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The Hidden Costs of Do-It-Yourself Hosting

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The Total Cost of Ownership of having your own servers is higher than you think.
By Geoffrey James

Many companies rely upon Return on Investment (ROI) when making technology strategy decisions, but few take the time to actually determine how much that strategy will cost over time. That’s unfortunate, because without estimating the Total Cost of Ownership (TCO), ROI is meaningless. There’s no way of knowing how large an investment is actually being made.

That’s particularly true when companies decide whether to use an IT hosting provider or take the do-it-yourself route. Because managed hosting is presenting a complete solution, all costs are on the table from the start. By contrast, in-house hosting often involves hidden costs that aren’t surfaced until the do-it-yourself project is well underway.

To better understand the TCO for in-house hosting, let’s look at a hypothetical new division, XYZ, being launched inside a parent firm, ABC Inc. The XYZ business plan defines $10m in revenue in the first year of operation followed by a ten percent growth per year over the subsequent four years. All sales will come from e-commerce on the Internet and that the average customer, once acquired, will spend an average of $1,000 a year, in ten increments of $100 each, with an expected profit margin of 10 percent.

As it prepares to launch, XYZ’s management must decide whether to host the e-commerce application at ABC’s existing data center or hire an IT hosting provider to host and manage the application. ABC’s hardware vendor has proposed a five-year purchase agreement with yearly numbers comparable to the proposed cost of managed hosting, suggesting that ABC can simply fold the XYZ application into the existing IT infrastructure.
On the surface, the two strategies seem similar in terms of financial impact, but when one looks deeper, the do-it-yourself proposal neglects the TCO impact in four critical areas: staffing, facilities, stability and security.
The TCO of Staffing

There’s no such thing as a free resource, so even if ABC already has an IT infrastructure, assigning IT staff to the XYZ project means that they won’t be available elsewhere. Even with the existing staff, then, the do-it- yourself approach will require hiring at least two and probably three system administrators to ensure that key applications remain up and running.

Nationwide, systems administrators receive an average salary of about $85,000 a year, according to David Foote, president of Foote Partners, a company that publishes IT salary surveys. In addition, since talented systems administrators are in great demand, it’s not unusual for them to receive seven to fifteen percent of their base pay in bonuses or stock options.

In addition, there are numerous hidden expenses associated with employing technical personnel, including office space, personal computers, HR overhead, benefits and so forth. Foote estimates that such expenses account for an additional 80 to 100 percent of the engineer’s base pay. Therefore, the TCO impact of the two new-hires is approximately $340,000 the first year.

Assuming a seven percent raise each year for each administrator over the five years of the project, XYZ will end up
paying nearly $2 million in additional personnel costs.

The True Cost of Do-It-Yourself Hosting:
Personnel Cost…….$1,955,251
Facilities Cost………… $140,000
Stability Cost………….$387,674
Security Cost………….$100,000
TOTAL $2,582,925

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On October 11, 2011
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