Recalibrating Indirect Costs
by David Merrill on Jun 18, 2012
As our industry starts to move to consumption-based pricing for storage, there will be an increased need to understand and track current direct and indirect costs, especially at the point that we compare current cost structures to consumption or cloud offerings.
This past week I spent a half-day with a large client in SE Asia, and our primary topic of conversation was chargeback and cost recovery calculations. This is a topic that I do not seem to address very often, since most IT organizations do not account for, or recover, consumption costs of storage. With this customer, we got into a deep discussion on the topic and a review of their direct and indirect costs. The purpose of the meeting was to strategize on reducing their direct costs and what impact would be possible. During our talk, I learned that indirect costs were a larger portion of the total cost even though they were not focused on these areas.
One of the solutions that came out was MSU or capacity-on-demand from 3rd party providers, and I warned that they would have a ‘sticker shock’ if they did not consider their direct and indirect costs when comparing and contrasting 3rd party consumption options. The reason is that when you purchase from a provider, they will not discriminate between direct and indirect, but will pass along all their cost of goods, including their margin, to the consumer in the monthly rate.
When organizations focus on direct, and are not sensitive to indirect costs, then the move to a cloud or consumption model may not look economically attractive. A more complete total cost picture has to be presented to contrast to other options, especially when such a move is done with the goal of reducing costs.
For many people, the definitions of direct and indirect can be summarized as:
|Capital costs, depreciation or lease||Power, cooling and often DC floor space|
|HW maintenance||Storage management labor (can be either type)|
|SW maintenance||Monitoring, tuning|
|On-boarding, transformation services||Provisioning time and effort|
|Storage management labor (can be either type)||SAN, LAN, WAN|
|Backups (again, can be either type)|
|Outage time, cost and risk|
|Performance cost and risk|
|Migration and remastering time and effort|
The reasons why people segment costs in these buckets can vary from customer to customer, but it usually comes down to local and individual budgets assigned to the IT infrastructure group for storage. For example, the network and environmental costs are handled by another organization, so to the IT storage team these become indirect costs.
There is nothing wrong with this segmentation process, but when looking for macro or micro optimization, many more cost areas need to be considered than what is simply under the budget control of the storage team. And when consumption or cloud offerings are considered, an even broader view of direct and indirect costs needs to be included in any comparative work or business case development. See this older blog link on the topic of not shifting or ignoring certain costs when looking at cloud storage offerings: Don’t Just Transfer the Costs.