Return On Investment Issues

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Return On Investment Issues

• 4MOC
• Session 05

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Objectives

• Return On Investment (ROI)?
• What is ROI in Open Source?
• Assumptions behind the equation
• How open source costs differ from commercial
  software costs?
• Evaluation Costs
• License and Maintenance Costs
• Installation and Configuration Costs
• Integration and Customization Costs
• Operations and Support Costs

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Return On Investment

• Using open source because it is free.
• Not all open source codes are provided with
  training, support and documentation.
• Using the open source involves investment in time
  and resources.
• Must conduct a cost and benefit analysis to
  determine whether the investment is justified.

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Difficulties in using ROI

• Results of ROI are changed due to the changes in
  assumptions.
• Undervalued the Intangible benefits e.g.
  flexibility or creating a simpler architecture.
• Difficulties to estimate how the new technology
  will increase revenue.
• ROI makes sense but it is hard to quantify some
  costs.
• Use Strategic investment - It means that the
  investment make sense and will improve the
  companys position but the dollar analysis is
  nebulous.

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ROI Equation
1 ?gt 1 ?lt 1 ?
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Assumptions

• Time horizon. How long? One year? Two years? Is
  there a minimum payback period for all IT
  investments?
• Is it possible to compare alternatives? How much
  the company may earn from alternative
  investments?
• Should we choose the fastest time to payback or
  the largest saving over the long term?
• Interest rate assumptions? What is the minimum
  return for any investment?
• Is it part of the infrastructure costs? e.g.
  extra costs like electric power, bandwidth and
  hosting cost.
• Should reduced costs in the future be included?
  How can these costs be estimated?
• Are the same costs between the alternatives being
  compared? What costs are vendors concealing or
  disregarding?

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How open source costs differ from commercial
software costs?

• Not much difference on the revenue side
• For savings the situation is much the same
• Simply they are hard to quantify due to the
  differences in reliability, downtime and
  maintenance procedures etc.

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Cost factors in the ROI equation

• Evaluation Costs
• License and Maintenance Costs
• Installation and Configuration Costs
• Integration and Customization Costs
• Operations and Support Costs

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Evaluation Costs

• For commercial software
• Vendors like to educate potential buyers about
  why their software is valuable.
• Vendors convince the organization has a need for
  the software.
• Vendors offer the best choice and the right time
  to buy the product.
• Vendors spend a lot of money on whitepapers,
  marketing materials, conferences, and other
  content to promote the product.
• Trial license that might have a time limit
  payment of service fees.
• IT Management making the decision whether the
  product is appropriate or not.

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Evaluation Costs

• For open source
• Few promotion materials exist.
• Not many whitepapers explaining why you need the
  software. You need it you visit their web site.
• And open source projects really don't care if you
  have a need now, or sometime in the future.
• Time taken to install a product is based on the
  IT organization's skills. Expert and advanced
  users can install and get most open source
  software.
• IT staff may install the software for trial. They
  must learn enough about the software to play
  around with it and understand its functionality
  to determine if it can meet the company's
  requirements. Doing this it reduces significant
  amount of risk.
• IT Staff may take the leading role, not the IT
  management.

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License and Maintenance Costs

• License and maintenance fees for commercial
  products can range from very low to very high.
  But the savings in license fees is no guarantee
  that open source is the right choice. Open source
  is no guarantee of zero licensing costs.
• For Linux distributions from Red Hat or SuSE,
  users need to pay subscription fees to get
• a coherent collection of software
• packaged consistently
• with a nice installation program
• a steady stream of updates.

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License and Maintenance Costs

• JBoss charges licensing fees for documentation.
• Resin requires licensing fees for commercial use.
• There is no maintenance fee for open source.
  Upgrades are free but you often need to spend
  more time with an open source project to figure
  out what is in the upgrade.
• With open source, the upgrade is not pushed by
  software vendor. IT department can move from one
  version to the next whenever the time is right
  for the company

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Installation and Configuration Costs

• For open source, it is time consuming for
  installation and configuration, especially for
  beginner organisations and immature products.
• For commercial software, they generally comes
  with the install wizard that guides the user
  through installation and basic configuration.
  Using such wizards in open source is still not
  widespread.
• The real costs depend on the organization's skill
  level in using open source development tools,
  system administration and operations.

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Integration and Customization Costs

• For open source projects, they are not usually
  created with the modern IT infrastructure
  environment in mind. e.g.
• Integration with single sign-on or support for
  monitoring protocols are rare.
• The choices of the database are limited to one or
  two only.
• With integration problems means they need to
  customise their codes.
• In general, more integration work is needed for
  open source project than for the commercial
  project.

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Operations and Support Costs

• Operations and support costs do not look
  different between open source and commercial
  software.
• Skill level is the key factor to determine the
  time required to support both commercial and open
  source software.
• Commercial software vendors charge licensing fees
  for the following situations
• Creating a development environment on each
  developer's workstation
• Creating a test environment or a staging
  environment
• Adding servers for scalability
• Adding servers for disaster recovery or for a hot
  backup site

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Conclusion

• For open source, the burden is on the IT
  department to develop or find the skills to
  evaluate, install, configure, operate, and
  support the software. If this burden is
  accepted, anything is possible.
• For commercial software, these burdens can take
  less time and cost more money.

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Making Your Own ROI Model
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Elements of Evaluation Costs

• Searching for open source
• Creating a test environment
• Installing and configuring software
• Writing test programs
• Researching questions and problems
• Researching integration techniques and costs
• Networking with open source community members and
  looking for answers to questions

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Elements of Installation and Configuration Costs

• Learning how to install the software in a test
  environment
• Learning how to install the software in a
  production environment
• Doing basic performance testing
• Developing backup scripts
• Learning how to operate the software
• Learning how to monitor the software
• Integrating the software into production
  monitoring and alerting systems
• Training time for developers
• Training time for top operations staff

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Elements of Integration and Customization Costs

• Gathering requirements for integration and
  customization
• Reading source code, documentation and bulletin
  boards to understand the workings of the software
• Designing the integration and customization
• Coding the integration and customization
• Testing the integration and customization
• Fees for any consultants brought in to help the
  process

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Elements of Operations and Support Costs

• Hardware costs
• Rack space
• Electric power
• Network bandwidth
• Operational monitoring
• Backups

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Skills versus Money

• For open source, users learn how to use the
  software. In other words, the investment in open
  source is also an investment in increasing an IT
  department's skill level.
• For commercial software, these costs represent
  renting expertise that does not leave an IT
  department smarter. Sometimes money is more
  important than the time it takes to solve a
  problem.
• But in general, it is hard to argue that creating
  a more skilled organization is anything but a net
  positive for an IT department.

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Class Activity

• Do Session05 class activity sheet.