Cloud Financial Proposal Ranking

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Analyze and Rank the Proposals for Cost Favorability

You reviewed several proposals and discussed the responses with your peers in the previous step. Now it is time to consider the financial or cost proposal elements of the RFP responses and rank them in terms of favorability.

While the cost associated with a proposal should not be the primary decision-making criterion, it is important to analyze the financials in order to understand the feasibility for the vendor to actually provide the requested services, whether the proposed costs are within your budget, and to ensure that all relevant costs are included.

Use the financial proposal ranking template to rank these financial proposals in order from most favorable to least favorable.

Analyze the Financials

When evaluating RFP responses for selection, the financial or cost proposal should not be used as the primary decision-making criterion, but at a minimum you should conduct an analysis of the financial proposal to assess the following:

  1. Feasibility for the vendor to actually provide the requested services
    1. At the cost provided by the vendor, can the company actually provide the services that you requested? For example, if the vendor bids $1 million and you know that when you use the AWS TCO calculator, it will actually cost $2 million just to provide the AWS portion of the RFP, that should be a sign of a problem.
  2. Is the cost for the services within your organization’s budget?
  3. Are there any costs missing from the proposal that were required by the RFP?
    1. For example, if the bid contains only the AWS costs and does not include the migration professional services costs, then you should disqualify the proposal.

In evaluating the financial proposal, it may help to use criteria such as the following:

  • Define a total number of possible points for the financial proposal
  • Give the lowest bidder the total number of possible points for the financial proposal
  • Prorate the points for all other bidders based on how the cost compares to the lowest bidder
    • For example, if the lowest bidder is $1 million and the total number of possible points is 100, the lowest bidder would get 100 points, and a bidder with 50% higher cost would only get 50 points (100 times 50%).

Analysis of Costs and Benefits of Cloud Computing

by Albana Madhi (Kacollja), Gjergji Shqau, and Aldi LekajAbstract: This article incorporates a theoretical and practical approach to cost-benefit analysis to help company managers to decide whether to adopt cloud computing. Cost-benefit analysis is divided into six distinct sections to determine what costs and benefits are economically significant for the case study analyzed.Based on the allocation sections, TEI (total economic impact) is applied. This methodology was chosen because it gives a general view of the impact and benefits in information technology to cloud computing adoption not only through the analysis of costs and benefits but also giving appropriate weight to existing information technology resources.The article deals with analysis, forecasts, and implementation of cloud computing, showing financial benefits acquired from “green IT” as a consequence from this technology. Through a detailed analysis of the cloud computing phenomenon and its connection with green IT, this article conducts a cost-benefit analysis as a case study using an Internet and communications services company. The aim is to show the potential benefits of the transition to cloud computing, benefits expressed in increased efficiency of the use of technological resources, or even increased environmental benefits.

Approach and Methodology

Specifically, we followed these steps:

      1. Interviewed marketing staff, sales and product managers, human resources managers.
      2. Interviewed 13 PRIMO Communications engineers working in various areas of the organization.
      3. Built an organization model based on features extracted from the interviews.
      4. Built a financial model using the TEI method. The financial model was populated with data about the costs and benefits that emerged after interviews.
      5. Following the methodology ,we analyzed four essential elements:
        • cost
        • benefits to the entire organization
        • strategic opportunities for flexibility
        • risk

Since large undertakings have a sophisticated investment analysis, particularly with regard to IT, TEI methodology provides a picture of the whole economic impact.

Purpose of This Article

The project examines what will happen from the cost-benefit point of view in the case of transition services for PRIMO Communications from on-site compared with use of Amazon cloud services (AWS, Amazon Web Services) for the data center.

Important Information

We have built a general picture for the total economic impact (TIE) of this change from an on-site data center to Amazon cloud service. Our hypothesis is that benefits of the shift to cloud computing data center will reduce the total operational cost. Many of the benefits of this transition are not easily translated into numerical values.However, there are three main areas where operational costs will undergo reduction:

      1. cost savings of hardware devices
      2. savings from energy consumption based on the loan of equipment to AWS
      3. savings in staff costs

Engineering staff productivity will increase due to higher efficiency of systems and time management. The value and quality of products and services offered will generate increased consumer satisfaction.Although the results of cost-benefit analysis were positive, environmental benefits are difficult to define and to determine if they play a decisive role in the choice of cloud computing. This relates to the fact that many of the biggest providers of cloud computing build huge data centers and use energy in order to increase their effectiveness. They do not take into account that they are destroying renewable energy. Secondly, the current legislation in force, including the developed countries of the most experienced in this field, do not give priority to environmental protection.

Project Description

A cost-benefit analysis in cloud computing transition was done for the company PRIMO Communications. The project analyzes the positive sides but also the risks if the company uses the services offered by Amazon.PRIMO Communications offers a package of services in Internet, telephone, and television. Since the number of users of these services is always growing, there is a constant need for capacity to offer quality and consistency.

Action Plan

The action plan for the transition to the cloud is organized as follows.

      • Analyses will be supported on Amazon Web Services (AWS).
      • Source for the transition to the cloud will be built on VPC (Virtual Private Cloud Amazon).
      • IT staff will create a template Amazon Machine Image (AMI) for operating systems currently in use (middleware, libraries, relevant configuration data).

Benefits of Cloud Technology

The main economic benefit of technology cloud comes from the type of payment. This is a kind of payment, based on use, usually known as the conversion of capital costs (CAPEX) to operating costs (OPEX). The payment model we use differs from the usual rent because the latter is a charge made for a certain period of use of computer resources in this case, even though they cannot be used at this time. The payment model we use is completely independent of the period of use but appears only in case of use of those resources.

Financial Benefits

Buying a computer or an application capacity (SaaS) is delivered as a cloud service technology known as operating expense (OPEX) that may increase or decrease depending on the request during an interval of time. The same solution in a data center in an organization is a sunk cost known as capital cost (CAPEX) and presented in the balance sheet as assets and amortized over the longer term.Transformation of capital costs in operating expenses makes financial decisions easier and less riskier. This is summarized in the table below.Comparison of CAPEX and OPEX

Factor Traditional Technology Cloud Technology
1-Type of expense Capital expense (CAPEX)
Operational expenses (OPEX)
Just (OPEX)
2-The flow of cash 0 Payments for offered service
3-Income Maintenance expenses
Amortization of capital expenditures
Maintenance payments
4-Balance Long-term assets
1-Hardware
2-Software
Not recorded in the balance
1-Hardware
2-Software

Cloud Computing Costs

A comparison between cloud computing and a data center is difficult because of the hidden and indirect costs that appear in a data center firm (in-house).There are many arguments and counterarguments regarding the total cost (TCO) between the types of cloud computing technology and in-house because the costs are specific and depend on the type of business.

Financial Analysis

Cash flows that are used in financial analysis start with an initial investment column reflecting costs incurred at time 0 or at the beginning of year 1. These costs are not discounted. Calculations for the present value (PV) were performed for each total cost and benefit. Present value calculations that are shown in the table are summarized and include the amount of inflows and outflows, with a discount rate every year. The table below lists the main assumptions used for measurements.The table provides approximate estimates of rates of annual use of data center processing nodes during the year. A use of 100% means that the server is using 8736 hours each year. This was measured by 24 hours * 7 days * 52 weeks. Some types cannot be shared servers in use, which means that their use is only intended for a single user. These are mainly small computers. Shared servers can be used by several users at the same time.The Percentages of Annual Use of Processing Nodes

Ref Type of Servers Typical Tasks Typical Usage Model Number of Hours Per Year Annual Percentage of Use
A11 Small For the daily office tasks 8 hrs * 5 days * 47 weeks 1880 21%
A12 Small For software testing purposes 8 hrs * 5 days * 47 weeks 1880 21%
A13 Medium For different customers 24 hrs * 7 days * 52 weeks 8736 100%
A14 Big For larger software development, documentation 10 hrs * 5 days * 47 weeks 2350 27%
A15 Very big Servers for the main services in the company 24 hrs * 7 days * 52 weeks 8736 100%

Costs for the Staff

When companies own and operate servers in their offices, they need to hire full-time personnel to select, acquire, set, support, and manage them. Server administrators perform a variety of tasks, including updating the server, returns, movement, incident management and problem management, and monitoring of salespeople. The table below gives a forecast of annual salary for this staff, which will consist of an IT manager, two system administrators, and four developers.Annual Cost of Staff Salaries

Ref Measurement Unit Basic Cost Number Decreasing rate Salary
B4 IT manager’s salary 140,000 1 100% 140,000
B5 System administrator’s salary 110,000 2 100% 220,000
B6 Developer’s salary 70,000 4 20% 56,000
Total 416,000

The Costs of the Data Center

The data center consists of only one main equipment room. We only included cost estimates that were visible and important. Ancillary costs such as architecture costs, cabling, real estate companies, the building management, security, etc., are not very easily seen, and maintaining and operating an infrastructure includes the cost other than those listed below, but we will assume that the following proposed assessment is reliable enough.Number of Computers

Type of Server Hardware Specifications Equivalent to AWS Specifications Number of Computers
Small server Platform 32-bit, 2 GHz CPU, 2 GB memory , 160 GB disc Small instance 1.7 GB of memory, 1 EC2 compute unit (1 virtual core with 1 EC2 compute unit), 160 GB storage, 32-bit platform 3
Medium server Platform 64-bit, 1 quad-core2 GHz CPU, memory 8 G RAM,500 GB disc Large instance 7.5 GB of memory, 4 EC2 compute units (2 virtual cores with 2 EC2 compute units each), 850 GB storage, 64-bit platform 5
Big server Platform 64-bit, 2 quad-core2 GHz CPUs, Memory 15 GB ,850 GB disc Extra-large instance 15 GB of memory, 8 EC2 compute units (4 virtual cores with 2 EC2 compute units each), 1690 GB storage, 64-bit platform 6
Huge server Platform 64-bit, 4 quad-core2 GHz CPUs, Memory 32 GB,1 TB disk High-memory double extra-large instance 34.2 GB of memory, 13 EC2 compute units (4 virtual cores), 850 GB of local instance storage, 64-bit platform 4
Total 18

Cost of hardware is based on the total cost of acquisition, operation, and substrate that comprises the data center servers, network equipment, and hardware maintenance. Costs that include operating system software and application licenses and lease of the building costs are not calculated in the financial analysis. This is because these costs are unchanged in terms of passing the assets of the company to the Amazon cloud. When calculating the financial impact of a data center, the cost of replacing computers that is included in depreciation costs should be considered. As such, the initial cost of buying the hardware will be amortized over the useful life of the asset. In this case, it is about three years (A4). Therefore, using a fair depreciation, expenses for servers are minus the initial purchase at the end of life of dividing this value received for life. For simplicity, we will assume a value equal to zero rescue. Consequently, the annual cost of servers is calculated as follows:Annual server cost = (total number of servers * by cost per server) / A4Network Equipment CostServers allow network devices to connect to each other and to the Internet. Network devices include firewalls, routers, switches, and intrusion detection systems and other equipment. We have assumed costs for equipment equal to 20 percent (A5) of the original value of the cost of amortizing the right server for three years of useful life (A4). The annual costs of network equipment is calculated by:Annual cost of network equipment = (total cost per server * by server * A5) / A4

Equipment Maintenance Cost

Servers and network devices are typically purchased with an annual contract maintenance plan for equipment repair in case of hardware defects. The annual maintenance cost is expressed as a percentage of the original purchase cost of servers and network devices, approximately 10 percent (A6). The annual cost of maintenance for servers and network equipment is calculated as follows:

      • Annual cost of hardware maintenance (hardware annual maintenance cost) = annual cost of maintenance of the servers (annual maintenance cost of servers) + annual maintenance cost of the network equipment (annual maintenance cost of network hardware), where:
      • Annual cost of maintenance of servers = total number of servers * cost per server * A6
      • Annual cost of maintenance of network equipment = total cost per server * server * A5 * A6

Servers Operating Costs and Energy Costs for Cooling the ServersData center servers not only consume energy, but also transform energy into heat that must be removed from to avoid overheating equipment. A study carried out by the Green Grid estimated that most data center PUE ratio (power usage effectiveness) have a value between 1.3 and 3.0. In this calculation, we assumed a PUE of 2.5 (A3) as a conservative value. The reality may be even worse than this value because few measures are taken for increasing efficiency. The following equation was used to calculate the full power of estimating the energy demand of server multiplying it with PUE. Total energy use is multiplied by the average cost of electricity per kW/hour to assess the total annual cost of power. The annual costs for operation of servers and their cooling is calculated with the following formula:

      • Annual cost of power and cooling (annual cost of power and cooling) = total number of servers * standard energy consumption per server * A10 * annual hours of work per server * A3 * (A9/1000)

The table below gives an estimate of the annual costs associated with maintenance and operation of the PRIMO Communications data center.Annual Cost of Operating and Maintaining the Data Center in Primo CommunicationsData Center Servers Cost

Ref Item Cost Per Unit Number of Units Basic Cost Year 1 Year 2 Year 3
C1 Small servers 41,000 3 123,000 41,000 41,000 41,000
C2 Medium servers 145,000 5 725,000 241,667 241,667 241667
C3 Big servers 295,000 6 1,770,000 590,000 590,000 590,000
C4 Huge servers 597,000 4 2,388,000 796,000 796,000 796,000

Data Center Equipment Costs

Ref Item Cost Per Unit Number of Units Basic Cost Year 1 Year 2 Year 3
C5 Network equipment 1,001,200 333,733 333,733 333,733

Hardware Maintenance Cost of the Data Center

Ref Item Cost Per Unit Number of Units Basic Cost Year 1 Year 2 Year 3
C6 Hardware maintenance 33,733 33,733 33,733
C7 Total hardware cost 6,007,200 2,035,773 2,035,773 2,035,773

Switching On and Cooling Costs of the Data Center

Ref Item Cost Per Unit Number of Units Basic Cost Year 1 Year 2 Year 3
C8 Cooling (kW) 12 lek/kW 512,000 2,048,000 2,048,000 2,048,000
C9 Total cost of the data center 4,083,773 lek 4,083,773 lek 4,083,773 lek
  1. Summary of Basic Business Costs

Adding annual staff cost to data center costs within PRIMO Communications:Actual Costs

Ref Item Year 1 Year 2 Year 3
D1 Staff total costs (B7) 416,000 436,800 458,640
D2 Data center total costs (C9) 4,083,773 4,083,773 4,083,773
D3 Basic total costs 4,499,773 lek 4,520,573 lek 4,542,413 lek

Project Implementation Costs

14.1 PHASE COSTS OF PLANNING AND DESIGN

Less time will be needed for project planning, understanding of AWS technology, necessary design changes and in particular the design of modifications to be performed in a virtual portal application. This portal is an application that was designed and built within PRIMO Communications to facilitate the provisioning of virtual machines. This application needs to be modified in order to enable the creation and deployment of instances and volumes (EBS) in the AWS cloud. There is a need to develop additional functionality to support the rights of access control and automatic shutdown of computer resources that are not used. No external professional services will be required to assist in the design and implementation of the project. Engineers working in PRIMO Communications are virtualization experts, so the manager in charge of this project should not have trouble finding appropriate resources to properly design the project. However, the project will require time from other departments from networking and software engineers to give a more accurate solution. It is anticipated that efforts to become familiar with AWS technology and design of the solution will require about 20 days. The average full salary workers likely to be involved in the planning and designing of the project is around 46400 daily.Costs of Planning and Design Phase, Without Risk Adjustment

Ref Unit Calculation Beginner
E1 Work day 20
E2 Cost of daily charge ((B1+B2+B3)/3)/A7 46,400
E3 Planning and design costs E1*E2 928,000

14.2 COSTS OF IMPLEMENTING THE PROJECT

The implementation phase of the project will be determined in about five months, which includes the transfer of servers. The initial stages and those that will follow it will require sufficient time for engineers to make the transition (migrate) the development of their existing environment to environment application using AWS—two days per server for a total of 36 days.Cost of the Project Implementation, Without Risk Adjustment

Ref Unit Calculation Beginner
F1 Work day 30
F2 Cost of daily charge ((B1+B2+B3)/3)/A7 46,400
F3 Planning and design costs F1*F2 1,392,000

14.3 CLOUD INFRASTRUCTURE COSTS

In order to have an accurate financial analysis, we determined the exact number of servers that will be transferred to AWS and the number of those who stay in the existing data center. Price for each hour varies by type of instance and by geographical location. Amazon offers several possibilities for the manner of payment, as follows:

      • Payment on demand using hourly rates/use
      • Payment of annual simultaneous or more years for an instance

Therefore, determining the number of instances you need and how long they are needed is the first step toward assessing the annual costs of AWS instances. For this purpose, we defined two categories of instances to be provisioned to meet the demands for resources during the year:

      • Baseline instances that are supposed to be used by engineers for a period of the year. They represent the minimum level of demand for computer resources. Buying these instances will be based on reservation model instances for a period of three years, which match the amortization period and the period of analysis.
      • Peak instances that are supposed to be used for a very short period of the year. They represent additional resources needed to meet the requirements in certain periods of the tests or by following the life cycle of different products. Buying such instances will be based on the prices of demand instances.

Annual use of instances per hour base load is calculated as:

      • Hours of use of ground instances (hours of baseline instance usage) = number of instances * basic * hours per year the average annual use of ground instances (average annual usage of baseline instance)
      • Hours of use uploaded instances (hours of peak instance usage) = number of instances * charged * hours per year the average annual use charge instances (average annual usage of peak instance)

The table below provides a summary of all costs for a cloud solution.Cloud Infrastructure Without Risk Adjustment
Baseline instance based on AWS hourly use/rate

Ref Units Cost per Unit Number of Units Basic Cost Year 1 Year 2 Year 3
J1 Small server 3.9 lek 5242 11,925 20,448 20.448
J2 Medium server 16.1 lek 8387 78,764 135,030 135,030
J3 Big server 30.1 lek 34,944 613,523 1,051,814 1,051,814
J4 Huge server 50.2 lek 17,472 511,609 877,094 877,094

Peak instances loaded in AWS planned for their use

Ref Units Cost per Unit Number of Units Basic Cost Year 1 Year 2 Year 3
J5 Small server 8.1 lek 0
J6 Medium server 30.5 lek 350 6227 10,675 20,675
J7 Big server 70.9 lek 2097 86,734 148,677 148,677
J8 Huge server 130.2 lek 874 66,376 113,795 113,795
J9 Volume EBS (GB) 8.9 4533 23,532 40,344 40,344
J10 EBS IOPS in millions 8.9 8286 43,016 73,745 73,745
J11 Total cost of cloud 1,441,706 2,471,637 2,471,637

14.4 STAFF COSTS

Since there will be fewer physical severs to maintain the existing data center and since each engineer will be able to provide authority previously configured automatically via the virtual application, thought loads of staff data center management will be reduced significantly, especially for both systems administrators. The table below provides a recalculation of their annual salary based on the assumption that system administrators will spend less time on operations and will have free time to focus on other activities.Recalculation of Annual Salary

Ref Measurement Unit Basic Costs Number Decrease Rate Salary
K1 IT manager salary 140,000 1 100% 140,000
K2 System administrator salaries 110,000 2 80% 176,000
K3 Developers salaries 70,000 4 10% 28,000
K4 Total 344,000

14.5 TOTAL PROJECT COSTS OF HYBRID CLOUD

The table below summarizes the overall project costs associated with the design, implementation, construction of infrastructure, and staff salaries by 5 percent annual growth. The present value (PV) is calculated as follows:PV = initial cost + cost of year 1 * .9091 + .8264 cost of year 2 * + * .7513 cost of year 3Summary of Total Costs of the Project

Ref Units Starting Cost Year 1 Year 2 Year 3 Total Actual Cost
L1 Planning and project cost (E3) 928,000 928,000 928,000
L2 Implementation costs (F3) 1,392,000 1,392,000 1,392,000
L3 Staff costs (K4) 344,000 361,200 379,260 1,084,460 896,164
L4 Cloud infrastructure costs (J11) 1,441,706 2,471,637 2,471,637 6,384,980 5,210,157
L5 Total costs of the project 2,320,000 1,785,706 2,832,837 2,850,897 9,789,440 8,426,321

Benefits and Opportunities for Savings

Most of the benefits that can be thought of in this project are not easily measurable in terms of return on investment (ROI). The hypothesis is that the benefits of cloud computing should obviously reduce the overall costs of operations performed in PRIMO Communications. The purpose of this section is to express these benefits in money so we can put a monetary value to their effects. Some calculations made in this section shall be conducted under uncertainty. Thus, we have two kinds of benefits:

      • quantitative benefits that go directly to the calculation of ROI
      • qualitative benefits that are not directly involved in calculating ROI

However, qualitative benefits are just as important as quantitative and should be considered in the final evaluation of the project. The following assumptions concerning the assessment of benefits are accomplished by following the categorization of benefits according to TEI.

15.1 BENEFIT FROM INCOME

PRIMO Communications earns income from the sale of products and services. The objective of this project is to cut costs where possible while staying within the budget that is allocated. What is interesting in the category of benefits by income reductions are operational costs that can be achieved by the use of outside resources at PRIMO Communications. As shown in the table below, there are two areas in which reductions in major costs can be achieved:

      • reductions to electricity costs as a result of the passage of many servers in the Amazon cloud.
      • reductions in staff salary costs as a result of the greater effectiveness of the solution.

Operational Benefits Without Risk Adjustments

Ref Units Calculations Year 1 Year 2 Year 3 Total
M1 Benefits from electricity power C8-0 2,048,000 2,048,000 2,048,000 6,144,000
M2 Benefits from paying staff salary D1-L3 72,000 75,600 79,380 226,980
M3 Total operational benefits 2,120,000 2,123,600 2,127,380 6,370,980

Key Financial Indicators: Financial Indicators with Risk Adjustment

Start Year 1 Year 2 Year 3 IRR Payback POI NPV
Costs -2,320,000 -1,785,706 -2,832,837 -2,950,897
Benefits 3,294,667 3,298,267 3,302,047
Savings -2,320,000 1,508,961 465,430 451,150 3.5% 3 4.6% 503,508.05

The internal rate of return (IRR) of an indicator is used in finance to compare odds from the investment. It is calculated as below:

      • Savings Year 1 / (1 + IRR) + Savings Year 2 1 / (1 + IRR) 2 + Savings Year 3 (1 + IRR) 3 = initial investment return on investment (ROI) for the three-year period is calculated:
      • ROI = ((initial investment gains-) / initial investment) * 100

Payback is the period that the company should take the return from the initial investment, i.e., to refund the amount of the initial investment. This indicator is expressed in years. Calculate returns based on savings rather than benefits.Savings Year 1 + Year 2 + Savings Year 3 > = initial investmentNPV is the best indicator for decision making if a project will be resolved or not. It is calculated:

      • NPV = Savings Year 1 / (1 + discount rate) Savings Year 2 + 1 / (1 + discount rate) 2 + Savings Year 3 / (1 + discount rate) 3

NPV = 1508961 / (1 +0.1) 1 + 465 430 / (1 +0.1) 2 + 451 150 (1 +0.1) 3-2320000 = 503,508.05Since NPV of the project has been positive and as NPV is the best method of assessing whether a project should be elected or not, the company should choose the project.

  1. Conclusions
      1. The analysis of the costs and benefits of data center transition to AWS for PRIMO Communications shows positive financial results.
      2. IT leaders pursue initiatives for energy saving in IT infrastructure and operation in any IT team.
      3. Cloud computing providers are more inclined to increase the efficiency of energy use because all this translates into increased profit margins.
      4. Industrialization and development of this new part of the information technology industry will affect the growth of the efficiency of energy use continuously.
      5. Cloud computing will reduce the dependence of users of computational resources on IT staff
      6. Cloud computing will reduce the time of development of new products.
      7. Adopting cloud technology will help mitigate the costs and risks.

Recommendations

      • A change in legislation regarding the carbon scheme movement and tax relief to companies that adhere to the code of ethics of the EU will affect the results of the financial analysis in the financial and environmental perspective.
      • Another issue on which research should be directed is creating dependency on a majority of European firms to those centered in the United States as Google or Microsoft.
      • The potential benefits of Green IT mainly in energy saving should make IT managers look at ways to increase the efficiency of operations

part 2

Analyze and Rank the Proposals for Technical Favorability

In the previous step, you analyzed and ranked the financial proposals. Now, you’ll analyze and rank the proposals by their technical specifications.The general criteria that you should use includes the following:

      • all technical requirements met
      • all functional requirements met
      • experience/competency requirements met
      • strength of technical solutions

You may wish to include additional evaluation criteria, based on the materials in the course, or your own research.

 

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