Virtualization Saves 90% on Power Costs

Pessoa

Analysis of Cost Benefits of Server Virtualization

Short Paper

Analysis of Cost Benefits of
Server Virtualization
Prepared by: Glaucio Pessoa, PE, PMP®

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By Gláucio T. Pessoa, P.E., PMP®
Executive Summary
Over the past few years, virtualization has gained attention in information systems.
Basically, server virtualization implies the implementation of servers in software.
Virtualization offers the benefits of infrastructure simplification, operational flexibility,
improved resource availability, enhanced availability, and streamlined security and
management. One can translate those five technical benefits into cost savings. This
essay analyzes two case scenarios which use virtualization to yield power consumption
reduction. Based on the data provided, assumptions made, and calculations performed,
the conclusion is that power savings from virtualization might be significant. However,
one might need to justify virtualization investments based on other cost benefits in
addition to savings in power requirements.
Introduction
Over the past few years, virtualization has been one of the biggest buzz words in
information systems. From 2007 through 2009, the investment adoption trend in
virtualization went from 30% to 45%. Moreover, in 2009, 37% of small organizations,
48% of medium organizations, and 47% of large organizations made investments in
virtual data centers (“Storage Virtualization”, 2009).
Claims of cost savings by implementing virtual information systems have been high.
Figure 1 displays the percentage of businesses that claimed a positive ROI due to
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virtualizing storage in 2009. The pie chart indicates that 78% of the analyzed
businesses reported gains.
In this short paper, we will expand on and analyze two possible applications:
replacement of physical servers in a small/medium size office; and consolidation of
equipment in a data center. The essay starts with a brief introduction to the topic and
the presentation of some of the potential benefits of virtualization.
Fundamentals of Virtualization
According to Gilmore (2008), virtualization is the process of consolidating dedicated
hardware for hosts (servers) to share resources thus reducing costs. Basically, this
consolidation consists of transforming hardware into software. One can explain this
transformation as the creation of a group of virtual machines.

Virtual machines are independent servers (computers) which are not physical and
tangible, but instead fully based on software. Virtual machines have the same
functionalities of the latter, but only exist virtually. One needs to set up a physical
server as host to several virtual machines. Each virtual machine behaves exactly like a
physical server, therefore, they interfaceand interact seamlessly with other physical and
virtual servers.

In a virtual server environment, there is allocation of the resources of the host physical
machine to the virtual serverin a dynamic and transparent manner. In this context,
resources are the physical main modules of a computer: memory, disk space, network

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capabilities, etc. One of the perks of virtualization is the fact that each virtual machine
operates as if it had a fixed portion of those resources, even though the resources are
shared in real-time (Gilmore, 2008).

Benefits of Virtualization
Sutherland (2011) describes virtualization as a mature technology with proven results.
He indicates that timing is perfect for companies that wish to adopt this framework due
to the pool of knowledge which is now available and the number of established software
solution providers. Amidst economic uncertainties, firms are progressively adopting
virtualization and reaping the benefits of better efficiency and cost savings.

According to Sutherland (2011), virtualization brings five major advantages:

Infrastructure simplification –Virtualization cuts on the number of
necessary servers and associated infrastructure thus lessening the
expenditures with real-estate, power, and cooling requirements

Improved resource utilization – Virtualization replaces the decades old
paradigm of “one server to one application”. It allows for an ever increasing
ratio of the number of virtual machines per physical host. Resources such as
computing power, memory, disk space, and network interfaces are allocated
to each virtual machine on an “as needed” basis

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Enhanced availability – Mission critical software applications have low
tolerance to downtime. Virtualization allows for whole clusters of virtual
machines to be backup or even moved. Since all operations are performed in
software, there is a reduction in recovery time thus improving business
continuity

Operational flexibility – Virtualization allows firms to rapidly install software
and configure hosts. Since resources are assigned dynamically, responses to
the new demands of the business can be implemented in reasonable
timeframes. As long as there is capacity in the existing infrastructure, there
are no delays associated with ordering and placing new equipment

Streamlined security and management – It is possible to better perform
concomitant configuration, security management, and back up of multiple
hosts, since they are resideas part of the same physical machine

The five points listed above are pluses in their own rights, however, for a
manager they all translate into potential cost savings. Infrastructure simplification
reduces equipment demands, therefore it lowers maintenance, administration,
and personnel costs. Improvements in resource utilization lead to a more efficient
use of resources thus guaranteeing better return on investment for physical
servers. Enhanced availabilityreduces costs incurred due to downtime plus
improves customer experience, which positively impacts revenues. Operational
flexibility also reduces downtime and cuts down on expansion expenses.
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Simplification of security and management creates the proper condition for
savings since less time is invested in performance monitoring.

At this point one might believe that virtualization is the “Holy grail” of computing.
However, virtualization is not a “silver bullet”, since it is not the response to all
software and hardware challenges and opportunities. Proper research and
planning is necessary to determine if there are truly payoffs to switching to a
virtual environment. Sutherland (2011) defines this as a two stage process:

Discovery – This is the first step which entails identifying the components
that make up the data center; e.g. servers, switches, network
interconnectivity, etc. After those elements have been classified, one also
needs to conduct a performance analysis to determine current and forecasted
needs

Planning – After one has mapped the physical environment, one is ready to
determine what portions can be virtualized. At this point, managers are ready
to perform a capital budgeting analysis to determine whether or not
virtualizing the data center makes financial sense

The five benefits described above make a strong case for virtualization. However, truly
financial benefits must be realized to justify moving into a virtual environment. The next

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section of this paper will review two case studies that illustrate how reduction in power
requirements can be translated into cost savings.

Virtualization case studies
Case Study 1 – Small/mid-side office with single data closet setup
Guster, Hemminger, and Krzenski (2009) conducted an analysis of the cost reduction
associated with virtualizing a small/mid-size office set up with nine servers with very
specific functionalities. Basically, they portrayed a set up with primary and secondary
servers, one web server, one e-mail server, and five other servers with networking and
security roles. This is a common set up which is similar to what might be employed for
basic daily activities.
For the study, the team implemented both the physical and the virtual setups and
conducted measurements over a span of nine days. Two parameters were logged: the
power requirements for running the servers; and the power requirements for cooling the
servers. The results pointed to an 80% reduction in the power for both operating and
cooling the servers, which in this simple scenario, were translated to $900 in annual
savings (Guster et al., 2009).

Would those savings be sufficient to justify a transition from nine physical servers to
nine virtual servers integrated into one physical machine? To answer that question, one
would need to first incorporate some additional assumptions into the analysis:

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Costs for software licenses would remain the same whether one migrates or not
to the virtual machine configuration
Server software and hardware admin costs would remain the same
Cost for acquiring a new physical server: $12,000.00
Cost to migrate the nine physical serversto a single virtual server: 3 business
days x 8 man-hours x $150/man-hour = $3,600.00
Useful life of server: 10 years
Server will be replaced in year 5
Depreciation schedule for sever: straight-line
Salvage value of server at end of useful life (10 years): $500.00
Sale price of server at the end of 5 years: $7,000.00
Salvage of value of each existing server: $500.00
Tax rate: 34%
Nominal rate of return: 10%
Inflation rate: 3%
In the proposed scenario, there will be incremental cash inflows of $900 from years 1
through 5. There will be a cash inflow of 9 x $250 for the salvage value of the existing
servers. The new server will be salvaged at $6,250 at the end of year 5. Based on the
assumptions above, there will be a cost of $12,000 plus $3,6000 to buy the physical
host and setup the virtual machines. Table 1 is the worksheet of incremental cash flows
for the replacement of the physical server with virtual servers. Please notice that the
calculated net present value (NPV) of the cash flows of the migration to virtual servers is
-$3,713.99 and the projected internal rate of return is -1.88%.
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Let us modify this scenario by assuming that the current nine physical servers will be
replaced with nine new physical machines. In this updated setting, we will assume that
there will be no energy savings since we would not be reducing the number of physical
servers. However, there would be an initial investment of $108,000 (9 x$12,000) since
we would be ordering more hardware. The revenue from selling the machines at the
end of 5 years would be $63,000.Table 2 is the worksheet of incremental cash flows for
installing new physical servers. The calculated NPV and IRR for the revised scenario
are -$50,425.74 and -6.89%, respectively.
Based on the computed NPV and IRR values for both options, we deduct that a
replacement of the physical servers with a virtual environment would significantly
reduce the impact of the initial investment in the NPV. Therefore, all things being equal,
given the opportunity to replace the hardware, virtualization makes more financial sense
in a simple scenario such as this one.
One important point that one must recognize is that in this case study, even though
virtualization was financially advantageous when compared to purchasing new
hardware, it would still yield a negative NPV. Therefore, power savings alone cannot be
the only driver for going with a virtual solution. One must look at the prospect of savings
in other areas such as cost benefits associated with security, flexibility, availability, plus
cost reduction due to better utilizing other resources, e.g. floor space and network
infrastructure. The next case study takes this analysis to the next level as it explores
potential cost savings in a large computing environment.

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Case Study 2– Server consolidation in a data center
Uddin, Rahman, and Alsaqour (2012) propose the use of virtual hosts to consolidate
physical servers in data centers. This approach is based on the fact that servers on
average have poor utilization rates, i.e. they do not fully utilize dedicated resources such
as CPU, memory, disk space, etc. This is exacerbated by the fact that in data centers
the number of servers range from hundreds to thousands.
Koomey (2007) points to a study that indicates that data centers account to 1.2% of the
total electricity consumption in the U.S., or an estimate of a whopping 9,477,000 kW.
Brown (2008) mentions a report from the Environment Protection Agency which not only
corroborates those findings, but also indicates that data center energy demands double
every five years. Even though data centers are populated with many individual and
specialized elements such as data storage devices, servers, cooling equipment,
networking hardware, generators, etc. servers are the biggest energy consumers since
they perform most of the processing functions (Koomey, 2008).

The approach proposed by Uddin et al. (2012), calls for categorizing servers based on
three categories:
Innovation servers – Servers used to develop new software
Production servers – Servers that run revenue producing applications
Mission critical servers – Servers with high impact to revenues and/or client
relationships

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In their paper, Uddin et al. (2012) propose the consolidation of servers into virtual
machines using a ratio of 15 to 1 for innovation servers, 10 to 1 for production servers,
and 5 to 1 for mission critical servers. For a data center made of 1,000 servers, this
represents are reduction in 92% in the number of servers, and power consumption
reduction of 150,460 Watts.

To analyze the potential cost benefits of this approach, let us use the same
assumptions stated for Case Study 1, plus the following additional suppositions:
Price per kilowatt-hour: $0.12
Estimated Annual savings: $0.12 x 24 hours x 365 days x 150.460 kW =
$158,163.55
No new servers will be acquired, since existing capacity will be re-utilized
Freed up servers will be turned down; 75% of freed up servers will be sold at the
estimated salvage value of $500

Table 3 shows the worksheet of incremental cash flows for this scenario. Please
notice that based on assumptions provided above, the calculated NPV is $53,602.89,
the estimated IRR is 11.95%, and the profitability index and payback period are 1.39
and 3.61 years, respectively.
Based on the listed computed metrics alone, one might conclude that power savings
from consolidation method being investigated would suffice to increase the value of the
firm. However, if one takes a closer look into Table 3, one verifies that $223,245.00 in
savings came from the sale of the decommissioned servers. Figure 2 represents the
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NPV based on percentage of unused equipmentsold. The graph indicates that the
breakeven point is when there is a sale of 57% of the hosts released after consolidation.
Here again, just like in the first case study, we see that although virtualization produces
substantial power savings, those savings alone might not be sufficient to justify
migration to a virtual server environment.
Conclusions
This short paper focused on the cost benefits of server virtualization, and it analyzed
two distinct case scenarios based on two different sizes of data centers. The
approaches to virtualization in both cases were similar, but not the same. The paper
presents calculations based on the data provided and a set of assumptions. In both
scenarios, it has been shown that virtualization can potentially produce savings in power
thus reducing operating costs. However, the computationsalso infer that cost savings
from power consumption diminution alone might not justify investments in virtualization.
Firms that plan to invest in virtual data centers must also look into other benefits such
as sales of unused equipment after consolidation to augment the financial value from
virtualization projects.
To further expand the work on this topic, one would have to refine the case scenarios
to include other potential sources of savings, such as savings associated with better
utilizing networking resources and physical space, plus cost decreases from
streamlining administration and security functions. Other possible subjects for review
would be cost benefits of desktop virtualization and virtualization in mobile devices; i.e.
smartphones and tablets.

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References
Brown, R. (2008). Report to congress on server and data center energy
efficiency.Public law. pp. 109-431.

Gilmore, A. (2008, November). Virtualization 2.0.Certification Magazine, pp. 42-43.
Guster, D., Hemminger, C., &Krzenski, S. (2009). Using Virtuzation to Reduce Data
Center Infrastructure and Promote Green Computing, International Journal of Business
Research, 9(6), pp. 133-140.
Koomey, J. G. (2007).Estimating total power consumption by servers in the US and the
world. Retrieved from High-Performance Building for High-Tech Industries website:
http://hightech.lbl.gov/documents/data_centers/svrpwrusecompletefinal.pdf

Koomey, J. G. (2008). Worldwide electricity used in data centers. Environmental
Research Letters,3. pp. 034008-034015.doi:10.1088/1748-9326/3/3/034008

Storage Virtualization Shows Promise, but Many on Fence.(2009, December).Computer
Economics, 31(12), pp. 1-9.

Sutherland, C. (2011). Benefits of Server Virtualization, Banking New York, 20, pp. 2430.
Uddin, M., Rahman, A. A., &Alsaqour, R. (2012), Server Virtualization: Building Energy
Efficient and High Performance Data Centers to Save Total Cost of Ownership.
International Review on Modelling and Simulations, 5(6). pp. 2618-2626.

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Appendix A
Tables and figures

Figure 1.Percentage of virtualization adopters who report positive, break-even, and
negative returns on investment (ROI).Adapted from “Storage Virtualization Shows
Promise, but Many on Fence”.(2009, December).Computer Economics, 31(12), pp. 19.Copyright 2009 by Computer Economics, Inc.

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$150,000

NPV vs. Percentage of Servers Sold

$100,000

$50,000

0
5
10
15
20
25
30
35
40
45
50
55
60
65
70
75
80
85
90
95
100

$0
NPV

($50,000)

($100,000)

($150,000)

($200,000)

Figure 2.Plot of the net present value (NPV) as a function of the percentage of freed up
servers being sold after consolidation.

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Table 1. Worksheet of incremental Cash Flows for implementing the nine basic virtual
servers for a small/medium size business
Data
Purchase Price of server
Useful life of server
Sale price of server in 5 years
Nominal rate of return
Tax rate

$12,000.00
10 years
$7,000.00
10.0%
34.0%

Investments
1
2
3
4

Acquisition of new server
Accumulated depreciation
Adjusted basis of machine after depreciation
Virtual machine setup cost

Year 0
($12,000.00)

Setup cost of virtual machines
Server will be replaced in
Salvage value of each existing server
Inflation rate
Real rate of return

$3,600.00
5 years
$500.00
3.0%
6.8%

Year 1

Year 2

Year 3

Year 4

$1,150.00
$10,850.00

$2,300.00
$9,700.00

$3,450.00
$8,550.00

$4,600.00
$7,400.00

Year 5
$6,745.00
$5,750.00
$6,250.00

($3,600.00)

Income
5
6
7
8
9
10

Revenues from sale of existing servers
Savings in power consumption
Depreciation
Income before taxes
Tax at 34%
Net income

Incremental cash flows
11
Savings in operating costs
12
Sales revenue
13
Taxes
14
Cash flows from operations (lines 11 + 12 +13)
15
Cash flows investments(lines 1 + 4)
16
Total incremental cash flows of project
NPV of project

($3,713.99)

$4,500.00
$900.00
$900.00
$900.00
$900.00
$900.00
($1,150.00) ($1,150.00) ($1,150.00) ($1,150.00) ($1,150.00)
$4,500.00
($250.00)
($250.00)
($250.00)
($250.00)
($250.00)
($1,530.00)
$85.00
$85.00
$85.00
$85.00
$85.00
$2,970.00
($165.00)
($165.00)
($165.00)
($165.00)
($165.00)

$900.00

$900.00

$900.00

$900.00

$900.00

$4,500.00
($1,530.00)
$2,970.00
($15,600.00)
($12,630.00)

$85.00
$985.00
$0.00
$985.00

$85.00
$985.00
$0.00
$985.00

$85.00
$985.00
$0.00
$985.00

$85.00
$985.00
$0.00
$985.00

$85.00
$985.00
$6,745.00
$7,730.00

IRR of project

-1.88%

Note: NPV calculations are based on the real rate of return.Revenues from the sale of the server in year 5
are based on sale price minus taxes on the difference between sales price and salvage value.

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Table 2. Worksheet of incremental Cash Flows for implementing the nine basic physical
servers for a small/medium size business
Data
Purchase Price per server
Useful life of servers
Sale price per server in 5 years
Tax rate

$12,000.00
10 years
$7,000.00
10.0%
34.0%

Investments
1
2
3
4

Acquisition of new servers
Accumulated depreciation
Adjusted basis of machine after depreciation
Virtual machine setup cost

Year 0
($108,000.00)

Setup cost of physical machines
Servers will be replaced in
Salvage value of each existing server
Inflation rate
Real rate of return
Year 1

Year 2

Year 3

$3,600.00
5 years
$500.00
3.0%
6.8%
Year 4

Year 5
$60,705.00
$10,350.00 $20,700.00 $31,050.00 $41,400.00 $51,750.00
$97,650.00 $87,300.00 $76,950.00 $66,600.00 $56,250.00

($3,600.00)

Income
5
6
7
8
9
10

Revenues from sale of existing servers
Depreciation
Income before taxes
Tax at 34%
Net income

11
12
Sales revenue
13
Taxes
14
Cash flows from operations (lines 11 + 12 +13)

$4,500.00
$0.00
$0.00
$0.00
$0.00
$0.00
($10,350.00) ($10,350.00) ($10,350.00) ($10,350.00) ($10,350.00)
$4,500.00 ($10,350.00) ($10,350.00) ($10,350.00) ($10,350.00) ($10,350.00)
($1,530.00) $3,519.00 $3,519.00 $3,519.00 $3,519.00 $3,519.00
$2,970.00 ($6,831.00) ($6,831.00) ($6,831.00) ($6,831.00) ($6,831.00)

$0.00

$0.00

$0.00

$0.00

$3,519.00
$3,519.00

$3,519.00
$3,519.00

$3,519.00
$3,519.00

$3,519.00
$3,519.00

$3,519.00
$3,519.00

Cash flows
frominvestments
(lines 1 + 4)

($111,600.00)
($108,630.00)

$0.00
$3,519.00

$0.00
$3,519.00

$0.00
$3,519.00

$0.00 $60,705.00
$3,519.00 $64,224.00

NPV of project

15
16

$0.00
$4,500.00
($1,530.00)
$2,970.00

IRR of project

-6.89%

($50,425.74)

Note: NPV calculations are based on the real rate of return. Revenues from the sale of the servers in year
5 are based on sale price minus taxes on the difference between sales price and salvage value.

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Table 3.Worksheet of incremental Cash Flows for consolidating 92% of the capacity in a data
center with 1,000 servers
Data
Set up cost per server
Tax rate
Number of servers to be sold
Estimated annual savings

$600.00
10.0%
34.0%
677
$158,163.55

Investments
1

Total number of servers (virtual & Physical)
Inflation rate
Real rate of return
Salvage price per physical server

Year 0
($600,000.00)

Total server set up cost

Year 1

$

1000
3.0%
6.8%
500.00

Year 2

Year 3

Year 4

Year 5

$158,163.55
$158,163.55
($53,775.61)
$104,387.94

$158,163.55
$158,163.55
($53,775.61)
$104,387.94

$158,163.55
$158,163.55
($53,775.61)
$104,387.94

$158,163.55
$158,163.55
($53,775.61)
$104,387.94

Income
2
3
4
5
6

Revenues from the sale of the freed up servers
Income before taxes
Tax at 34%
Net income

7
Revenues from the sale of the freed up servers
8
9
Server setup cost
10
Taxes
11
Cash flows from operations (lines 7 + 9 + 10)
12
Cash flows from investments(line 8)
13
NPV of project
Profitability Index

$53,602.89
1.39

$338,250.00
$338,250.00
($115,005.00)
$223,245.00

$158,163.55
$158,163.55
($53,775.61)
$104,387.94

$338,250.00
$158,163.55 $158,163.55 $158,163.55 $158,163.55 $158,163.55
($600,000.00)
($115,005.00)
$223,245.00
($600,000.00)
($376,755.00)
IRR of project
Payback period

($53,775.61) ($53,775.61) ($53,775.61) ($53,775.61) ($53,775.61)
$104,387.94 $104,387.94 $104,387.94 $104,387.94 $104,387.94
$104,387.94 $104,387.94 $104,387.94 $104,387.94 $104,387.94
11.95%
3.61 Years

Note: NPV calculations are based on the real rate of return.

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