igf: robert francis group whitepaper: the advantages of ibm power systems in-place upgrades

8/4/2019 IGF: Robert Francis Group whitepaper: The Advantages of IBM Power Systems In-Place Upgrades

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© Robert Frances Group 2009 Advantages of IBM Power Systems In-place Upgrades

The Advantages of

IBM Power™ Systems

In-Place Upgrades

Cal Braunstein

CEO and Executive Director of Research and

Adam Braunstein

Director of End-User Computing Strategies

Robert Frances Group





Executive Summary

RFG believes the conventional and accepted approach of building out Unix-based server farms byprovisioning additional purchased servers when needed proves to be a poor practice for servermanagement. When all factors are taken into account, RFG's total cost of ownership (TCO) analysisshows that Fair Market Value (FMV) leasing, coupled with in-place upgrades is a far more economicalapproach to server management for Unix server farms with increasing workloads. This approach canreduce both capital and operational expenditures by more than 17 percent over a five-year period,bypasses the need for 70 percent additional floor space, and eliminates the administrative overhead of added server configurations. Moreover, by refreshing servers regularly, the data center sees gains inenergy efficiencies and maintains platform currency, thereby obtaining the advantages of the latesttechnologies. IT executives working with their finance staff and preferred server vendor should do a

detailed analysis of their server needs to determine if the leasing with in-place system upgrades isdesirable. If so, finance and IT executives should work with their server vendor to structure a packagethat best meets current business, financial, and IT objectives.

Business Imperatives:

• It is more economical to grow servers vertically through upgrades than it is horizontally with theaddition of new servers. This is especially true when the servers are leased. The piecemealacquisition model used by most enterprises consumes precious capital, drives up operational costs,and is contrary to corporate environmental objectives and data center consolidation objectives. ITexecutives should work with their financial teams to determine which acquisition model is mostappropriate for their organization.

• Using a holistic approach to provisioning server processing requirements enables enterprises toutilize more rapid refresh periods and hardware leasing as a means of controlling cost increases.This paper evaluates a real-world example that considers the total cost of ownership (TCO) for aserver farm of 100 IBM Corp. Power Systems servers wherein performance growth of 10 percentevery six months over a five-year period is experienced. RFG finds that upgrading servers every 18months results in zero growth in the total number of deployed servers, whereas using the traditionalapproach of horizontal expansion would necessitate a 70 percent expansion in the number of servers. IT executives should understand how an upgrade strategy would work within theirenvironment and apply this data center management and cost containment strategy to thosebusiness sectors where it is economically and operationally possible.

• Leasing should be given very serious consideration in today's economic environment, as most

companies' IT investments are capital constrained and IT still has to address increasing processingdemands. Regardless of the financing method used for the current set of Unix servers, enterprisescan take advantage of the in-place leasing model. Companies that have purchased or financed theirexisting servers can take advantage of a sale/leaseback program that is available from most servervendors and then leverage leasing to enable further growth. Finance and IT executives should work with their preferred server vendors to evaluate what leasing program would best map to theenterprise's business and financial requirements.





In-Place System Upgrades: Same Server, New Engines

Previous RFG research has demonstrated that a three-year refresh cycle is preferable to five-year modelfor hardware including PCs, blade servers, and commodity x86 systems. The reasons for this areprimarily due to the rising costs of operating system and application patching, hardware failures, andwarranty costs. In an ideal environment, IT executives would be able to swap out older systems fornewer ones whenever ongoing maintenance costs and rising computing requirements outpaced the costof new hardware acquisitions minus the existing boxes' residual values. In practice, the task of systemupgrade and migration is a complex and costly activity that requires careful coordination and forsystems to run parallel for a period of time to ensure all facets occur properly and without servicedegradation. A TCO analysis that incorporates the rising operational cost vs. new hardware acquisitionequation may suggest that enterprises refresh some types of hardware more frequently than every 36months. The fact, however, remains that the problematic nature of these changeovers and resource

constraints makes this achievement impossible, irresponsible, undesirable, or some combination of theabove.

In the case of the IBM Power Systems architecture, the inhibitors preventing wholesale upgrades cannow be overcome. Over the last several years, IBM has merged its System i and System p platformsinto the IBM Power Systems line and enhanced the Power architecture with technologies thatpreviously existed only in its System z mainframes. Examples of such capabilities include abilities torun multiple operating systems, logical partitioning, micro-partitioning, migration of live applications,processor resource management, concurrent service and virtualization of hardware, network, andstorage. One additional capability that has recently descended from the mainframe is the ability toperform serial number preserving system upgrades.

An in-place system upgrade is the ability for an older server to be upgraded to perform identically to anew server by swapping out processing hardware components for the latest technology. A key pointhere is that this type of upgrade maintains the server serial number whereas an upgrade by doing a sideby side exchange would not. Many system components including the frame, power supplies, and othercomponents that tend to remain constant among models are left in place. This process allows an olderbox to become functionally equivalent to new hardware while providing investment protection withoutfinancing penalties due to the residual value recognition of the hardware carried forward. Similar towhat has transpired with IBM mainframes for many years, the ability to carry forward the serialnumbers is now available on selected Power Systems servers. In some cases, customers may even beable to upgrade systems that are more than one generation old.

The fundamental concept to using the in-place system upgrade methodology requires IT executives torethink how processor capacity demands are satisfied. The horizontal scale-out approach that isprevalent in non-mainframe environments is based on the belief that the addition of new servers tosatisfy added computing demands is the most economical solution. This paper demonstrates that thisbelief is false. When a holistic, all-inclusive TCO analysis is used, it is clear that it is more economicalto upgrade Unix servers with more powerful ones on an "as needed" basis. There are no economies of scale achieved in the scale-out approach while significant energy, facilities, personnel, and softwarecosts are gained through the scale-up methodology, especially when combined with a leasing program.





attractive interest rates to make the products more desirable and encourage an ongoing relationship.All of the major hardware vendors have funding arms that are highly motivated to achieve good

rates of return on their monies and are eager to engage enterprises in long-term, mutually beneficialrelationships. Thus, vendors are willing to provide enterprises with low-cost or no additional costadded services such as asset management tools and/or services. Which services companies chooseto obtain are largely based on the size of the deal and the IT executives' negotiation skills.

7. The end of End-of-Life Worries. End-of-life costs can be expensive, especially those that relate toregulatory requirements for safe disposal. Leasing can assist with the management of end-of-lifeservices and can protect corporations from lawsuits and fines associated with improper disposal, asthe lessor maintains ownership throughout the lease. Additionally, enterprises may be provided withgreater "buyback" pricing as an asset's residual value – which is factored into the lease – can belarger than the salvage value a vendor will purchase used equipment for by up to a factor of three.

8. To generate cash. Companies that currently own their servers might be able to convert these

declining assets into cash through the use of a "sale/leaseback" program. This will enable acompany to improve their cash position while positioning the firm for a leased system upgradeprogram.

9. Better financial management. Financing and leasing structures can affect corporate financialstatements. Measurements such as debt-to-equity ratios, return on assets, EBDITA, etc. can beeffectively managed through judicious use of operating leases. These ratios are important to banks,capital markets, investors, and executive management where compensation could be based on howeffectively these metrics are managed. Leasing is a tool that can assist in financial management.

10. Avoidance of asset ownership. There are conditions under which added asset ownership is adisadvantage for an enterprise. The reasons can vary from compliance and legal issues to liabilityexposures to debt covenants to disposal risks. Leasing eliminates this exposure.

TCO Analysis Considerations

The Model

The RFG model used for its TCO analysis assumed that an enterprise purchased 100 IBM PowerSystems eight-core servers in the initial year. These servers are performing a variety of tasks but eachserver goes operational with a utilization of 60 percent. It is also hypothesized that the workloaddemand is growing at 10 percent every six months uniformly for all servers. The servers are able toincrease in utilization until they reach 80 percent, at which point it becomes necessary to upgrade oroffload workload to a newly acquired servers. RFG assumed that the initial servers are IBM eight-core

System p 570s and the second generation servers are IBM Power 570s. RFG used IBM pricing andperformance ratings for these processors.

Using the above assumptions, the model showed that upgrades or new purchases needed to be madeevery 18 months. RFG constructed a model that had new equipment installed at months 18, 36, and 54.The model assumes that in the purchase option none of the servers are refreshed, only new ones arepurchased to handle the added performance demands. For the outlying years of the model, RFGassumed that IBM would continue to use its existing approach whereby it delivers a price/performanceboost of 20 percent per annum. This occurs through price drops or performance gains or a mix of both.





Based on this hypothesis, RFG constructed what it believed to be the pricing and performancecharacteristics of future IBM Power Systems servers – that being an improvement of 20 percent per

year in price/performance. For simplicity RFG also assumed that IBM Global Finance (IGF) would useits current pricing model for the future systems and that a six percent financing or leasing rate1 isreasonable to assume as a constant over time. RFG recognizes that financing leasing rates vary overtime and by lessee, and that in today's turbulent market there could be significant variability in rateswhich could greatly impact the TCO results. Similarly for the purchased servers, RFG assumed therewas no major upfront capital expenditure, rather the units were financed at six percent and the payoutwas over a five year period. Thus, finance and IT executives need to create their own models similar tothese to determine the actual savings they would attain by use of this methodology.

Model Cost Components

• Hardware: Server costs are an important component of the TCO but it is not the largestcontributing factor. Typically, the hardware runs between 25 and 35 percent of the overall costsover the five-year cycle when financed. In this case study, RFG has assumed that IBM wouldfollow its standard approach to pricing and performance growth – that being a targetedimprovement of 20 percent per year improvement. RFG has also extrapolated the pricing for futuresystems based on IBM's past methodology for pricing Power Systems servers. Actual results mayvary but the variances should not result in a change in the outcomes of the analysis. IT executivesshould employ negotiation strategies to reduce costs through volume purchase agreements andother tactics, as well as pressure vendors to provide low-cost or free services. Moreover, hardwareconsolidation and virtualization strategies can be used to further lower hardware costs.

• Deployment: This component incorporates the cost of building system images, installing the new

hardware, migrating system loads, and decommissioning the old hardware. In the study there is nodifference in the deployment costs between the two options. RFG believes this understates thepurchase option slightly in that network and domain reconfigurations as well as applicationrebalancing may need to be done, which can add to the overall deployment costs. Deployment costsfor added purchased servers could also increase if the new processors were a different server type.Deployment of additional servers, which means reconfiguring networks and domains and manualmovement of cables, frequently causes outages that can result in revenue losses. Downtime losseswere not included in the analysis.

• Provisioning: RFG viewed the provisioning costs the same for both options; however, companiesthat would chose to use the RFP route for the acquisition of additional servers would find that theexpenses for added purchases through this path would be greater. Platform standardization and

volume purchase agreements can lower these costs.• Warranty: Standard warrantees are typically one or three years in duration, but they usually are for

peak hour service only and non-critical response times. This research analysis assumes enterpriseswill want to upgrade their warrantees to include same-day, on-site turnaround for parts replacement.The standard included warranty for low-end and mid-range servers typically provides coverage for

1 The leasing scenarios are for illustrative purposes only and are based on a 36 month FMV lease, best credit customer.Actual financing rates are based on client's credit rating, financing terms, offering type, equipment type and options. Otherrestrictions may apply as well.





eight hours a day with a four hour on-site response while high-end servers typically offer 7x24coverage with a four hour on-site response. Although warranty costs for year one are sometimes

included in the acquisition price, vendors frequently look for the full three- or five-year supportpurchase to be paid up front. Many companies initially purchase the standard one- or three-yearwarranty and then opt to extend it with additional two or more years of maintenance. RFG's TCOanalysis uses a mix of three- and five-year maintenance and warranty support as appropriate.

• Administrator costs: Administrator salaries are spread over the number of systems a singleadministrator can support. There are application, database, and system administrators assumed inthe analysis. The more widely varied the number of operating environments, the fewer the numberof servers an administrator can support. Wage increases are assumed to occur annually. The numberof servers supported per administrator is kept constant throughout the time period.

• Administrator training: Administrators must keep their skills fresh to expedite applicationinstallation, general administration, backup, patching, system builds, and upgrades. These costs rise

exponentially in accordance with the number of authorized operating environment variations.• Software: The software costs include the upfront license fees for all the software that may reside

on the servers. There can be tremendous variability on these charges, as there are multipleapplications that tend to running on a large Unix server farm with a variety of different databases.For the sake of simplicity, RFG has conservatively estimated that the annual software fees on aprocessor when aggregated equal the annual cost of the hardware. This is at the low end of therange for Unix servers. For the purpose of the study these fees are spread over the five year TCOterm and are not lumped into the first year of the server's service. Because software vendors chargeby the number of servers or cores, use of system upgrades keeps the fees constant over the periodwhile the addition of new servers drives up the software costs.

• Software Maintenance: This charge covers the software maintenance, support, and upgrade fees.

Vendors typically charge 15 to 22 percent for their support fees, with the higher fees being assessedto certain business or mission critical applications or premium support services. Vendor fees arenormally based on the number of servers or cores in use and not the power of the Unix server.Economies of scale here are tied to growing servers vertically with higher performance engines andnot through addition of added servers or cores.

• Power and Cooling: Power and cooling costs at one time were not included in most TCO analyses.However these costs are a concern today and need to be incorporated in the analysis. RFG'sanalysis accounts for the total costs associated with a server, and not just the server itself. That is,the processors consume only a fraction of the power and cooling needed to be delivered into thedata center in order to support the processing workload. Each new generation of equipment today isconsuming less power than its predecessor on a per workload basis. While there are monitoring

tools available that can reduce the power consumption further by quiescing devices when not inuse, these savings are not factored into the analysis. It is assumed that all servers are on all the time.The cost of electricity varies significantly. RFG assumed a $0.10/kwh cost.

• Facilities: The facilities costs are those for the server only and the necessary open floor space thatmust surround it. The square footage costs for facilities vary considerably by location. RFGassumed a $20/square foot cost.





TCO Findings

Summary

RFG determined that enterprises that used the conventional wisdom of scaling out to meet capacitydemands ended up growing the number of servers over the five year period by 70 percent. A 100 serverfarm grew to become 170 servers at the end of 54 months while companies that used the systemupgrade methodology were able to satisfy the growth in workload without adding any additionalservers on the data center floor. Moreover, when in-place upgrades are combined with equipmentleasing, RFG finds that the standard approach which cost $108 million over five years is almost 31percent more expensive than leasing which ran $83 million for the same period. When net presentvalue (NPV) calculations are taken into account, the standard approach proves to be 28 percent moreexpensive than leasing ($89.3 million versus $69.5 million). The non-leasing costs are responsible for

virtually all of the increase in expenses.

RFG also noted the only year when the annual total cost of ownership of leasing exceeded purchasedoccurred in the first year. However, for the year the total costs associated with leasing was less thanthree percent higher than the purchased run rate. In all other years leasing was less expensive.Enterprises can eliminate the cost delta by negotiating a leasing payout schedule that best maps to theirbudgetary needs. Thus, for companies concerned about cash flow in the 2009-2010 period, they couldarrange a payout schedule that defers some of the leasing payments to the out years.





Figure 1. TCO Summary

year 1 year 2 year 3 year 4 year 5Purchase option

Systems at yearend 100 123 123 146 170

hardware - financed $ 3,905,721 $ 4,631,064 $ 5,356,407 $ 7,234,120 $ 8,436,594 $ 29,563,905

all else $ 10,729,158 $ 12,504,544 $ 14,385,866 $ 19,072,110 $ 22,060,352

totals $ 14,634,879 $ 17,135,608 $ 19,742,272 $ 26,306,230 $ 30,496,946 $ 108,315,935

NPV $ 89,259,202 170 systems

Lease option

Systems at yearend 100 100 100 100 100

lease fees $ 5,161,848 $ 5,701,149 $ 6,240,450 $ 6,584,828 $ 6,766,612 $ 30,454,888

all else $ 9,887,698 $ 10,159,004 $ 10,283,714 $ 10,922,863 $ 11,261,293Totals $ 15,049,546 $ 15,860,153 $ 16,524,164 $ 17,507,692 $ 18,027,905 $ 82,969,460

NPV $ 69,526,403 100 systems

annual differences $ (414,667) $ 1,275,455 $ 3,218,109 $ 8,798,538 $ 12,469,040 $ 25,346,475

total NPV difference $ 19,732,800

TCO Detail Findings

An examination of the one time charges shows that the out of pocket charges to purchase and install the

70 new servers costs $5 million more than the same costs for the in-place system upgrades of the 100existing servers. A major cause of these fees is the purchase of a five-year warranty, which issignificantly more costly than the three-year warranties. Purchasing remains less expensive in the firsttwo years but in year three leasing becomes less expensive and the overall savings in the out yearsgives leasing the advantage when considering one time costs.

However, 75 percent of the TCO difference is related to the ongoing charges. In the leasing example,the company did not need to add servers. Therefore, there was no requirement for additional softwarelicenses or maintenance fees, no added administrative personnel expenses, no expanded floor space,and minimal growth in energy consumption. The annual software expenditures in the lease modelremained at $3.9 million a year while in the purchase model it more than doubled to more than $8.4

million. Similarly, the software maintenance fees held at $2.5 million a year in the leasing model whileit more than doubled from $2.5 million to almost $5.5 million when new systems were purchased.Administrative costs for purchased systems increased by 150 percent over the period, growing from$1.7 million to $3.2 million while they only grew 4 percent per year (salary increases) when the serverswere leased. In a comparable fashion, power and cooling charges advanced 78 percent over the fiveyears as the server farm grew while they only increased 13 percent as the systems were refreshed withfaster processors.





Figure 2. Detailed TCO Summary

year 1 year 2 year 3 year 4 year 5Purchase option

One Time 100 123 123 146 170

Hardware Yearly Cost $ 3,905,721 $ 4,631,064 $ 5,356,407 $ 7,234,120 $ 8,436,594

Deployment $ 100,000 $ 23,000 $ - $ 23,000 $ 24,000

Provisioning $ 50,000 $ 11,500 $ - $ 11,500 $ 12,000

Warranty $ 1,682,920 $ 1,995,460 $ 2,308,000 $ 3,117,080 $ 3,635,209

Ongoing

Administrator Costs $ 1,714,286 $ 1,987,886 $ 2,280,631 $ 2,815,374 $ 3,168,645

Administrator Training $ 28,571 $ 33,131 $ 38,011 $ 46,923 $ 52,811

Software $ 3,905,721 $ 4,631,064 $ 5,356,407 $ 7,234,120 $ 8,436,594

Maintenance $ 2,524,380 $ 2,993,190 $ 3,462,000 $ 4,675,621 $ 5,452,814Power And Cooling $ 683,280 $ 784,713 $ 891,617 $ 1,090,092 $ 1,215,080

Facilities $ 40,000 $ 44,600 $ 49,200 $ 58,400 $ 63,200

Total Per Year $ 14,634,879 $ 17,135,608 $ 19,742,272 $26,306,230 $ 30,496,946TOTAL ACCUMULATIVECOST $ 14,634,879 $ 31,770,487 $ 51,512,759 $77,818,989 $108,315,935

AVG COST Per Year 14,634,879 15,885,243 17,170,920 19,454,747 21,663,187

NPV for the 5 years $ 89,259,202

year 1 year 2 year 3 year 4 year 5Lease option

One Time 100 100 100 100 100

Hardware Yearly Cost $ 5,161,848 $ 5,701,149 $ 6,240,450 $ 6,584,828 $ 6,766,612

Deployment $ 100,000 $ 100,000 $ - $ 100,000 $ 100,000

Provisioning $ 50,000 $ 50,000 $ - $ 50,000 $ 50,000

Warranty $ 841,460 $ 1,022,554 $ 1,203,647 $ 1,595,647 $ 1,833,259

$ 6,153,308 $ 6,873,703 $ 7,444,097 $ 8,330,475 $ 8,749,871

Ongoing

Administrator Costs $ 1,714,286 $ 1,782,857 $ 1,854,171 $ 1,928,338 $ 2,005,472

Administrator Training $ 28,571 $ 29,714 $ 30,903 $ 32,139 $ 33,425

Software $ 3,905,721 $ 3,905,721 $ 3,905,721 $ 3,905,721 $ 3,905,721

Maintenance $ 2,524,380 $ 2,524,380 $ 2,524,380 $ 2,524,380 $ 2,524,380Power And Cooling $ 683,280 $ 703,778 $ 724,892 $ 746,639 $ 769,038

Facilities $ 40,000 $ 40,000 $ 40,000 $ 40,000 $ 40,000

Total Per Year $ 15,049,546 $ 15,860,153 $ 16,524,164 $17,507,692 $ 18,027,905TOTAL ACCUMULATIVECOST $ 15,049,546 $ 30,909,699 $ 47,433,863 $64,941,555 $ 82,969,460

AVG COST Per Year 15,049,546 15,454,849 15,811,288 16,235,389 16,593,892

NPV for the 5 years $ 69,526,403





Conclusions

RFG believes the conventional wisdom for capacity growth of Unix servers is quite expensive and candeplete enterprises of treasured cash reserves or credit lines. The TCO model proves that an in-houseupgrade of Unix server farms combined with a well structured leasing program could save an enterprise30 percent or more over five years. In fact, the average cost per year of the in-place upgrade/leasingmodel increases by only 10 percent over five years while the average cost per year of the purchasedserver model expands almost 50 percent over the same period. Additionally, by containing the serverfootprint, the upgrade strategy could prevent the expansion of floor space whereby a new multi-milliondollar data center is needed to meet the added demands. Finance and IT executives working with theirpreferred hardware leasing vendor should construct their own lease versus purchase models andevaluate if and where the in-place upgrade/lease model works for them. In enterprises where the

servers are purchased, executives should also combine this exercise with an analysis of a sale/leaseback program to determine what financial package and structure best meet the company's business, financial,and IT needs.

IBM Corp. sponsored this study and analysis. This document exclusively reflects the analysis and opinions of

Robert Frances Group (RFG), who has final control of its content.

All rights reserved. The Robert Frances Group, 120 Post Road West, Suite 201, Westport, CT 06880. Telephone203-429-8951 www.rfgonline.com. This publication may not be reproduced in any form or by any electronic ormechanical means without prior written permission. The information and materials presented herein represent tothe best of our knowledge true and accurate information as of date of publication. It nevertheless is beingprovided on an "as is" basis.

igf: robert francis group whitepaper: the advantages of ibm power systems in-place upgrades

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