Back to 1999 CAPEX Ratio
by David Merrill on Dec 20, 2012
I like looking at trends. Let’s take a look at one storage economics trend—the ratio of CAPEX to OPEX in the total cost of storage ownership.
In 1999, we saw a pattern that the purchase cost was about 50% of storage cost of ownership. Disk was relatively expensive (one million dollars per TB) so when we analyze the total cost of a GB back then, we saw that CAPEX was the major contributor. This time period was before the shift to SAN and enterprise-pooled storage. Disk was local to the server or mainframe.
When we look at TCO circa 2005, we notice that this rate changed radically. The CAPEX portion went from 50% to about 20% of the TCO. The total cost was reduced by 80% over this 6-year period, resulting in a change of cost ratios driven by:
- A lower cost of disk infrastructure
- Higher costs of labor, power, floor space needed to operate these environments
- Levels of waste creating a lot of operational and financial problems. Poor utilization increased overall OPEX cost
- Post 9/11 storage architectures placing more emphasis on data protection and disaster protection
- Migrations becoming much more complex and expensive due to a high rate of growth in storage assets
Now, let’s take a look at another recent trend. After seeing very high OPEX costs (as a percent of TCO), IT organization started investing and seeing results from:
- Virtualization of the storage systems, volumes and servers
- Tiering of data, thin provisioned volumes
- Virtualization-assisted migration
- Auto-archive and backup improvements
The result that we see is with effective and efficient investments (technology, best practices, behavior changes) IT department tend to see their storage economics have returned back to CAPEX being 50% of TCO. Again, the total cost has been reduced by over 90% since 1999, but the CAPEX to OPEX ratio has returned to a 13-year old ratio. This is both good and bad news.
The good news is that OPEX costs can be and has been reduced over the years. Virtual, thin and tiered storage has a lower cost of ownership. Migration costs are dramatically reduced with virtualization. Environmental costs are much lower on a per-TB basis. Lastly, data protection (backup and DR) processes have improved significantly, especially in regards to reducing the cost of risk. Economies of scale have reduced local and long distance circuit costs. People, process and automation have also matured for most organizations. Clearly having higher rates of data in the TCO denominator helps to drive down unit costs, but we cannot altogether ignore the many improvements achieved over the last 10-15 years.
The bad news is that we don’t know where to go from here to continue reducing costs. We have to ignore for the moment the results in Figure 2 and focus on the cost allocation percentiles in Figure 1. We have to assume that OPEX costs will continue to improve, but the biggest hurdle for total cost reduction is the cost of capitalization. Look at figure 2, the CAPEX rate can be about the same due in large part to:
- Buying more than we need
- Buying ahead for a “rainy day”
- Overall poor utilization
- Long depreciation terms
- Project-based (not shared) infrastructure procurement
- We see that some customers throw more storage capacity at a problem rather than spend labor costs (headcount) to properly manage the storage they already have. This adds to excess capacity
- The explosion of copies for backup, snapshots, DR, data mining, development test, etc
In order to continue reducing the TCO of storage is to challenge our current CAPEX traditions and ownership models. We need to take a more radical view of depreciation, and why we allow a tax-accounting-book-value-methodology to dictate how and when we upgrade storage infrastructures in order to deliver cost reduction. I believe in the near-future, those IT centers that have exhausted most (if not all) technical, operational, architectural and behavioral changes in order to reduce costs, will start to look at alternatives to CAPEX to acquire and store data. I have covered these methods previously in these blogs:
[...] Dave Merrill (aka The Storage Economist) talks about storage cost ratios in “Back to 1999 Capex Ratio“. Dave’s content is good, certainly thought provoking but perhaps worthy of a wider [...].