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The new economics of a virtualized datacenter: moving towards an application-based cost model

It’s now widely accepted that virtualization is one of those industry-wide “techtonic” shifts that, like previous shifts to client-server architecture or to the Internet, mark the beginning of a major transformation in how datacenters are architected and run. However, the virtualization transformation doesn’t stop there. The recurring theme that we hear from customers and partners is that the transformational effect of virtualization goes far beyond technology to directly impacting how IT looks at the economics and cost structure of the datacenter. At the core of this economic shift is the fact that in the virtualized datacenter, applications run on shared compute resources, not on dedicated ones like in the old physical datacenter. Customers tell us that in the new reality of the virtual datacenter the main variable driving planning and budgeting activities isn’t the number of physical servers any more, but the number of virtual machines (i.e. applications). In our experience, we have found that for this reason in the context of a fully or even partially virtualized datacenter application-based or VM-based models do a more accurate job of quantifying cost because they inherently factor in the economies of scale of multiple applications running on a shared infrastructure. It is very intuitive to recognize that, everything else equal, a higher the number of VMs per virtualization host, aka. VM density, corresponds to a higher infrastructure utilization rate and a lower average cost of running an application.

To help companies see how to implement a per-VM cost model for their datacenter, we asked IDC to work with one of our customers – Landmark Healthcare – and document how they are using an application-based cost model to track the cost structure evolution of their datacenter in their journey to the fully virtualized datacenter and the private cloud. The findings were documented in the IDC White Paper sponsored by VMware, The Economics of Virtualization: Moving Toward an Application – Based Cost Model.[1]

"Very clearly the existing process for the datacenter are undergoing a dramatic transformation. IDC believes that we are entering a new business cycle for IT and that virtualization will remain the foundation for enabling and driving a new set of economics for the datacenter. As customers increasingly deploy virtual environments they find themselves re-evaluating their traditional procurement and sourcing models. We continue to see cost per application as a more valid metric for measuring datacenter efficiency that will challenge existing server-based cost models."Michelle Bailey, Research VP, Enterprise Platforms and Datacenter Trends

Landmark Healthcare – IDC Case Study Summary

Landmark Healthcare is an insurance provider for chiropractic medicine, currently generating $20+ millions in revenues with about 110 employees. The company is transitioning its business from that of a pure-play insurance company to one that specializes in claims processing and claims analytics for other health care providers. In 2008 Landmark decided to virtualize about half of their business applications in an effort to consolidate their server install base and contain their expected growth. Like many others, Landmark rapidly realized that the benefits of a virtual infrastructure could be extended well beyond the initial capital savings into areas like improved business continuity, faster application deployment, simpler management and higher productivity. Coming from the success of their initial virtualization phase and seeing the tremendous additional value they could get, Landmark now plans to virtualize all the remaining business applications and to invest in an iSCSI storage array to leverage business continuity features like VMware HA, VMotion, and Fault Tolerance. Once this second virtualization phase is completed in 2010, Landmark’s datacenter will be 100% virtual and will have enough extra capacity to support the expected applications growth for the following two years. In this time frame, Landmark expects it will only have to continue expanding its disk storage capacity according to the typical needs of its applications.

Landmark Healthcare – cost per application analysis

Working with Landmark, IDC built a detailed view of the company’s annualized cost per application at each stage, from a) fully physical to b) fully virtualized to c) planning for future needs. The chart below – taken from the IDC white paper – shows a summary of Landmark’s past, present, and projected cost-per-application and VM density (i.e. number of VMs per virtualization host).

Cost Per Application of VMware Virtual Infrastructure

As the chart shows, Landmark will reduce the average annualized cost of running its applications from $1,514 before virtualization (2008) to $643 in a fully virtualized datacenter (2009) despite a sizable investment in a new SAN. While this may sound like a big reduction, it is actually typical for VMware customers, who can achieve higher economies of scale by driving up hardware utilization without compromising application performance, reliability or availability. It is also important to note that the chart only shows the “hard” capital cost savings for Landmark’s infrastructure. It does not include a quantitative measure of the other benefits of virtualizing, such as increased admin productivity, shorter recovery time in case of system failure, and faster IT response time to business needs.

VMware’s technology has been instrumental for us to reliably virtualize our apps while maximizing the utilization rate of our hardware. As our datacenter becomes 100% virtual, we will lower the cost of running our apps by over 60% even despite a sizable investment in a new iSCSI SAN. At the same time we will improve availability, improve business continuity and enable our business owners to achieve a faster time to market for our services. The ability to drive up consolidation ratios with vSphere will curb the need for additional infrastructure investment. In fact, we expect that in the near future we will be able to support the forecasted growth for our business without the need for additional servers, simply by expanding our storage capacity to accommodate the natural demands of our business applications – Ron Davis, Senior Network Engineer, Landmark Healthcare

It is easy to predict that with the trend towards fully virtualized datacenters, private clouds, and hybrid clouds, application-based cost models will become a standard practice. Read about the details of the Landmark Healthcare case in the IDC white paper. In addition to the detailed quantitative analysis, the white paper also provides information on virtualization industry trends as well as practical advices on leveraging vSphere to maximize hardware utilization.

What’s your take? How are you measuring cost in your virtualized datacenter?

[1] IDC White Paper sponsored by VMware, The Economics of a Virtualized Datacenter: Moving Toward an Application- Based Cost Model, Doc # 220766, November 2009

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Alberto Farronato

About Alberto Farronato

Alberto Farronato is Sr. Director of Product Marketing for Integrated Systems at VMware and is responsible for driving the go-to-market of VMware Cloud Foundation and other integrated offerings. At VMware, he has also been responsible for product marketing of VMware’s server virtualization, storage, availability and private cloud solutions. With over 12 years of experience in the IT industry, he worked for other leading technology providers such Accenture and EMC in addition to VMware. Alberto holds a B.S./M.S. degree in Electrical Engineering from the Politecnico of Milano, Italy, and an M.B.A. degree from the MIT Sloan School of Management.