To understand the economics of different technology investment alternatives, Wikibon has constructed a model to evaluate return on assets (ROA). We have used this model with several clients in assessing technologies that impact existing assets. Examples include email platforms, storage networks, heterogeneous virtualization engines and zero data loss disaster recovery solutions. An ROA model differs from a classical ROI model in several ways.
- An ROI model evaluates how quickly and by what magnitude benefits accrue to offset initial startup costs combined with ongoing operational expenses. It’s an excellent approach for evaluating a one-time investment that has relatively small ongoing capex.
- Classic ROI models are not as useful however when an investment is constantly taking on new injections of capex over time—such as is the case, for example, with email infrastructure where upgrades of technology are more regular over time.
- The primary objective of an ROA model is to provide a budget view and understand how investments impact currently installed assets and how future rolling investments will affect costs and business value over time. It attempts to model a real customer with myriad assets installed over a number of years. Importantly, an ROA model takes into account the fact that there exists assets on the books with value that will not be de-installed until their useful life has expired.
- An ROA model allows clients to compare, longer term, a strategy of installing, for example, cheaper infrastructure with one that may appear more expensive initially but leverages the value of existing assets over time. An ROA model can differentiate between investments that have no impact on installed assets (Greenfield) and those that do.
An ROA model assumes for example that there is a mix of arrays installed that vary by age. There are boxes that have been installed for 4, 3,2 and 1 years respectively. Each system has different initial costs, opex, power/cooling, staffing, etc…and over time, specific assets are replaced by new assets. Understanding true costs requires modeling a complicated series of interrelationships that more accurately reflect a real world installation.
In summary, the benefit of an ROA model is it provides a way of assessing the profile of an installed customer and understanding the impact on the customer over a period of time. Importantly, unlike many ROI models, an ROA model does not assume brand new technology is installed, rather it uses a mix of new and older equipment evaluating the impact on the overall base as a whole.
As indicated, the ROA model takes a budget view by applying costs over a period of time (we typically use 48 months but the model can accommodate more or less) where capex are depreciated using a simple straight line method. The capex are reflected as depreciation or lease payments and are added to other operational costs, including:
- Maintenance fees
- Staffing costs
- Power, cooling and space costs
- Miscellaneous costs such as cabling, switching and other expenses.
In a similar fashion to an ROI model, the ROA model makes assumptions about cost per FTE, power and space costs, etc. The ROA model also assumes growth which triggers new injections of capital over the time period analyzed.
Over the next several months, Wikibon will be publishing the results of applying this model in a variety of customer situations to include Exchange 2010 and Oracle 11g. Additional candidates we have not analyzed at this point include data compression and data deduplication.
Action Item: For many infrastructure projects, understanding true costs requires investigating the impact that technologies will have on existing assets that are aging and already on the books. By taking a return on assets approach, CIO's can model the true cost of technology and gain better understanding of infrastructure economics over a longer period of time.
Footnotes: Example of an ROA model.