The Total Economic Impact Of Dell s Server Consolidation And Virtualization Solutions

Transcription

1 Prepared for Dell, Inc. August 1, 2007 The Total Economic Impact Of Dell s Server Consolidation And Virtualization Solutions Single Company Analysis Project Director: Bob Cormier, Forrester Consulting

2 Table Of Contents Executive Summary...3 About The Dell Server Consolidation And Virtualization Solution...5 Costs, Benefits, Flexibility, And Risks...7 Financial Analysis Summary: The Organization...12 Conclusions...13 Appendix A: Total Economic Impact Overview...14 Appendix B: About The Project Director , Forrester Research, Inc. All rights reserved. Forrester, Forrester Wave, RoleView, Technographics, and Total Economic Impact are trademarks of Forrester Research, Inc. All other trademarks are the property of their respective companies. Forrester clients may make one attributed copy or slide of each figure contained herein. Additional reproduction is strictly prohibited. For additional reproduction rights and usage information, go to Information is based on best available resources. Opinions reflect judgment at the time and are subject to change. 2

3 Executive Summary In early 2007, Dell commissioned Forrester Research to examine the financial impact and potential return on investment (ROI) an organization might realize from implementing Dell s server consolidation and virtualization solutions, hereafter referred to as the Dell Solution. To determine the impact, Forrester examined the specific costs, benefits, flexibility, and risk elements that a Dell retail customer experienced when it implemented the Dell Solution. This Organization, which has chosen to remain anonymous, is a large grocery store chain doing business primarily in the southwestern US. Purpose The purpose of this study is to provide readers with a framework to evaluate the potential financial impact of the Dell Solution. Forrester s aim is to clearly show all calculations and assumptions that go into the analysis. This study should be seen as a guide to better understand and evaluate Dell s server consolidation and virtualization solutions. Methodology Dell selected Forrester for this project because of our expertise in server consolidation and virtualization technologies and Forrester s Total Economic Impact (TEI) analysis methodology. TEI not only measures costs and benefits (areas that are typically accounted for within IT) but also weighs the enabling value of a technology in increasing the effectiveness of overall business processes. Forrester s TEI methodology serves an extremely useful purpose by providing a complete picture of the total economic impact of purchase decisions (see Appendix A for additional information on the TEI methodology). Approach Forrester used a four-step approach for this study: 1. Forrester interviewed Dell marketing, product management, and sales employees to fully understand the value proposition of Dell s server consolidation and virtualization solutions. 2. Using knowledge of the Dell Solution, as well as input from existing Forrester research and Dell, a Forrester representative conducted in-depth discussions with the Organization s group director of IS with input from other executives from this retail organization. 3. Forrester constructed a financial value model representative of the data collected in the interview. 4. Forrester created this study, which represents and examines the estimated value of the findings derived from the customer interview and analysis process and from Forrester s independent research. 3

4 Key Findings Table 1 represents a summary of the ROI the Organization expects to realize over a four-year period by deploying the Dell Solution. Table 1: Four-Year Summary Financial Results Interviewed Organization Summary financial results Unadjusted (best case) Risk-adjusted ROI 286% 254% Payback period Within 10 months Within 12 months Total costs (PV) ($525,355) ($525,355) Total cost savings and benefits (PV) $2,028,286 $1,858,195 Total (NPV) $1,502,931 $1,332,840 Source: Forrester Research, Inc. The four-year, risk-adjusted total NPV (net present value) of $1,332,840 represents the net cost savings and benefits attributed to using the Dell Solution when compared with the costs of the Organization s legacy physical server environment (see details below in the Costs, Benefits, Flexibility, and Risks section). In addition, the risk-adjusted ROI was a very favorable 254%. Forrester Research also identified five significant unquantified business and IT benefits attributed to server consolidation and virtualization, which are listed on page 10 of this study. The objective of this study is not to illustrate savings that other enterprises can obtain by deploying the Dell Solution but rather to identify savings experienced by the interviewed Organization. These results can be used as a guide to allow other enterprises to determine the appropriate benefits for their particular environment. Disclosures The reader should be aware of the following disclosures associated with this study: The study was commissioned by Dell and delivered by the Forrester Consulting group. Dell and the interviewed Organization reviewed and provided feedback to Forrester, but Forrester maintained editorial control over the study, its findings, and its financial data. Forrester did not accept any changes to the study that contradicted its findings, obscured the meaning of the study, or that changed any of the data collected. The customer name for the interview was provided by Dell. Forrester makes no assumptions as to the potential ROI other enterprises will receive within their own environment. Forrester strongly advises that the reader use his or her own estimates within the framework provided in the study to determine the appropriateness of implementing the Dell Solution. This study is not a Forrester endorsement of Dell or its offerings. The study is not a competitive product analysis. 4

5 About The Dell Server Consolidation And Virtualization Solution According to Dell, server virtualization, a core enabling technology for computing infrastructure, can bring measurable benefits to organizations including simplified operations, better resource utilization, and cost-effective scalability to meet business demands. As this important technology evolves, Dell continues to drive standards development and deliver standards-based solutions that promote customer choice and control. Dell s enterprise strategy is focused on simplifying core elements of the computing infrastructure to reduce complexity and deliver superior value. Systemic standardization, and the resulting interoperability, enables organizations to build advanced, scaled-out solutions from standard hardware building blocks and best-of breed software components. Dell s strategy: Is an open, multipurpose architecture. Uses standards-based platforms. Enables optimized use of resources and maximum innovation. Anticipates incremental growth. Supports virtually limitless expansion. According to Dell, virtualization is a core enabling technology used to simplify IT. Virtualization decouples software from hardware and presents a logical view of physical hardware to software. In other words, a single server can act and behave as multiple independent servers. Virtualization is a basic tenet of computing. Forms of it show up in a variety of constructs meant to abstract the interface of a resource from its physical implementation. Examples include storage (RAID or logical volumes), networking (VLAN), and Web services APIs. Server virtualization applies the same concept to industry-standard servers. Server virtualization is enabled primarily by a piece of software (often called the hypervisor) that sits between the server hardware and the operating system. This software provides a container that presents a logical hardware interface to an operating system. This operating system (guest OS), along with any applications or other software running on it, thinks it is running on a physical server and is known as a virtual machine (VM). This logical interface enables hardware resources to be partitioned and shared among multiple guest operating systems, allowing servers to be utilized more fully. Additionally, a VM including the associated operating system, applications, and data is stored as a large file on the physical system. Administrators can easily transfer a VM from one physical system to another or save it on shared storage so that multiple systems may access it as business needs dictate. Server virtualization helps deliver benefits in three primary ways: 1. Simplifying operations. Server virtualization effectively hides hardware details from software, allowing the hardware to be truly interchangeable without affecting the software. Virtualization can simplify operations by: 5

6 a. Ensuring workload portability across multiple servers. This includes the ability to re-host software, including legacy OSes that are no longer supported, on new servers. b. Streamlining application development and platform certification by certifying to a common virtual interface rather than multiple implementations or generations of physical hardware. c. Encapsulating complex configurations into a file that is easily replicated and provisioned. 2. Improving utilization and uptime. Server virtualization helps organizations gain optimal use of existing resources. A single physical server may now host many virtual workloads that previously would have required many physical servers. Additionally, because workloads can be relocated or replicated easily, administrators can move them when performing maintenance without affecting service levels, and quickly provision new servers on the fly, as needed. Virtualization helps improve utilization and uptime by: a. Enabling safe resource sharing on industry-standard servers if one virtual server fails, the others aren t affected. b. Leveraging the ability to migrate workloads dynamically from one physical server to another. Thus, workload SLAs can automatically match demand with capacity, and system maintenance may be performed without disrupting business services. c. Empowering disaster recovery operations by restoring lost services regardless of the target physical platforms providing the service. 3. Scaling cost-effectively. The management and utilization benefits brought by server virtualization facilitate cost-effective, pay as you grow scalability across a common, standards-based infrastructure. Virtualization supports cost-effective scaling by: a. Separating the OS/application workload from the physical server and enabling dynamic scaling through resource sharing and rapid provisioning. b. Leveraging and optimizing industry-standard hardware, which delivers sustained, incremental performance improvements at consistent, competitive prices. The Organization Chooses Dell s Server Consolidation And Virtualization Solution In November 2005, this Organization began working with Dell to consolidate and virtualize their server infrastructure for its development and testing environment. In November 2006, it began using the Dell Solution in its data center, and during the latter half of 2007, it will begin using the Dell Solution for its almost 300 stores. The Organization had three high-level goals and objectives it was hoping to satisfy: In 2004, the Organization was looking for ways to reduce data center hardware and footprint costs and also reduce the costs of its remote servers. It came to the conclusion that implementing Dell s server consolidation and virtualization solutions would allow them to achieve this goal. The Organization s IT group had a goal of being viewed by their business groups as collaborators and enablers of business value. Server virtualization would allow them to deploy new business applications two to three weeks earlier than purchasing a physical server, thereby gaining the applications benefits earlier. 6

7 In the long term, the Organization wants to recreate a business continuity and disaster recovery strategy using Dell s virtualization solution, which includes VMware software. One of the benefits would be the ability to restore lost services regardless of the target physical platforms providing the service. Costs, Benefits, Flexibility, And Risks To calculate the ROI for the Organization, Forrester analyzed the costs, benefits, flexibility, and risk associated with deploying the Dell Solution. Background And Future Direction The Organization has been working with Dell to consolidate and virtualized its server infrastructure in its testing and development environment since early 2006, when it initially purchased eight Dell PowerEdge 2850 Servers. At the launch of the Dell PowerEdge 2950 Servers, the Organization opted to reallocate the PowerEdge 2850 Servers and deploy PowerEdge 2950 servers with HBAs (host bus adapter) and 16 GB RAM, along with VMware ESX Server software licenses (all costs associated with this hardware and software are included in the Cost section below). Today it has 201 virtualized test, development, and certification virtual servers (of which 90 were physical to virtual conversions) running on 30 physical hosts, of which 22 were recovered assets and eight were purchased for this purpose. In addition, the Organization is in the process of replacing more than 100 physical production servers with virtualized machines in its data center. Also in this data center today there are 50 virtual servers running on six physical hosts. Of the 50 virtual machines, 45 are supporting new business projects and five represent the consolidation of old data center physical servers. The future plan is to eliminate and consolidate 20 more physical servers and have 60 virtualized production servers by November The quantifiable benefits associated with this consolidation and virtualization are described in the Benefits section below. The Organization has two more Dell PowerEdge 2950 servers not yet in service as of July In addition, the Organization has future plans to consolidate applications on virtual servers in each of its 290 retail stores (costs and benefits of this future project are not included in this study). Costs The key cost categories associated with the Dell Solution total $545,684 and are as follows: IT labor costs to plan and test the Dell Solution: $3,000. The Organization s IT staff (Windows administrators, storage engineers, and network engineers) spent 60 hours (in aggregate) planning and testing the Dell Solution. Eight Dell PowerEdge (virtual hosts) servers for testing and development: $56,000. These servers are being used for consolidating old servers in the testing and development environment. VMware VIN (Virtual Infrastructure Node) licenses for testing and development: $180,000. This software includes the following for the 30 physical servers: ESX, VMotion, Virtual Center in the licensing package, and three years (2006, 2007, and 2008) of Gold Support (all paid in 2006). VMware VIN Gold Support for fourth year (2009): $31,500. (see bullet above for software details). 7

8 Eight Dell PowerEdge (virtual hosts) servers for production requirements: $61,200. These servers are being used for consolidating old servers in the production environments, as well as adding new business applications. Standard VMware ESX license with three-year Platinum support: $67,600. In 2006, the Organization purchased the standard VMware ESX license for all eight of its Dell PowerEdge servers in the production environment. Upgraded VMware license to VI3; VMware ESX Infrastructure Suite (Enterprise Version): $16,384. In 2006, the Organization purchased the upgraded VMware ESX Infrastructure Suite license for its Dell PowerEdge production servers. Additional storage purchases as a result of virtualization: $105,000. The Organization will need to purchase additional storage capacity to replace the storage that was associated with its legacy physical servers. VMware ESX Server training costs: $25,000. Six administrators took advantage of VMware ESX Server training at a cost of $25,000. Table 2: Total Cost Of The Dell Solution Project costs Total PV Preplanning and testing of the Dell Solution Eight Dell PowerEdge (virtual) servers for testing and development VMware VIN (Virtual Infrastructure Node) licenses VMware VIN Gold support for year 2009 Eight Dell PowerEdge (virtual hosts) servers for production requirements Standard VMware ESX license with three-year Platinum support $3, $3,000 $3,000 $56, $56,000 $56,000 $180, $180,000 $180, $31,500 $31,500 $22,421 $61, $61,200 $61,200 $67, $67,600 $67,600 Upgraded VMware license to VI3 Additional storage purchases as a result of virtualization VMware ESX Server training costs $16, $16,384 $16,384 0 $105, $105,000 $93,750 $25, $25,000 $25,000 Total costs $409,184 $105,000 0 $31, , ,355 Source: Forrester Research, Inc. 8

9 Benefits The Organization identified $2,362,500 (non-risk-adjusted) in significant and quantifiable benefits resulting from implementation of the Dell Solution. Savings And Benefits Savings in test and development server consolidation and virtualization: $912,500. Over the past 16 to 18 months, the Organization has replaced its physical server environment with virtual servers, thereby avoiding the future costs associated with replenishing 90 physical servers at a total cost of $10,000 per server (including hardware, software, and support costs) over the four years of this analysis. In addition, the Organization estimates that it will avoid 250 hours of labor costs (at $50 per hour) associated with not needing to install the 90 physical servers for a labor savings of $12,500. Therefore total cost avoidance savings are $900,000 in servers, plus $12,500 in labor, for a total of $912,500 ($228,125 annually over four years). Savings implementing new production applications on virtual servers: $450,000. The Organization has implemented 45 new business applications on virtual servers in the past eight months, allowing it to avoid the cost of 45 new physical servers at $10,000 per server (including hardware, software, support, cabling, and racking/stacking costs). Note: Although there were labor savings associated with the test and development environment (above), the Organization reports that production virtual host servers are still installed one at a time, similar to physical servers, so there are no labor savings. Savings in data center legacy server consolidation: $1,000,000. The Organization will experience significant savings by replacing its normal four-year physical server refresh cycle with server virtualization. As legacy servers reach the end of their useful life, the Organization has been migrating the applications onto new virtual servers using VMware s VMotion (with no service interruption). The Organization estimates that it will save $10,000 per server (hardware, software, support, cabling, and racking/stacking costs) for each server that it does not have to buy, as a result of data center server consolidation and virtualization. Over a four-year period, 100 physical servers will be migrated to virtual servers, saving the Organization $250,000 annually, or a total of $1,000,000. Table 3: Total Savings And Benefits Of The Dell Solution (Non-Risk Adjusted) Savings and benefits Total PV Savings in test and development server consolidation and virtualization Savings implementing new production applications on virtual servers $228,125 $228,125 $228,125 $228,125 $912,500 $776,043 0 $450, $450,000 $401,786 Savings in data center legacy server consolidation $250,000 $250,000 $250,000 $250,000 1,000,000 $850,458 Total savings and benefits $478,125 $928,125 $478,125 $478,125 $2,362,500 $2,028,286 Source: Forrester Research, Inc. 9

10 Benefits: Unquantified The Organization identified the following additional business and IT benefits achieved from using the Dell s server consolidation and virtualization solutions; however, it was not able to quantify these benefits: Accelerated the implementation of business applications. With Dell s server consolidation and virtualization solutions, the Organization was able to implement 45 new business applications on virtual servers two to four weeks faster than with physical servers, thereby obtaining the benefits of those applications sooner. The Organization always has immediately available server capacity, thereby avoiding the server procurement and installation lead times that delay the implementation of new applications. Dynamically allocate additional resources to applications during peak periods. There are seasonal fluctuations that have caused specific business applications physical environments to reach their demand peak. In one instance, the Organization was able to quickly stand up two virtual servers to help augment that increase in demand. Without the ability to scale quickly and add capacity, the Organization would incur business performance degradation and customer satisfaction issues. Delay the expansion of the data center. The Organization will be able to delay the costs associated with expanding its data center by four to five years because the current and near-term footprint requirements are being reduced with server consolidation and virtualization. The current virtual server environment takes up only a ½ rack of space and is still only 20% utilized. Savings from reduced power, cooling, and cabling costs. The Organization knows that its power and cooling costs have been reduced with server consolidation, as well as the cost avoidance of not having to network hundreds of new servers. Future savings in retail store legacy server consolidation. In the future, the Organization anticipates savings from reducing the number of physical servers in its retail stores. There are currently two legacy servers in each store with the need to add a third server (application) in the future. The Organization anticipates replacing the two legacy servers, and accommodating the third server with three virtual servers residing on one virtual host server in each of its 290 stores. Forrester makes no assumptions regarding the effects of the Dell Solution at other organizations. For the benefits quantified above, each reader needs to determine his or her organization s ability to deliver the benefits and cost reductions of Dell s server consolidation and virtualization solutions. The underlying objective of this document is to provide guidance to technology decision-makers seeking to identify areas where value can potentially be created by using the Dell Solution. Flexibility Options Flexibility, as defined by Forrester s TEI methodology, represents investing in additional capacity or agility today that can be turned into business benefits later, at some additional cost. The Organization cited the flexibility of the Dell Solution in two specific areas: The future simplification of disaster recovery mirroring activities. If the Organization has 40 virtual servers on the same server box, it only has to mirror one server, not 40 different servers. This will also give it the ability to restore lost services, regardless of the target physical platforms providing the service. 10

11 The future flexibility to use Red Hat Linux and Windows applications on the same virtualized server, saving the considerable cost of purchasing and supporting Unix servers which cannot be virtualized. The Organization believes its investment in the Dell Solution gives it the flexibility option to both simplify disaster recovery mirroring as well as more efficiently use Red Hat Linux; however, it was not able to calculate the future value of these flexibility options at this time. In some instances, the reader of this study may believe his or her organization is ready to take advantage of the Dell Solution s flexibility; and in that case, the option will have a present value that can be estimated. The flexibility component of TEI captures that value using the financial industry standard Black-Scholes options pricing model. The value of flexibility is clearly unique to each organization, and the willingness to measure its value varies from company to company (see Appendix A for additional information regarding flexibility). Risks And Risk Mitigation Strategies There are two aspects of risk and risk mitigation considered in this study: project risks and the risks associated with the estimates of costs and benefits in a business case. Below is a summary of each. Project Risk And Mitigation There are risks associated with IT projects in general and specifically with Dell s server consolidation and virtualization solutions; however, the Organization s group director of IS indicated that there were clearly more risks to IT and the business in not implementing the Dell Solution and continuing with its more costly and higher-risk physical server environment. The Organization cited the possible performance degradation of virtualized applications sharing a physical server with other virtual applications that have high I/O (input/output) requirements. To mitigate this risk, it made the decision to not virtualize any application that has high I/O requirements; those applications will remain on their own dedicated physical servers. Another risk cited by the Organization was the resistance from business application groups who were not familiar with the virtualization technology and might not want to share their servers with other applications. To mitigate this risk, the group director of IS sought to reassure business stakeholders by communicating the significant cost savings attributed to server consolidation and virtualization and the decision to host high I/O applications on their own physical servers. When asked how other organizations might mitigate implementation risks, the interviewee agreed that IT administrators should take the VMware ESX Server training prior to implementing the Dell Solution. The Organization took advantage of sending six people to this training at a risk mitigation cost of $25,000. To further mitigate project risk, the Organization worked with Dell professional services for planning and implementation advice and then thoroughly tested the Dell Solution. Also, all of the Organization s administrators are Dell-certified. Risks Associated With Estimates Of Costs And Benefits Risk- and non-risk-adjusted ROI are both discussed in this study. Since the future cannot be accurately predicted, there is risk inherent in any project. Risk assessments provide a range of 11

12 possible outcomes based on the risks associated with IT projects in general and specific risks related to moving toward a particular technology solution. Risk Adjustments Reflected In This Study Forrester examined the costs and benefits in this study and determined that almost all of the costs have already been incurred so there is no need to risk adjust these costs. Also, a majority of the quantified benefits have been realized, except for the future savings in data center legacy server consolidation, which Forrester determined had a 20% risk of the consolidation not happening on schedule. Table 3 (from the Benefits section, above) has been re-created as Table 3R (riskadjusted) below. You will see that the bolded row titled Savings in data center legacy server consolidation has been reduced by the 20% risk factor (from a total of $1,000,000 to $800,000 and then re-adjusted for PV). This is the sole cause of the ROI difference of 254% risk adjusted versus 286% non-risk adjusted. Table 3R: Total Savings And Benefits Of The Dell Solution (Risk-Adjusted) Savings and benefits Total PV Savings in test and development server consolidation and virtualization Savings implementing new production applications on virtual servers $228,125 $228,125 $228,125 $228,125 $912,500 $776,043 0 $450, $450,000 $401,786 Savings in data center legacy server consolidation $200,000 $200,000 $200,000 $200,000 $800,000 $680,366 Total savings and benefits $428,125 $878,125 $428,125 $428,125 $2,162,500 $1,858,195 Source: Forrester Research, Inc. With the benefit of hindsight, the Organization believes that its investment in the Dell server consolidation and virtualization solution carries a lower level of risk when compared with the Organization s legacy physical server environment. Financial Analysis Summary: The Organization Table 1 (below; repeated from the Executive Summary) represents a summary of the costs and savings the Organization expects to achieve during the four-year period by using the Dell Solution. Table 1 (repeated): Four-Year Summary Financial Results Interviewed Organization Summary financial results Unadjusted (best case) Risk-adjusted ROI 286% 254% Payback period Within 10 months Within 12 months Total costs (PV) ($525,355) ($525,355) Total cost savings and benefits (PV) $2,028,286 $1,858,195 Total (NPV) $1,502,931 $1,332,840 Source: Forrester Research, Inc. The four-year, risk-adjusted total NPV (net present value) of $1,332,840 represents the net cost savings and benefits attributed to using the Dell Solution when compared with the costs of the 12

13 Organization s legacy physical server environment (see details in the Costs, Benefits, Flexibility, and Risks section). In addition, the risk-adjusted ROI was a very favorable 254%. Forrester Research also identified five significant unquantified business and IT benefits attributed to server consolidation and virtualization, which are listed on page 10 of this study. If a risk-adjusted ROI still demonstrates a compelling business case, it raises confidence that the investment is likely to succeed, because the risks that threaten the project have been taken into consideration and quantified. The risk-adjusted numbers should be taken as realistic expectations, since they represent the expected value considering risk. Assuming normal success at mitigating risk, the risk-adjusted numbers should more closely reflect the expected outcome of the investment. Conclusions This study is meant to provide the reader with a framework to examine the costs and benefits of Dell s server consolidation and virtualization solutions. Based on our in-depth discussions with the Organization, Forrester projects a four-year risk-adjusted ROI of 254% (286% non risk-adjusted). The net present value for the investment is $1,332,840 (risk-adjusted) and $1,502,931 (non-riskadjusted). For the Organization, a successful, well-planned implementation allowed cost savings to be achieved by the IT organization. The Organization also believes that its investment in the Dell Solution gives it the flexibility option to both simplify disaster recovery mirroring, as well as more efficiently use Red Hat Linux; however, it was not able to calculate the future value of these flexibility options as of this writing. Other organizations that are likely to see beneficial results using the Dell Solution have the following characteristics: They have many underutilized, and costly-to-manage X86 servers. Organizations that need to reduce headcount and/or redirect IT staff toward projects that add business value instead of maintenance of the infrastructure, e.g., deploying servers, loading software, installing patches, etc. (although the Organization in this study did not reduce current headcount). Progressive IT organization whose culture supports the mindset that virtualization and consolidation are production-ready technologies (beyond testing and development environments). They have many applications with low-moderate I/O requirements that can take advantage of a virtual server environment (high I/O applications should reside on their own dedicated physical machines). For our subject Organization, the Dell Solution carries a relatively low level of risk, a very positive 254% risk-adjusted ROI, and a fast (within) 12-month horizon to recoup the investment. Forrester makes no assumptions regarding the effects of the Dell Solution at other organizations. This study examines the financial impact attributable to one Organization. The underlying objective of this document is to provide guidance to technology decision-makers seeking to identify areas where value can potentially be created by using the Dell Solution. 13

14 Appendix A: Total Economic Impact Overview Total Economic Impact is a methodology developed by Forrester Research that enhances a company s technology decision-making processes and assists vendors in communicating the value proposition of their products and services to clients. The TEI methodology helps companies demonstrate, justify, and realize the tangible value of IT initiatives to both senior management and other key business stakeholders. The TEI methodology consists of four components to evaluate investment value: benefits, cost, flexibility, and risk. Benefits Benefits represent the value delivered to the user organization IT and/or business units by the proposed product or project. Often product or project justification exercises focus just on IT cost and cost reduction, leaving little room for analysis of the impact of the technology on the entire organization. The TEI methodology and resulting financial model places equal weight of the measure of benefits to that of costs, allowing for a full examination of the impact of the technology on the entire organization. Calculation of benefit estimates involves a clear dialogue with the user organization to understand the specific value that is created. In addition, Forrester also requires that there be a clear line of accountability established between the measurement and justification of benefit estimates after the project has been completed. This ensures that benefit estimates tie back directly to the bottom line. Cost Costs represent the investment necessary to capture the value, or benefits, of the proposed project. IT or the business units may incur costs. These may be in the form of fully burdened labor, subcontractors, or materials. Costs consider all the investment and expenses necessary to deliver the value proposed. In addition, the cost category within TEI captures any incremental costs over the existing environment for ongoing costs associated with the solution. All costs must be tied to the benefits that are created. Flexibility Within the TEI methodology, direct benefits represent one part of the investment value. While direct benefits can typically be the primary way to justify a project, Forrester believes that organizations should be able to measure the strategic value of an investment. Flexibility represents the value that can be obtained for some future additional investment building on top of the initial investment already made. For instance, an initial investment in an enterprisewide upgrade of an office productivity suite can increase standardization (to increase efficiency) and reduce licensing costs. Later, the organization may decide to take advantage of an embedded collaboration feature, which may translate to greater worker productivity if activated. However, this collaboration feature can only be used with an additional investment in user training. The ability to capture the benefit associated with this collaboration feature has a present value that can be estimated. The flexibility component of TEI captures that value using the Black-Scholes option pricing model. Risk Risk is the fourth component of the TEI methodology. It is a measurement of the uncertainty of benefit and cost estimates contained within the investment. Uncertainty is measured two ways: 1) the likelihood that the cost and benefit estimates will meet the original projections, and 2) the likelihood that the estimates will be measured and tracked over time. TEI applies a probability density function known as triangular distribution to the values entered. At minimum, three values are calculated to estimate the underlying range around each cost and benefit. 14

15 Appendix B: About The Project Director Bob Cormier Principal Consultant Bob is a principal consultant for Forrester s Total Economic Impact (TEI) service. He specializes in advising clients on the TEI framework services that help organizations make decisions about the overall financial value of IT strategies and investments. Bob came to Forrester through its acquisition of Giga Information Group and has more than 25 years experience in the IT and consulting industries. Prior to joining Giga, he held senior-level positions at two leading ebusiness consulting firms, ZEFER and Cambridge Technology Partners. Bob has successfully led company efforts to optimize financial, operational, and resource planning activities, incorporating leadingedge, professional service automation (PSA) applications and enterprise resource planning (ERP) systems. He has also held management positions at Digital Equipment and Anixter International. Bob earned an M.B.A. from Bentley College and a B.S. in business from the University of New Hampshire. As an adjunct professor, he has taught finance and economics courses for more than 10 years at Southern New Hampshire University and Daniel Webster College. 15