How to calculate ROI and TCO for virtualization projects

Finding out how to calculate ROI and TCO can be a challenge with virtualization projects. Depend more on your ROI calculations and less on vendors' virtualization ROI calculators.

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Figuring out how to calculate ROI and TCO is one of the biggest challenges of virtualization projects.

Technology vendors, particularly in the virtualization arena, provide ROI calculators that supposedly help with purchase decisions. But a virtualization ROI calculator has limited utility.

"The vendors want you to look at power consumption, heating and cooling, and the data center footprint," said Eric Perkins, chief technology officer at Cyberklix, a security and networking tool provider in Chicago. "They can't put enough variables in their calculators to fit everybody."

More on how to calculate ROI

Instead, when figuring out how to calculate ROI, the suggested tactic is to take a top-down approach. Start with the biggest and most important factors and then systematically refining the model for your own organization based on individual circumstances.

The sum of these factors, along with other factors that might be more appropriate for individual businesses, represents the total cost of ownership (TCO) for the new virtual server deployment. Time is always a vital consideration for a TCO and ROI calculation, and some organizations will perform a short-term and long-term ROI calculation for a better sense of time-related costs.

How to calculate ROI over time

For example, virtualization costs like service and maintenance can be more significant over longer timeframes.

Beyond that, it's usually time for a technology refresh anyway. If you re-calculate the costs for a comparable bare-iron infrastructure, the difference between the bare-iron and virtualized costs should represent the total savings. Now divide the savings into the total for the new virtualized deployment. That should yield a ballpark return on investment (ROI).

ROI is not a one-time exercise. Many organizations continue to refine their ROI calculation model for virtualization projects and recalculate the results as their model matures.

"You still want to update it," said Gary Chen, research manager for enterprise virtualization software at IDC. "Generally people don't virtualize everything at once, so the learning experience is going to be useful for the next project."

So how much ROI should you look for? Individual company results vary, but Perkins cited an ROI of 2.5 years for one large virtualization project and one year for another medium-sized client.

Chen reports that basic server virtualization projects, which are really about server consolidation, pay for themselves in an average of 6.8 months, and advanced deployments, with features like disaster recovery, can recover their costs in as little as 4.3 months. Chen said basic server virtualization projects yield 427% ROI over three years, while advanced deployments can return a 769% ROI over three years.

Those figures may seem impressive, but experts underscore the importance of features and capabilities rather than focusing solely on how to calculate ROI.

ROI calculation trends in virtualization projects

Changes are coming in both hardware and software that will have an impact on TCO/ROI calculation models. For example, as more processor cores and memory are added into increasingly power-conscious systems, consolidation benefits will gain ground.

Processors from Intel and AMD already include technologies that optimize virtualization, but experts also see a move to include hypervisor capabilities on processors as well, further boosting server performance and consolidation. Perkins expects solid-state drive technology to find a greater role in high-performance virtualization projects.

Software is also changing. With server virtualization now considered a reliable technology, organizations should seek better licensing deals and more value in management tools.

"As virtualization becomes the norm, we're seeing software vendors shift in licensing. I think you'll see licensing costs altered," Perkins said. "The real power is coming from the tools an organization uses to manage these environments and the ease of managing them."

Ultimately, the need for ROI calculations doesn't really change. Every business needs some reasonable justification for investments in infrastructure. But the use of server virtualization is evolving and expanding quickly, which, in turn, is affecting the factors in an ROI calculation model -- as well as the best practices for how to calculate ROI.

Virtualization ROI guide

About the author
Stephen J. Bigelow, a senior technology writer at TechTarget, has more than 15 years of technical writing experience in the technology industry. He has written hundreds of articles and more than 15 feature books on computer troubleshooting, including Bigelow's PC Hardware Desk Reference and Bigelow's PC Hardware Annoyances. Contact him at sbigelow@techtarget.com.

This was first published in March 2010

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