – This is the first step which entails identifying the components

that make up the data center; e.g. servers, switches, network

interconnectivity, etc. After those elements have been classified, one also

needs to conduct a performance analysis to determine current and forecasted

needs

Planning – After one has mapped the physical environment, one is ready to

determine what portions can be virtualized. At this point, managers are ready

to perform a capital budgeting analysis to determine whether or not

virtualizing the data center makes financial sense

The five benefits described above make a strong case for virtualization. However,

truly financial benefits must be realized to justify moving into a virtual environment. The

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next section of this paper will review two case studies that illustrate how reduction in

power requirements can be translated into cost savings.

Virtualization case studies

Case Study 1 – Small/mid-side office with single data closet setup

Guster, Hemminger, and Krzenski (2009) conducted an analysis of the cost reduction

associated with virtualizing a small/mid-size office set up with nine servers with very

specific functionalities. Basically, they portrayed a set up with primary and secondary

servers, one web server, one e-mail server, and five other servers with networking and

security roles. This is a common set up which is similar to what might be employed for

basic daily activities.

For the study, the team implemented both the physical and the virtual setups and

conducted measurements over a span of nine days. Two parameters were logged: the

power requirements for running the servers; and the power requirements for cooling the

servers. The results pointed to an 80% reduction in the power for both operating and

cooling the servers, which in this simple scenario, were translated to $900 in annual

savings (Guster et al., 2009).

Would those savings be sufficient to justify a transition from nine physical servers to

nine virtual servers integrated into one physical machine? To answer that question, one

would need to first incorporate some additional assumptions into the analysis:

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Costs for software licenses would remain the same whether one migrates or not

to the virtual machine configuration

Server software and hardware admin costs would remain the same

Cost for acquiring a new physical server: $12,000.00

Cost to migrate the nine physical servers to a single virtual server: 3 business

days x 8 man-hours x $150/man-hour = $3,600.00

Useful life of server: 10 years

Server will be replaced in year 5

Depreciation schedule for sever: straight-line

Salvage value of server at end of useful life (10 years): $500.00

Sale price of server at the end of 5 years: $7,000.00

Salvage of value of each existing server: $500.00

Tax rate: 34%

Nominal rate of return: 10%

Inflation rate: 3%

In the proposed scenario, there will be incremental cash inflows of $900 from years 1

through 5. There will be a cash inflow of 9 x $250 for the salvage value of the existing

servers. The new server will be salvaged at $6,250 at the end of year 5. Based on the

assumptions above, there will be a cost of $12,000 plus $3,6000 to buy the physical

host and setup the virtual machines. Table 1 is the worksheet of incremental cash flows

for the replacement of the physical server with virtual servers. Please notice that the

calculated net present value (NPV) of the cash flows of the migration to virtual servers is

-$3,713.99 and the projected internal rate of return is -1.88%.

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Let us modify this scenario by assuming that the current nine physical servers will be

replaced with nine new physical machines. In this updated setting, we will assume that

there will be no energy savings since we would not be reducing the number of physical

servers. However, there would be an initial investment of $108,000 (9 x$12,000) since

we would be ordering more hardware. The revenue from selling the machines at the

end of 5 years would be $63,000. Table 2 is the worksheet of incremental cash flows

for installing new physical servers. The calculated NPV and IRR for the revised scenario

are -$50,425.74 and -6.89%, respectively.

Based on the computed NPV and IRR values for both options, we deduct that a

replacement of the physical servers with a virtual environment would significantly

reduce the impact of the initial investment in the NPV. Therefore, all things being equal,

given the opportunity to replace the hardware, virtualization makes more financial sense

in a simple scenario such as this one.

One important point that one must recognize is that in this case study, even though

virtualization was financially advantageous when compared to purchasing new

hardware, it would still yield a negative NPV. Therefore, power savings alone cannot be

the only driver for going with a virtual solution. One must look at the prospect of savings

in other areas such as cost benefits associated with security, flexibility, availability, plus

cost reduction due to better utilizing other resources, e.g. floor space and network

infrastructure. The next case study takes this analysis to the next level as it explores

potential cost savings in a large computing environment.

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Case Study 2– Server consolidation in a data center

Uddin, Rahman, and Alsaqour (2012) propose the use of virtual hosts to consolidate

physical servers in data centers. This approach is based on the fact that servers on

average have poor utilization rates, i.e. they do not fully utilize dedicated resources such

as CPU, memory, disk space, etc. This is exacerbated by the fact that in data centers

the number of servers range from hundreds to thousands.

Koomey (2007) points to a study that indicates that data centers account to 1.2% of

the total electricity consumption in the U.S., or an estimate of a whopping 9,477,000

kW. Brown (2008) mentions a report from the Environment Protection Agency which not

only corroborates those findings, but also indicates that data center energy demands

double every five years. Even though data centers are populated with many individual

and specialized elements such as data storage devices, servers, cooling equipment,

networking hardware, generators, etc. servers are the biggest energy consumers since

they perform most of the processing functions (Koomey, 2008).

The approach proposed by Uddin et al. (2012), calls for categorizing servers based on

three categories:

Innovation servers – Servers used to develop new software

Production servers – Servers that run revenue producing applications

Mission critical servers – Servers with high impact to revenues and/or client

relationships

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In their paper, Uddin et al. (2012) propose the consolidation of servers into virtual

machines using a ratio of 15 to 1 for innovation servers, 10 to 1 for production servers,

and 5 to 1 for mission critical servers. For a data center made of 1,000 servers, this

represents are reduction in 92% in the number of servers, and power consumption

reduction of 150,460 Watts.

To analyze the potential cost benefits of this approach, let us use the same

assumptions stated for Case Study 1, plus the following additional suppositions:

Price per kilowatt-hour: $0.12

Estimated Annual savings: $0.12 x 24 hours x 365 days x 150.460 kW =

$158,163.55

No new servers will be acquired, since existing capacity will be re-utilized

Freed up servers will be turned down; 75% of freed up servers will be sold at the

estimated salvage value of $500

Table 3 shows the worksheet of incremental cash flows for this scenario. Please

notice that based on assumptions provided above, the calculated NPV is $53,602.89,

the estimated IRR is 11.95%, and the profitability index and payback period are 1.39

and 3.61 years, respectively.

Based on the listed computed metrics alone, one might conclude that power savings

from consolidation method being investigated would suffice to increase the value of the

firm. However, if one takes a closer look into Table 3, one verifies that $223,245.00 in

savings came from the sale of the decommissioned servers. Figure 2 represents the

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NPV based on percentage of unused equipment sold. The graph indicates that the

breakeven point is when there is a sale of 57% of the hosts released after consolidation.

Here again, just like in the first case study, we see that although virtualization produces

substantial power savings, those savings alone might not be sufficient to justify

migration to a virtual server environment.

Conclusions

This short paper focused on the cost benefits of server virtualization, and it analyzed

two distinct case scenarios based on two different sizes of data centers. The

approaches to virtualization in both cases were similar, but not the same. The paper

presents calculations based on the data provided and a set of assumptions. In both

scenarios, it has been shown that virtualization can potentially produce savings in power

thus reducing operating costs. However, the computations also infer that cost savings

from power consumption diminution alone might not justify investments in virtualization.

Firms that plan to invest in virtual data centers must also look into other benefits such

as sales of unused equipment after consolidation to augment the financial value from

virtualization projects.

To further expand the work on this topic, one would have to refine the case scenarios

to include other potential sources of savings, such as savings associated with better

utilizing networking resources and physical space, plus cost decreases from

streamlining administration and security functions. Other possible subjects for review

would be cost benefits of desktop virtualization and virtualization in mobile devices; i.e.

smartphones and tablets.

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References

Brown, R. (2008). Report to congress on server and data center energy efficiency.

Public law. pp. 109-431.

Gilmore, A. (2008, November). Virtualization 2.0. Certification Magazine, pp. 42-43.

Guster, D., Hemminger, C., & Krzenski, S. (2009). Using Virtuzation to Reduce Data

Center Infrastructure and Promote Green Computing, International Journal of Business

Research, 9(6), pp. 133-140.

Koomey, J. G. (2007). Estimating total power consumption by servers in the US and the

world. Retrieved from High-Performance Building for High-Tech Industries website:

http://hightech.lbl.gov/documents/data_centers/svrpwrusecompletefinal.pdf

Koomey, J. G. (2008). Worldwide electricity used in data centers. Environmental

Research Letters, 3. pp. 034008-034015. doi:10.1088/1748-9326/3/3/034008

Storage Virtualization Shows Promise, but Many on Fence. (2009, December).

Computer Economics, 31(12), pp. 1-9.

Sutherland, C. (2011). Benefits of Server Virtualization, Banking New York, 20, pp. 24-

30.

Uddin, M., Rahman, A. A., & Alsaqour, R. (2012), Server Virtualization: Building Energy

Efficient and High Performance Data Centers to Save Total Cost of Ownership.

International Review on Modelling and Simulations, 5(6). pp. 2618-2626.

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Appendix A

Tables and figures

Figure 1. Percentage of virtualization adopters who report positive, break-even, and

negative returns on investment (ROI). Adapted from “Storage Virtualization Shows

Promise, but Many on Fence”. (2009, December). Computer Economics, 31(12), pp. 1-

9.Copyright 2009 by Computer Economics, Inc.

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0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100

($200,000)

($150,000)

($100,000)

($50,000)

$0

$50,000

$100,000

$150,000 NPV vs. Percentage of Servers Sold

NPV

Figure 2. Plot of the net present value (NPV) as a function of the percentage of freed up

servers being sold after consolidation.

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Table 1. Worksheet of incremental Cash Flows for implementing the nine basic virtual

servers for a small/medium size business

DataPurchase Price of server $12,000.00 Setup cost of virtual machines $3,600.00Useful life of server 10 years Server will be replaced in 5 yearsSale price of server in 5 years $7,000.00 Salvage value of each existing server $500.00Nominal rate of return 10.0% Inflation rate 3.0%Tax rate 34.0% Real rate of return 6.8%

Investments Year 0 Year 1 Year 2 Year 3 Year 4 Year 51 Acquisition of new server ($12,000.00) $6,745.002 Accumulated depreciation $1,150.00 $2,300.00 $3,450.00 $4,600.00 $5,750.003 Adjusted basis of machine after depreciation $10,850.00 $9,700.00 $8,550.00 $7,400.00 $6,250.004 Virtual machine setup cost ($3,600.00)

Income5 Revenues from sale of existing servers $4,500.006 Savings in power consumption $900.00 $900.00 $900.00 $900.00 $900.007 Depreciation ($1,150.00) ($1,150.00) ($1,150.00) ($1,150.00) ($1,150.00)8 Income before taxes $4,500.00 ($250.00) ($250.00) ($250.00) ($250.00) ($250.00)9 Tax at 34% ($1,530.00) $85.00 $85.00 $85.00 $85.00 $85.0010 Net income $2,970.00 ($165.00) ($165.00) ($165.00) ($165.00) ($165.00)

Incremental cash flows11 Savings in operating costs $900.00 $900.00 $900.00 $900.00 $900.0012 Sales revenue $4,500.0013 Taxes ($1,530.00) $85.00 $85.00 $85.00 $85.00 $85.0014 Cash flows from operations (lines 11 + 12 +13) $2,970.00 $985.00 $985.00 $985.00 $985.00 $985.0015 Cash flows investments(lines 1 + 4) ($15,600.00) $0.00 $0.00 $0.00 $0.00 $6,745.0016 Total incremental cash flows of project ($12,630.00) $985.00 $985.00 $985.00 $985.00 $7,730.00

NPV of project ($3,713.99) IRR of project -1.88%

Note: NPV calculations are based on the real rate of return. Revenues from the sale of the server in year

5 are based on sale price minus taxes on the difference between sales price and salvage value.

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Table 2. Worksheet of incremental Cash Flows for implementing the nine basic physical

servers for a small/medium size business

DataPurchase Price per server $12,000.00 Setup cost of physical machines $3,600.00Useful life of servers 10 years Servers will be replaced in 5 yearsSale price per server in 5 years $7,000.00 Salvage value of each existing server $500.00Nominal rate of return 10.0% Inflation rate 3.0%Tax rate 34.0% Real rate of return 6.8%

Investments Year 0 Year 1 Year 2 Year 3 Year 4 Year 51 Acquisition of new servers ($108,000.00) $60,705.002 Accumulated depreciation $10,350.00 $20,700.00 $31,050.00 $41,400.00 $51,750.003 Adjusted basis of machine after depreciation $97,650.00 $87,300.00 $76,950.00 $66,600.00 $56,250.004 Virtual machine setup cost ($3,600.00)

Income5 Revenues from sale of existing servers $4,500.006 Savings in power consumption $0.00 $0.00 $0.00 $0.00 $0.007 Depreciation ($10,350.00) ($10,350.00) ($10,350.00) ($10,350.00) ($10,350.00)8 Income before taxes $4,500.00 ($10,350.00) ($10,350.00) ($10,350.00) ($10,350.00) ($10,350.00)9 Tax at 34% ($1,530.00) $3,519.00 $3,519.00 $3,519.00 $3,519.00 $3,519.0010 Net income $2,970.00 ($6,831.00) ($6,831.00) ($6,831.00) ($6,831.00) ($6,831.00)

Incremental cash flows11 Savings in operating costs $0.00 $0.00 $0.00 $0.00 $0.0012 Sales revenue $4,500.0013 Taxes ($1,530.00) $3,519.00 $3,519.00 $3,519.00 $3,519.00 $3,519.0014 Cash flows from operations (lines 11 + 12 +13) $2,970.00 $3,519.00 $3,519.00 $3,519.00 $3,519.00 $3,519.00

15

Cash flows frominvestments(lines 1 + 4) ($111,600.00) $0.00 $0.00 $0.00 $0.00 $60,705.00

16 Total incremental cash flows of project ($108,630.00) $3,519.00 $3,519.00 $3,519.00 $3,519.00 $64,224.00

NPV of project ($50,425.74) IRR of project -6.89%

Note: NPV calculations are based on the real rate of return. Revenues from the sale of the servers in year

5 are based on sale price minus taxes on the difference between sales price and salvage value.

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Table 3. Worksheet of incremental Cash Flows for consolidating 92% of the capacity in a data

center with 1,000 servers

Data

Set up cost per server $600.00 Total number of servers (virtual & Physical) 1000Nominal rate of return 10.0% Inflation rate 3.0%Tax rate 34.0% Real rate of return 6.8%Number of servers to be sold 677 Salvage price per physical server 500.00$ Estimated annual savings $158,163.55

Investments Year 0 Year 1 Year 2 Year 3 Year 4 Year 51 Total server set up cost ($600,000.00)

Income2 Revenues from the sale of the freed up servers $338,250.003 Savings in power consumption $158,163.55 $158,163.55 $158,163.55 $158,163.55 $158,163.554 Income before taxes $338,250.00 $158,163.55 $158,163.55 $158,163.55 $158,163.55 $158,163.555 Tax at 34% ($115,005.00) ($53,775.61) ($53,775.61) ($53,775.61) ($53,775.61) ($53,775.61)6 Net income $223,245.00 $104,387.94 $104,387.94 $104,387.94 $104,387.94 $104,387.94

Incremental cash flows7 Revenues from the sale of the freed up servers $338,250.008 Savings in operating costs $158,163.55 $158,163.55 $158,163.55 $158,163.55 $158,163.559 Server setup cost ($600,000.00)

10 Taxes ($115,005.00) ($53,775.61) ($53,775.61) ($53,775.61) ($53,775.61) ($53,775.61)11 Cash flows from operations (lines 7 + 9 + 10) $223,245.00 $104,387.94 $104,387.94 $104,387.94 $104,387.94 $104,387.9412 Cash flows from investments(line 8) ($600,000.00)13 Total incremental cash flows of project ($376,755.00) $104,387.94 $104,387.94 $104,387.94 $104,387.94 $104,387.94

NPV of project $53,602.89 IRR of project 11.95%Profitability Index 1.39 Payback period 3.61 Years

Note: NPV calculations are based on the real rate of return.

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Analysis of cost savings of server virtualization

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