How to create a TCO model for a data center
Include all of these steps for a thorough Total Cost of Ownership model
A data center is a long-term asset. It is important to know and understand all the different costs that can be associated with owning and operating one. Oftentimes, a Total Cost of Ownership Model is solely comprised of a simple spreadsheet comparing price and cost differentials. This method, however, can make it easy to ignore the bigger picture and fall prey to a decision based on upfront costs. A well-crafted Total Cost of Ownership Model and Analysis Report can help the data center see the bigger picture and make the best choice for the data center in the long term.
A Total Cost of Ownership (TCO) Model and Analysis Report can be a useful tool tailored to suit your data center’s type, function, and other unique details in order to determine TCO, make an accurate comparison, understand the pros and cons, and enable an informed decision. The report can be used to compare different data center designs or different component and/or equipment choices. Due to the expensive and labor-intensive nature of owning and operating a data center, this in-depth analysis is often very necessary to avoid costly mistakes and to make the best choices for the continuing viability of the data center. A well-made TCO and Analysis Report lays out a comparison clearly and accurately, allowing non-technical executives to quickly ascertain the value of each and choose which option makes the most sense. Below are important elements you should consider including in your TCO model and analysis, although the order, detail, and length of the sections can be adjusted to suit your company and its intention for the model and the analysis.
FIRST STEP: BEFORE YOU BEGIN
First things first, compile all costs associated with your analysis. This includes capital expenditure (CAPEX) and operational expense (OPEX). CAPEX is composed of the hard cost of land, construction, and equipment, as well as soft costs such as engineering, design, equipment lifecycle, and replacement costs, among others. OPEX is composed of costs like power consumption and other utilities, preventative and predictive maintenance, connectivity, staffing, etc. Often mistakes and/or miscalculations are made when determining the costs of preventive/predictive maintenance vs. corrective maintenance, which can significantly impact either OPEX or CAPEX. Many studies have found that the costs of corrective maintenance can be up to ten times the cost of a comprehensive preventive/predictive maintenance program over the lifecycle of a data center and its equipment. Corrective maintenance can be expensive and not only impacts reliability and performance, but also CAPEX costs negatively.
Both CAPEX and OPEX will vary depending on the type of data center and whether it is a cost center or a profit center. Financials for an enterprise data center or single owner and/or single occupant data center will be vastly different from a multi-tenant data center (MTDC) or data center service provider. Once you’ve accumulated all the necessary data, you may begin crafting your model.
SECOND STEP: THE OVERVIEW
Briefly introduce your TCO model and analysis. Give any relevant background information, possibly including some company history and/or the current state of the company. Present the problem that the model hopes to solve and name the options that will be compared in the document.
THIRD STEP: THE GLOSSARY OF TERMS AND ACRONYMS
Most technical documents include a host of complicated or esoteric terms, and a good number of acronyms. While perhaps many of the technical people within your data center would easily recognize most, if not all of them, be sure to keep your wider audience in mind. Layout and define each of the terms in this section as well as how they will be written or referred to going forward in the text.
FOURTH STEP: THE BACKGROUND
As the old adage goes, it’s important to know where you’ve been in order to know where you’re going. Chronologically describe previous solution attempts in this section, including the research performed and the major challenges and obstacles that resulted or were predicted. Give the reasons for the ultimate rejection of each of these proposed solutions. Name any other possible solutions your company has looked into that have failed to satisfactorily solve the problem at hand. Based on the lessons learned from these previous attempts, list the requirements for the new solution in order for it to be effective. After discussing any pertinent background information, detail the steps made towards the creation of the first design or solution that will be analyzed in the TCO model and analysis. Summarize the solution and estimate its results. Repeat for the second solution and so on.
FIFTH STEP:THE SCOPE OF THE MODEL
This is among the most important sections of the document. Here, explain the purpose and intention of the model and analysis. Define what you will be addressing specifically, including the comparison of different designs and the projected yields of each or the impact of certain equipment choices. Develop a list of selection criteria for comparison of the options such as reliability, performance, efficiency, maintainability, and lastly, price. Rank them according to the organization’s long-term goals and objectives. This is the point at which the “best” options can be separated from “price alone” decisions.
Give pertinent information on the proposed solutions. It is helpful to readers and skimmers alike to consider incorporating a clearly formatted statement that sums up the model’s comparison in just a sentence or two.
SIXTH STEP: THE DEMONSTRATION OF NUMERICAL FINDINGS
When it comes to weighing cost options, display your CAPEX and OPEX totals for each solution in a summarized spreadsheet. To some it may seem like overkill, but it’s always good to show your work. The calculations will give your conclusions a solid foundation to stand on.
SEVENTH STEP: THE PROS AND CONS ANALYSIS
Again, this might seem overly thorough, but a pros and cons analysis can be very useful for a reader needing a speedy summary of the TCO model and analysis comparison. For all options, make spreadsheets from each perspective: financial, ranked selection criteria, operations, sales, and marketing (if applicable). Broken down into bullet points, the pros and cons are quickly read and understood, and the columns themselves form a visual representation of which option is the apparent winner based on which options have the longer pros columns and the shorter cons columns. In a glance, the reader can compare the solutions or designs and see which is more beneficial from all relevant perspectives and selection criteria.
EIGHTH STEP: THE SUMMARY AND CONCLUSIONS
The Summary and Conclusions section is another important component to include in your TCO Model and Analysis Report, as it is the most likely to be read by busy executives who may be prone to skim the document. Out of the options being compared, conclude which option is more beneficial and explain why. Detail each piece of evidence that proves that your chosen option is superior from a financial perspective, selection criteria, operational perspective, and a sales/marketing perspective, if applicable. At the end, summarize your findings in a tidy, straightforward manner.
While you should tailor your TCO model and analysis to fit your data center’s needs and model’s intentions, a TCO Model and Analysis Report should contain all of the above components to maximize its utility. It is also important to keep your readers in mind and pay extra attention to the scope of the model, summary and conclusions, and the demonstration of numerical findings spreadsheets, which are the sections that will be given the most attention. The scope of the model is vital, as it lays out the intention and selection criteria of the TCO model and analysis. Wielding your new TCO Model and Analysis Report crafting abilities, you can predict the advantages and disadvantages of numerous proposed designs or solutions, saving yourself and your data center unnecessary effort, expenditures, and heartache.