There has been a lot of press lately around the concept of open access to broadband warless networks. Much of this was fueled by the Federal Communication Commission (FCC) decision to reclaim and auction off a portion of the 700MHZ radio band. When Google put their hat in the ring as a pontifical bidder and at the same time starting hyping their open source mobile operating system known as Andoid, the media hype hit a fever pitch. At roughly the same time the 700 MHZ drama was unfolding, QUALCOMM was working on a less hyped wireless broadband modem dubbed Gobi (Global Mobile Internet) that allows for connectivity to multiple broadband carrier network. Gobi is a shift from traditional broadband cards that where programmed by the manufacture to communicate with a particular carrier’s wireless frequency. So, in the past you had to decide which carrier you wanted to commit to before ordering your device, with Gobi that is no longer true.
There is no lack of press on what these developments mean to the fleet of mobile information workers dashing from hotel to air port lobby. But what does all this fast paced, sexy wireless technology innovation mean to Technology Managers responsible for large fleets of mobile, blue collar field workers using devices from non-consumer hardware manufactures such as Intermec? What will be the impact on cost structures for the technology that supports direct store delivery (DSD), shipping, field service repair etc...? I try to give some guidance on these points below.
How Does Open Access Help My Daily Operations?
The short answer (and the one always favored by consultants) is that it depends. Let me first briefly define what open access really means. When the FCC decided to auction off a portion of the 700 MHZ frequency it attached a small catch. Whoever won the bid would be required to allow ANY device to connect to the frequency. This has been compared to the Carterfone decision made by the FCC in 1969 that ordered the then telecommunications monopoly AT&T to allow consumers to buy any hand set to hook to the AT&T network. Prior to the Carterfone decision, the rotary handsets for homes where rented equipment from AT&T. So, companies like Verizon Wireless who had in the past had tight control over the devices that connected to their network would now be forced to loosen their standards. This means that any device that passes a set of standard tests outlined by the carriers would be allowed to connect. This is expected to open up a new round of innovation in devices such as water meters and vending machines, giving producers of these devices new communication options and the ability to build services around those options. So, the open access movement may in fact produce smarter field equipment that enables business to cut cost. Time will tell. What is the impact of open access on the current set of mobile devices you have in the field today being used for daily operations? Not much, nothing really. It is conceivable that over the next five years the open access of 3G network will make it attractive for niche hardware players to get into the ruggedized device market. So perhaps as you go to negotiate your next round of major hardware purchases you will have more options. The reality is however that the buzz around open access to 3G networks is really overplayed with respect to the traditional work horse devices such as Intermec and Symbol. As you can order most of these devices today programmed to connect to the carrier of your choice any real impact on your choice of devices in this market niche is probably five or more years away.
Gobi Devices are Coming
In late 2009 major manufactures of rugged mobile field devices may introduce Gobi broadband cards, allowing you to choose your provider through programming of the card. Now this is big news. Lets compare this to how things are done today. Today, you go through an analysis of which major carrier has the best average coverage at all of your field locations or service areas. You pick the one you think has the best coverage and negotiate contract terms. Once you agree on a wireless contract you order your devices with that carrier’s chipset. Let’s say your wireless contract is two years. At the end of that two years you have hundred or maybe thousands of devices in the field serving daily operations. Are really likely to switch out all these devices to move to another carrier? No, and trust me, your carrier is well aware of that fact. After your initial negotiation you really loose a ton of leverage when it comes time to renew. With the Gobi wireless cards, that all changes. Switching providers now becomes much less painful and thus you maintain some of your leverage in subsequent contract talks. You are also shielded against situations where carriers merge or get sold. Or maybe a new carrier comes online in a particular part of your geography that you want to use in that one warehouse. With the Gobi cards you can easily switch devices to that carrier. So, what impact does this development have on your current operations? Again the answer is not much. The Gobi cards should absolutely factor into your next round of hardware purchases however and if you are considering making a big purchase now it might even be a good idea to wait a few months.
Summary
Despite all the current media hype around open 3g network access and the Google mobile operating system the true impact on your current field operations is little to none. It is not likely that the open access rules enacted by the FCC will have short term impact on your procurement or platform decisions with respect to ruggedized field devices. The opportunity for long term innovation odes exist however and should be monitored. The advent of the Gobi technology from QUALCOMM will have significant future impact on the flexibility you have with respect to wireless broadband carriers. Again, the Gobi technology will hit the market in ruggedized devices in late 2009. If you are considering a hardware purchase now, the benefits of Gobi are great enough that you may want to consider waiting it out.
Friday, April 24, 2009
Sunday, April 19, 2009
Beyond the Hype of ROI: A Real World Model
How many times have you read vendor literature promising that their technology would “decrease TCO and maximize ROI”. All technology managers have, at some point, been promised Return on Investment (ROI) should he or she choose to invest in a particular technology. We all know that ROI is a “Good” thing and our business owners and senior management like it. Most technology managers understand in general what ROI means in that it affords their organization a chance to recoup or gain money by investing in a particular technology. What many technology managers do not know however is that ROI is not a purely theoretical concept. ROI is a specific number derived through a numerical analysis of the costs and benefits of a particular technology. My goal in this article is to give technology managers a high level understanding of what exactly ROI is and arm them with the facts to ask pointed questions to vendors who spout flowery prose to their management teams. I will work through a simple example explaining the important concepts at a high level. At the end of this article I also point you to a blank spreadsheet model that you can use to do your own ROI analysis. This is a model I have used many times and it has served me well with respect to cutting through vendor hype.
It’s All About the Journey
Before we start working through the example I want to emphasize a critical point. The actual number that pops out the bottom of the ROI model is much less important than the interactive conversations you will have with your stake holders while deriving the numbers to plug into the model. By forcing folks to sit down and think through the potential benefits and possible pitfalls of a particular technology investment you can be sure your decisions will be well thought out. The hours you will spend with folks debating things like “How much time will we actually save as a result of this technology?” or “Are we introducing cost elsewhere in the organization as a result of this investment?” are the most valuable dimension of this process. The numbers are important, yes. However, getting agreement and buy in on the assumptions being made to derive the numbers is absolutely critical to success.
Finance 101 in Ten Minutes or Less
You are a technology person, not a bean counter. You speak TCP/IP and .Net, not debits and credits, I get it. The cold fact is however that the folks in your organization holding the purse strings are Finance people. If you want to gain their respect and trust you need to make an attempt to speak their language. After all, you should never be making technology investments for technology’s sake. Every technology investment should have a solid business driver and a financial benefit for your organization. If you have made it to the level of Technology Manager or Director you have probably figured that out by now.
There are three main documents that serve to explain the financial performance of an organization. These are the Income Statement, the Balance Sheet and the Cash Flow Statement. In order to execute an ROI analysis you do not need to know the gritty details of these documents but you do need to know at a high level what each is used for. While you won’t directly use these documents, your ROI model is ultimately demonstrating the effect your proposed technology investment will have on each. Here we go, I know this is not as exciting as a reading a networking white paper or debugging C# code but stick with me….
Income Statement - At a high level this document shows the difference between revenue and cost. The result is a numerical entity knows as Net Income. Net Income is NOT the same as cash because some of the “cost” items on the Income Statement are things that do not represent real money being paid out (e.g. depreciation). Just remember that Net Income is the difference between revenue and cost but does not represent the amount of cash a company has.
Balance Sheet - When you think about the balance sheet think assets. Assets are the things a company owns. The Balance sheet also lists liabilities. Liabilities are the things a company owes. At a high level the Balance Sheet shows the difference between assets and liabilities. So, if a company sold everything it owned (its assets) would it have enough cash to cover everything it owes (its liabilities). All you really need to know in terms of ROI analysis is that the Balance Sheet is where your fixed assets such as servers and networking gear will go.
Cash Flow Statement - Cash is king and the Cash Flow Statement essentially defines the size of your organizations throne. The Cash Flow Statement shows how much cash your organization had on hand at a particular point in time. As the name implies it really shows the flow of cash in and out of an organization during a time period. For our purposes here and for your purposes as a technology manager just remember that the Cash Flow statement shows how cash rich an organization is.
OK, that was rough. In the next section we will start working through a tangible example and you will truly see that only a basic understanding of the documents outlined above will carry you through a detailed ROI analysis of your technology investment.
The ROI of Virtualization
Let’s work through an example. In order to follow along you can download the PDF of the analysis here. The link to a blank version of the spreadsheet model is available at the end of this article. OK, lets first look at the impact your virtualization investment will have on your organizations net income.
The Income Statement
There will be both benefits and costs to your investment represented in the model as Increased Operating Profit and Increased Operating Cost, respectfully. The Increased Operating Profit section is where you want to list the financial benefits of your virtualization investment. These are items that will reduce expense in areas of IT operations. As a practical matter, you should not enter these numbers directly in the ROI model. In the blank model you will find a tab called work. Use that area as your scratch pad and enter all you numbers there and have them roll up to your model. Remember, a huge part of the benefit you will receive from this process is in debating the actual amounts for each benefit. You will spend most of your time in the work tab actively debating what you will really get out of your investment. The Increased Operating Cost section is where you want to list the costs associated with your investment.
The cost section has two parts. The Depreciation cost is a calculated figure derived from your investment in fixed assets (described below). Basically, you do not need to enter anything for the depreciation line item, it is calculated for you in the model. Just in case you are curious, depreciation is an accounting method for matching the realization of an items expense to the realization of its benefit. The costs you want to enter on the work tab and actively debate are the ones that populate the SG&A (Sales, General and Administration) line items. These costs are NOT the one time cost you will have buying the hardware, and software needed for your project. These costs represent increased run rates in your I.T. operations that will be engendered by your investment. For example, you may incur additional yearly fees such as conference expenses that you did not have prior to the investment.
The final line items of the Income Statement section are EBIT, tax and Net Income. Earnings before Interest and Tax (EBIT) is an accounting measure meant to capture a company’s true operating profit before money is either added through investment income (e.g. income made through interest on savings accounts rather than through actual business operations) or taken away by non operating expenses such as tax. In the model EBIT is a calculated figure that is equal to operating profit minus operating cost. The model then subtracts a standard 35% U.S. Corporate tax rate from the increase in operating profit created by your project (Uncle Sam has to get his piece). Your organizations tax rate may be lower and you can usually get it from either you controller or your CFO. The difference between EBIT and tax is Net Income. Net Income represents from an accounting perspective the yearly benefit your technology investment will have on your organizations performance. Of course, a positive impact on Net Income is good, but it is not the ultimate factor that should drive your investment decisions. Remember earlier I said cash is king? The reason I emphasize that Net Income shows the benefit of your investment from an accounting perspective is that you should ultimately be concerned with the impact of your investment on your organizations cash flow. What good is a positive Net Income if you don’t have cash to pay the light bill? The rest of the model is concerned with getting at the actual increased cash flow your investment will provide.
The Balance Sheet
In our ROI model, the Balance Sheet section consists of one line item, fixed assets. This is the amount you are asking for with respect to your technology investment. The fixed asset number is generally the amount of CAPEX (Capital Expense) you will be asking your CFO to approve for your project. Again, as a practical matter, you should generally populate a separate tab with your investment costs and have them rollup to the model so that you can easily manipulate things as you negotiate with your vendor (you will negotiate with your vendor, right?). The fixed Asset number drives the calculation of depreciation in the income statement section and you will see it again as Net Capital Spending in the Project Cash Flow section below.
Project Cash Flows
OK, this is about to get a little hairy so stay with me because we are now getting to the heart of the whole ROI subject. Most of the line items in this section are auto populated from figures earlier in the model. EBIT, Depreciation and Tax are pulled directly from preceding values in the model. Operating cash flow is a derived value equal to EBIT plus depreciation minus tax. Why? Remember EBIT is what the company made before adding interest or taking away tax. EBIT also includes in it the depreciation figure. Remember, depreciation is an accounting entity, NOT a true cash expense. That is a key point. We are worried with the amount of actual currency we are taking in and paying out, cash money! So, to get at the true cash being generated here we have to take depreciation out. We take depreciation out by adding it BACK to EBIT because remember, we took it away before as an expense in the income statement. Now we take away the amount that we paid for tax because that is real cash (try giving Uncle Sam an accounting entity….). What we come out with is Operating Cash Flow, the TRUE amount of cash that your investment will generate (or consume) for your organization every year. This is a critical figure especially for smaller organizations or for those with long accounts receivable cycles (e.g. organizations that take a long time to make a product and get paid for it but who have to incur expenses while all that is happening, think Boeing making air planes). The last two line items of the Project Cash Flow section are Net Capital Spending and Increase in Net Working Capital. Net Capital spending represents the amount of cash your organization will spend on your investment in a year. For the first year it is the same as the amount you plan on spending on fixed assets. If your investment calls for any additional fixed asset spending in subsequent years this is where you would show that spending. If you put in additional capital spending after your initial investment be sure to adjust the depreciation accordingly to reflect the cumulative effect of the fixed asset addition. The final line item, Increase in Working Capital, is rarely used for technology investments. The best example for this is a project that will temporally increase inventory on the warehouse floor for the duration of the project. It is assumed that the cash spent on the increased working capital in year one is redeemed at the end of the project. Don’t worry about this too much. Again, it is rare that a technology investment will use this line item.
Great, now you have the cash flow your project will generate for your organization for each year over the next five years. It is now time for the grand finale, the introduction of the concept known as the time value of money and how it is used to calculate the ROI of your project.
The Time Value of Money
A bird in the hand is worth two in the bush, right? In the same vein, a dollar today is worth more than a dollar you get three years from now. Why, because the dollar you get today can be invested and earn interest. So, to really compare apples to apples the value of the cash you will give me today versus that you will give me three years from now I have to account for or discount those future dollars to reflect the loss in interest. The way you do that is to use a formula that takes each years cash flow and discounts it back to be equal to the value of dollars received in year one of your project. The formula is already in the model, all you need to do is plug in your organizations WACC (Weighted Average Cost of Capital) in the work tab. You can get this number from your controller or CFO and it represents what it costs your organization to acquire capital (technically it is the weighted average between what it costs your organization to raise equity and what it cost to raise debt). At a minimum, someone in your organization will be table to tell you what is the typical discount rate used for ROI analysis (often it is more of an art than a science and an organization may simply have a number they prefer to use).
Once you plug in the WACC value all of your project cash flows will be discounted and you will see a number appear for NPV (Net Present Value). NPV is the sum of the discounted cash flows for each year in your project. The NPV value gives you the total amount of cash your investment will generate in today’s dollars. Thus, NPV gives you a way to compare the amount of cash you will pay today for your investment with an equivalent amount of cash in today’s dollars that your investment will generate. In fact, when you divide the NPV by the amount of your investment the result is a mathematical entity called ROI! ROI is expressed as a percent and reflects the percentage return your investment will give your organization on the money you are asking them to invest.
Summary
The goal of this article was to give technology managers a high level understanding of the mathematical computation of ROI. I hope that after reading this article, you will be more informed and in a better position to ask punted questions to sales folks offering great “ROI”. While a Certified Public Accountant (CPA) or other finance professionals would quibble with the specifics of what I have explained here, there is no doubt that this model is a solid, high level tool for evaluating technology investments. It has worked for me for years and I have used it to evaluate everything from storage systems to complete Enterprise Recourse Planning (ERP) implementations. I can not stress enough that the exercise of thinking critically about the benefits and cost your investment will create is the highest generator of value in the ROI analysis process. I hope you use this model to help drive meetings and discussions and to gain alignment among key stake holders in your organization.
You can download a blank copy of the spreadsheet model here.
It’s All About the Journey
Before we start working through the example I want to emphasize a critical point. The actual number that pops out the bottom of the ROI model is much less important than the interactive conversations you will have with your stake holders while deriving the numbers to plug into the model. By forcing folks to sit down and think through the potential benefits and possible pitfalls of a particular technology investment you can be sure your decisions will be well thought out. The hours you will spend with folks debating things like “How much time will we actually save as a result of this technology?” or “Are we introducing cost elsewhere in the organization as a result of this investment?” are the most valuable dimension of this process. The numbers are important, yes. However, getting agreement and buy in on the assumptions being made to derive the numbers is absolutely critical to success.
Finance 101 in Ten Minutes or Less
You are a technology person, not a bean counter. You speak TCP/IP and .Net, not debits and credits, I get it. The cold fact is however that the folks in your organization holding the purse strings are Finance people. If you want to gain their respect and trust you need to make an attempt to speak their language. After all, you should never be making technology investments for technology’s sake. Every technology investment should have a solid business driver and a financial benefit for your organization. If you have made it to the level of Technology Manager or Director you have probably figured that out by now.
There are three main documents that serve to explain the financial performance of an organization. These are the Income Statement, the Balance Sheet and the Cash Flow Statement. In order to execute an ROI analysis you do not need to know the gritty details of these documents but you do need to know at a high level what each is used for. While you won’t directly use these documents, your ROI model is ultimately demonstrating the effect your proposed technology investment will have on each. Here we go, I know this is not as exciting as a reading a networking white paper or debugging C# code but stick with me….
Income Statement - At a high level this document shows the difference between revenue and cost. The result is a numerical entity knows as Net Income. Net Income is NOT the same as cash because some of the “cost” items on the Income Statement are things that do not represent real money being paid out (e.g. depreciation). Just remember that Net Income is the difference between revenue and cost but does not represent the amount of cash a company has.
Balance Sheet - When you think about the balance sheet think assets. Assets are the things a company owns. The Balance sheet also lists liabilities. Liabilities are the things a company owes. At a high level the Balance Sheet shows the difference between assets and liabilities. So, if a company sold everything it owned (its assets) would it have enough cash to cover everything it owes (its liabilities). All you really need to know in terms of ROI analysis is that the Balance Sheet is where your fixed assets such as servers and networking gear will go.
Cash Flow Statement - Cash is king and the Cash Flow Statement essentially defines the size of your organizations throne. The Cash Flow Statement shows how much cash your organization had on hand at a particular point in time. As the name implies it really shows the flow of cash in and out of an organization during a time period. For our purposes here and for your purposes as a technology manager just remember that the Cash Flow statement shows how cash rich an organization is.
OK, that was rough. In the next section we will start working through a tangible example and you will truly see that only a basic understanding of the documents outlined above will carry you through a detailed ROI analysis of your technology investment.
The ROI of Virtualization
Let’s work through an example. In order to follow along you can download the PDF of the analysis here. The link to a blank version of the spreadsheet model is available at the end of this article. OK, lets first look at the impact your virtualization investment will have on your organizations net income.
The Income Statement
There will be both benefits and costs to your investment represented in the model as Increased Operating Profit and Increased Operating Cost, respectfully. The Increased Operating Profit section is where you want to list the financial benefits of your virtualization investment. These are items that will reduce expense in areas of IT operations. As a practical matter, you should not enter these numbers directly in the ROI model. In the blank model you will find a tab called work. Use that area as your scratch pad and enter all you numbers there and have them roll up to your model. Remember, a huge part of the benefit you will receive from this process is in debating the actual amounts for each benefit. You will spend most of your time in the work tab actively debating what you will really get out of your investment. The Increased Operating Cost section is where you want to list the costs associated with your investment.
The cost section has two parts. The Depreciation cost is a calculated figure derived from your investment in fixed assets (described below). Basically, you do not need to enter anything for the depreciation line item, it is calculated for you in the model. Just in case you are curious, depreciation is an accounting method for matching the realization of an items expense to the realization of its benefit. The costs you want to enter on the work tab and actively debate are the ones that populate the SG&A (Sales, General and Administration) line items. These costs are NOT the one time cost you will have buying the hardware, and software needed for your project. These costs represent increased run rates in your I.T. operations that will be engendered by your investment. For example, you may incur additional yearly fees such as conference expenses that you did not have prior to the investment.
The final line items of the Income Statement section are EBIT, tax and Net Income. Earnings before Interest and Tax (EBIT) is an accounting measure meant to capture a company’s true operating profit before money is either added through investment income (e.g. income made through interest on savings accounts rather than through actual business operations) or taken away by non operating expenses such as tax. In the model EBIT is a calculated figure that is equal to operating profit minus operating cost. The model then subtracts a standard 35% U.S. Corporate tax rate from the increase in operating profit created by your project (Uncle Sam has to get his piece). Your organizations tax rate may be lower and you can usually get it from either you controller or your CFO. The difference between EBIT and tax is Net Income. Net Income represents from an accounting perspective the yearly benefit your technology investment will have on your organizations performance. Of course, a positive impact on Net Income is good, but it is not the ultimate factor that should drive your investment decisions. Remember earlier I said cash is king? The reason I emphasize that Net Income shows the benefit of your investment from an accounting perspective is that you should ultimately be concerned with the impact of your investment on your organizations cash flow. What good is a positive Net Income if you don’t have cash to pay the light bill? The rest of the model is concerned with getting at the actual increased cash flow your investment will provide.
The Balance Sheet
In our ROI model, the Balance Sheet section consists of one line item, fixed assets. This is the amount you are asking for with respect to your technology investment. The fixed asset number is generally the amount of CAPEX (Capital Expense) you will be asking your CFO to approve for your project. Again, as a practical matter, you should generally populate a separate tab with your investment costs and have them rollup to the model so that you can easily manipulate things as you negotiate with your vendor (you will negotiate with your vendor, right?). The fixed Asset number drives the calculation of depreciation in the income statement section and you will see it again as Net Capital Spending in the Project Cash Flow section below.
Project Cash Flows
OK, this is about to get a little hairy so stay with me because we are now getting to the heart of the whole ROI subject. Most of the line items in this section are auto populated from figures earlier in the model. EBIT, Depreciation and Tax are pulled directly from preceding values in the model. Operating cash flow is a derived value equal to EBIT plus depreciation minus tax. Why? Remember EBIT is what the company made before adding interest or taking away tax. EBIT also includes in it the depreciation figure. Remember, depreciation is an accounting entity, NOT a true cash expense. That is a key point. We are worried with the amount of actual currency we are taking in and paying out, cash money! So, to get at the true cash being generated here we have to take depreciation out. We take depreciation out by adding it BACK to EBIT because remember, we took it away before as an expense in the income statement. Now we take away the amount that we paid for tax because that is real cash (try giving Uncle Sam an accounting entity….). What we come out with is Operating Cash Flow, the TRUE amount of cash that your investment will generate (or consume) for your organization every year. This is a critical figure especially for smaller organizations or for those with long accounts receivable cycles (e.g. organizations that take a long time to make a product and get paid for it but who have to incur expenses while all that is happening, think Boeing making air planes). The last two line items of the Project Cash Flow section are Net Capital Spending and Increase in Net Working Capital. Net Capital spending represents the amount of cash your organization will spend on your investment in a year. For the first year it is the same as the amount you plan on spending on fixed assets. If your investment calls for any additional fixed asset spending in subsequent years this is where you would show that spending. If you put in additional capital spending after your initial investment be sure to adjust the depreciation accordingly to reflect the cumulative effect of the fixed asset addition. The final line item, Increase in Working Capital, is rarely used for technology investments. The best example for this is a project that will temporally increase inventory on the warehouse floor for the duration of the project. It is assumed that the cash spent on the increased working capital in year one is redeemed at the end of the project. Don’t worry about this too much. Again, it is rare that a technology investment will use this line item.
Great, now you have the cash flow your project will generate for your organization for each year over the next five years. It is now time for the grand finale, the introduction of the concept known as the time value of money and how it is used to calculate the ROI of your project.
The Time Value of Money
A bird in the hand is worth two in the bush, right? In the same vein, a dollar today is worth more than a dollar you get three years from now. Why, because the dollar you get today can be invested and earn interest. So, to really compare apples to apples the value of the cash you will give me today versus that you will give me three years from now I have to account for or discount those future dollars to reflect the loss in interest. The way you do that is to use a formula that takes each years cash flow and discounts it back to be equal to the value of dollars received in year one of your project. The formula is already in the model, all you need to do is plug in your organizations WACC (Weighted Average Cost of Capital) in the work tab. You can get this number from your controller or CFO and it represents what it costs your organization to acquire capital (technically it is the weighted average between what it costs your organization to raise equity and what it cost to raise debt). At a minimum, someone in your organization will be table to tell you what is the typical discount rate used for ROI analysis (often it is more of an art than a science and an organization may simply have a number they prefer to use).
Once you plug in the WACC value all of your project cash flows will be discounted and you will see a number appear for NPV (Net Present Value). NPV is the sum of the discounted cash flows for each year in your project. The NPV value gives you the total amount of cash your investment will generate in today’s dollars. Thus, NPV gives you a way to compare the amount of cash you will pay today for your investment with an equivalent amount of cash in today’s dollars that your investment will generate. In fact, when you divide the NPV by the amount of your investment the result is a mathematical entity called ROI! ROI is expressed as a percent and reflects the percentage return your investment will give your organization on the money you are asking them to invest.
Summary
The goal of this article was to give technology managers a high level understanding of the mathematical computation of ROI. I hope that after reading this article, you will be more informed and in a better position to ask punted questions to sales folks offering great “ROI”. While a Certified Public Accountant (CPA) or other finance professionals would quibble with the specifics of what I have explained here, there is no doubt that this model is a solid, high level tool for evaluating technology investments. It has worked for me for years and I have used it to evaluate everything from storage systems to complete Enterprise Recourse Planning (ERP) implementations. I can not stress enough that the exercise of thinking critically about the benefits and cost your investment will create is the highest generator of value in the ROI analysis process. I hope you use this model to help drive meetings and discussions and to gain alignment among key stake holders in your organization.
You can download a blank copy of the spreadsheet model here.
Tuesday, April 14, 2009
How to Manage a Team During the Adoption of Virtualization
Virtualization is one of those disruptive technologies that will no doubt change the long term look and feel of all corporate datacenters. So it is no wonder that when you start to explore implementing virtualization you will find a plethora of technical best practices from your network vendor, your storage vendor and your application providers. The one area in which you may find a paucity of information however is in the arena of ensuring your internal IT team is prepared for the shift in datacenter philosophy virtualization will bring. It is easy to confuse being prepared for the philosophy shift with being technically trained on virtualization technology. While training is paramount for ensuring your team buys into the virtualization philosophy, in and of itself it does not ensure team commitment. Often, virtualization will impact so many dimensions of your datacenter operations that even trained team members may find the change in operational strategy daunting. Below are three points I have had to manage as a result of adopting the virtualization philosophy in my organization.
1. Why do we need to make so much change as a result of this? Things where working fine before virtualization…..
You will find that adopting the virtualization philosophy in your datacenter affords you a fantastic opportunity to rethink nearly every dimension of your technical landscape. Be sure to understand your organizations business strategy and where you may need to go in terms of technical infrastructure to support that strategy. Use this opportunity to align your datacenter strategy with your organizations goals and to create a scalable technology infrastructure. Be aware however that doing this will surely upset some folk’s apple carts and cause them to question the need for all the change. Common arguments will include things like “It works like it is” and “We are introducing more complexity”. The reality is both of these arguments may very well be true. Your team has probably dome a good job building the current environment. As you build additional scalability into your infrastructure in areas such as datacenter network design, storage design and standard server configurations, operational management may in deed become slightly more complex. Don’t hide from this; acknowledge your teams concerns as valid.
Marshal Goldsmith published a book in 2007 titled “What Got you Here Won’t Get you There: How Successful People Become even more Successful” The high level gist of this book is that folks often mistakenly believe that by continuing to do the things they have always done, they will continue to excel. And why not, it has worked to this point? The reality is however that the needs at the next level are often different. Circumstances change and require flexibility. This is true in terms of both business acumen as well as your technical infrastructure. Sure it has worked to date but in order to continue to be successful you have to adapt to the changing needs of your organization. Be proud of what you have done; be excited about the opportunity to do better in the future.
2. A silent indifference to best practices…..
There is a saying that goes ‘Standards are great because there are so many to choose from”. The same can be said about best practices. As you start your virtualization project you will find that every vendor at every point in your infrastructure will likely have best practice guidelines. There is absolutely no paucity of information here much of which will be very detailed. It is likely that as you start adopting the virtualization philosophy many of these Best Practices will initially seem irrelevant. Following detailed steps such as ensuring disk partition alignment or setting a plethora of detailed advanced parameters on your storage device will likely engender, at best, audible groans from your team and at worst a silent indifference. You will need to reiterate to your technical team that you are building a foundation for the future. The tweaks being made now may not likely impact performance for two or more years; however, getting it right now will be easier than fixing it once your entire datacenter is live. A good methodology here is to assign certain Best Practice readings to specific team members. Hold them accountable for presenting these practices to their peers and soliciting constructive debate on the best way to proceed. By instilling a sense of ownership in the solution being architected you will help solidify the buy in of your team and ultimately ensure the overall architecture is built around established Best Practices.
3. The end goal seems unreachable and we have many competing priorities…..
Gartner has established a well documented trend for new technology adoption they refer to as the technology adoption curve. The principal is that new technologies get hyped to the point of inflated expectations. The peak of inflated expectations leads to a rush to implement without a clear vision. This hurried adoption leads to the trough of disillusionment. Once early adopters begin to make real use of the technology in a tangible way the adoption curve will start to level off and real value will be gleamed from the technology. In some ways you can expect to see a similar pattern among your team with respect to the adoption of virtualization technology. Initially, as your team is getting trained and setting up your first sandbox environment you may see a lot of excitement about the potential of virtualization. Your team may embrace the classes and spend a good deal of time learning, reading and discussing virtualization. Many lofty ideas will be debated and a general buzz may exist around the project. As you move into your first phase of actually converting certain servers you may see this enthusiasm continue as you start picking off the low hanging fruit in the datacenter. The tricky part comes when all the low hanging fruit has been picked and now you have to start climbing some ladders to get the prize. Maybe the next round of servers can’t be taken down during production hours or there is debate on whether systems should be rebuilt or P2V’d. The team may likely start posing a lot of questions about how to move forward and may even get discouraged about how to actually plot the road ahead. Competing priorities may begin to take on more weight in the mind of team members as the initial euphoria of virtualization turns into a practical work effort. This is where you have to emphasize the importance of eating an elephant one bite at a time. Sit with your team and help to plot out a detailed road map for conversion. Set practical, incremental goals that can be reached in reasonable time frames. This will help keep the momentum going while alleviating the discouragement surrounding the seemingly overwhelming task ahead. Emphasize key areas that will demonstrate practical value to the business and make sure you publicize your team’s success regarding each critical milestone.
In summary, the adoption of a virtualization philosophy has the potential to deliver enormous value to your business. In order to realize the value of virtualization you, as a manger, will have to manage many team issues that can be harder to solve than the pure technical issues. Listen to your teams concerns, help them see the opportunity that virtualization affords them and help plot a pragmatic path that keeps them engaged and excited. Remember, once all the technology is in house and the lights are blinking, it is ultimately your team who will determine the true success of your virtualization efforts.
1. Why do we need to make so much change as a result of this? Things where working fine before virtualization…..
You will find that adopting the virtualization philosophy in your datacenter affords you a fantastic opportunity to rethink nearly every dimension of your technical landscape. Be sure to understand your organizations business strategy and where you may need to go in terms of technical infrastructure to support that strategy. Use this opportunity to align your datacenter strategy with your organizations goals and to create a scalable technology infrastructure. Be aware however that doing this will surely upset some folk’s apple carts and cause them to question the need for all the change. Common arguments will include things like “It works like it is” and “We are introducing more complexity”. The reality is both of these arguments may very well be true. Your team has probably dome a good job building the current environment. As you build additional scalability into your infrastructure in areas such as datacenter network design, storage design and standard server configurations, operational management may in deed become slightly more complex. Don’t hide from this; acknowledge your teams concerns as valid.
Marshal Goldsmith published a book in 2007 titled “What Got you Here Won’t Get you There: How Successful People Become even more Successful” The high level gist of this book is that folks often mistakenly believe that by continuing to do the things they have always done, they will continue to excel. And why not, it has worked to this point? The reality is however that the needs at the next level are often different. Circumstances change and require flexibility. This is true in terms of both business acumen as well as your technical infrastructure. Sure it has worked to date but in order to continue to be successful you have to adapt to the changing needs of your organization. Be proud of what you have done; be excited about the opportunity to do better in the future.
2. A silent indifference to best practices…..
There is a saying that goes ‘Standards are great because there are so many to choose from”. The same can be said about best practices. As you start your virtualization project you will find that every vendor at every point in your infrastructure will likely have best practice guidelines. There is absolutely no paucity of information here much of which will be very detailed. It is likely that as you start adopting the virtualization philosophy many of these Best Practices will initially seem irrelevant. Following detailed steps such as ensuring disk partition alignment or setting a plethora of detailed advanced parameters on your storage device will likely engender, at best, audible groans from your team and at worst a silent indifference. You will need to reiterate to your technical team that you are building a foundation for the future. The tweaks being made now may not likely impact performance for two or more years; however, getting it right now will be easier than fixing it once your entire datacenter is live. A good methodology here is to assign certain Best Practice readings to specific team members. Hold them accountable for presenting these practices to their peers and soliciting constructive debate on the best way to proceed. By instilling a sense of ownership in the solution being architected you will help solidify the buy in of your team and ultimately ensure the overall architecture is built around established Best Practices.
3. The end goal seems unreachable and we have many competing priorities…..
Gartner has established a well documented trend for new technology adoption they refer to as the technology adoption curve. The principal is that new technologies get hyped to the point of inflated expectations. The peak of inflated expectations leads to a rush to implement without a clear vision. This hurried adoption leads to the trough of disillusionment. Once early adopters begin to make real use of the technology in a tangible way the adoption curve will start to level off and real value will be gleamed from the technology. In some ways you can expect to see a similar pattern among your team with respect to the adoption of virtualization technology. Initially, as your team is getting trained and setting up your first sandbox environment you may see a lot of excitement about the potential of virtualization. Your team may embrace the classes and spend a good deal of time learning, reading and discussing virtualization. Many lofty ideas will be debated and a general buzz may exist around the project. As you move into your first phase of actually converting certain servers you may see this enthusiasm continue as you start picking off the low hanging fruit in the datacenter. The tricky part comes when all the low hanging fruit has been picked and now you have to start climbing some ladders to get the prize. Maybe the next round of servers can’t be taken down during production hours or there is debate on whether systems should be rebuilt or P2V’d. The team may likely start posing a lot of questions about how to move forward and may even get discouraged about how to actually plot the road ahead. Competing priorities may begin to take on more weight in the mind of team members as the initial euphoria of virtualization turns into a practical work effort. This is where you have to emphasize the importance of eating an elephant one bite at a time. Sit with your team and help to plot out a detailed road map for conversion. Set practical, incremental goals that can be reached in reasonable time frames. This will help keep the momentum going while alleviating the discouragement surrounding the seemingly overwhelming task ahead. Emphasize key areas that will demonstrate practical value to the business and make sure you publicize your team’s success regarding each critical milestone.
In summary, the adoption of a virtualization philosophy has the potential to deliver enormous value to your business. In order to realize the value of virtualization you, as a manger, will have to manage many team issues that can be harder to solve than the pure technical issues. Listen to your teams concerns, help them see the opportunity that virtualization affords them and help plot a pragmatic path that keeps them engaged and excited. Remember, once all the technology is in house and the lights are blinking, it is ultimately your team who will determine the true success of your virtualization efforts.
Subscribe to:
Posts (Atom)