This is the blog of Neteffects Technologies, Inc. Visit us on the Internet at http://www.neteffectstech.com
The changing paradigm of small business computing infrastructure
Until fairly recently the options for a small business to build a robust and competitive computing and communications infrastructure have been pretty limited. Essentially, until recently, a small business had to invest significant capital dollars or commit to onerous leasing agreements to procure on-premise server computers, software and networking gear. With these came the need for timely and recurring technical administrative maintenance.
Of course, the typical small business was most often unable to cost justify hiring a dedicated IT professional – even the high school or college student working part time was expensive and problematic because even the best small business owner was not well equipped to qualify a real tech pro as capable of providing all the services needed to do the job. Heck that’s often difficult for us even though we verify certificates of education and call references!
Together, adding the cost of desktop and laptop computers needed by other employees created a significant cost barrier/burden. For years small startups have used Hotmail and yahoo accounts as first generation email tools. Over time they often subscribe to a domain name that refers to their business or line of work/product set and continue to host email with a webmail service provider, but this is still not a robust solution for the long haul.
As a small business celebrates its third anniversary, the need to protect, organize and share information becomes a significant challenge as the founder/owner begins to realize how valuable the data collected is to the survival of the business. About this time, an owner/operator begins to think of the business information as a real asset worth possibly more than cash on hand and begins to search for a way to protect that asset.
The answer to the problem of protecting information assets is control. For decades control has been thought of as having/owning a computing system which contained the valuable data and for decades, small business owners have shouldered the cost of a server computer, back up hardware and software and associated computer room items that create a computing infrastructure.
This physical ownership concept has become an option instead of a mandate with the availability of virtual infrastructure. Virtual Infrastructure isn’t the name we commonly use today, however. The modern reference to a virtual server or service is “hosted” or “cloud” system. Ownership is the same as having a local on premise installed system, but with the Internet as the connection instead of just a bunch of wires and networking gear on-site.
In my ten years working with business owners, I often witnessed the entrepreneur’s paranoid obsession with “possession” of the central computer, aka; server computer. I learned, being one myself, that there are multiple reasons that we think this way and principal among these is competitive thinking… knowing we do not want our competitors to get their hands on our private, valuable customer information. This creates a trust issue and trust is hard for a business owner to endow upon an employee or other outsider. Thus the “on-premise” approach to provisioning IT systems is changing very slowly. But change is well underway!
Today, a small business owner can provision enterprise class IT systems for employee users with hosted/cloud based systems and preserve a great deal of cash capital in the process. In the following, I will try to convey the cost differences between an on premise system vs a hosted/cloud based solution. The following is based on either a young business buying and installing its first IT infrastructure or a more mature business replacing an aged on premise system due for retirement.
Our focus for the past ten years has been the small and medium size business market, but I’ll use a small business as the financial template below. This would be a business with 25 to 50 computer users and one that may have field personnel beyond this number performing sales and/or service work. This business is usually very well served with a Microsoft Small Business Server running on a robust and redundant server computer.
When tasked with sizing, designing, providing and installing such as system, we typically promote HP as the computer provider who will also provide the Small Business Server Software System (SBS) as an Original Equipment Manufacturer’s license – OEM, which is less expensive than buying media and license alone and then installing it. In fact, HP will without cost install the SBS before it is shipped. A reduced license fee is charged. That saves time for installation, but not much. There’s allot that needs to be done to get a new server installed whether it’s a first time investment or a replacement for an aged SBS server.
Here’s the bill of material for the new server computer, Microsoft SBS, backup drive, backup software, power conditioning and supplies. This doesn’t include everything a small business will need, such as network switching equipment and Internet security software such as a firewall or anti-virus/malware software.
Computer. Single processor for small enterprises – dual for larger small businesses. Windows N needs at least 8 Gb of memory since release of Windows Server 2008. Disk storage requirements depend on how much data the customer already has on a retiring server or total of email boxes in a webmail service such as Hotmail or yahoo.
A server computer’s disk drives are always redundant to prevent loss of data or downtime for the business in the likely event of a hard drive failure during the life of a server computer which runs 24 X 7 for five plus years before it must be retired. Minimal configurations with today’s drives will produce a server with more than a terabyte (TB) of disk availability across three to five drives. Also, prudent server computer design requires redundant (dual) power supplies and redundant fan assemblies. Typical cost for a system with in-built back up drive and other items listed above will be $4,000 – $7,000!
For a first time buyer, you can expect to spend another 50% of this amount on your IT contractor to install it. If this is a replacement of an aging server, you can expect to spend as much as 100% of the purchase amount to migrate the data from the old server to a new one. This means for this size business that expense will be between $6,000 and $14,000. These figures don’t include anti-virus protection for the end user computers which you will need for an on premise approach or a hosted/cloud approach.
The above expenses are only the beginning of the cost of an on premise system. The above is the cost of purchase, but not the cost of ownership. Within 90 days of installation, the server will need administrative maintenance and that’s a service you will need to bear for the life of the system.
There are a number of ways to procure this kind of support, but you will need to decide what your tolerance of downtime is. Administrative maintenance on a server computer is disruptive to computer operations as the system must be rebooted and that causes user disruption during business hours unless you contract for services performed after hours.
Beyond scheduling, there is the element of surprise. An un-monitored system is likely to fail over a weekend when there’s a temporary power outage. This is common where users find systems down first thing Monday morning! A call for support to even the most responsive IT services contract firm will often result in two hours of delayed start on your business.
If you have a service business that relies on schedules for technicians with customer names, addresses and phone numbers with appointments for as early as 8AM Monday morning this type of failure is a night mare of customer relations damage and employee frustration as they bear the brunt of customer dissatisfaction all of Monday and possibly part of Tuesday as the impact of computer downtime is suffered and schedules get back on track.
Another approach to contracting support for your on premise system is to procure “managed services.” These services are an arrangement of computers monitoring your computers continuously. In the above example of a power failure over the weekend, a managed services provider’s computers would have identified a failure promptly and alerted the service provider’s technical personnel who would have your systems back up and running if power had been restored and no damage was done to the servers in the power outage, which is remotely possible.
Whichever approach is taken, there is a significant cost to maintaining your on premise computing infrastructure and by the way, you will need to appoint a staff member to insure that the backup storage system is changed daily. A complete backup solution requires that backup copies of your data be rotated off site where they will be safe in the event of a physical site disaster, such as a fire.
Costs for the first example of contract support will be between $1,500 and $2,400/year if the system is stable and proves to be reliable. That’s a “luck of the draw” scenario. Cost for managed services upon the server and network infrastructure only will likely be between $2,400 and $4,000 annually depending on a number of factors.
Now a look at the hosted/cloud approach to provisioning an IT infrastructure for your small business. The first notable difference is there is no new server computer involved! That’s a significant cost avoidance right up front, but there are costs – just different costs.
Your initial cost for a hosted/cloud alternative approach to the on premise example above is “subscription” expenses. Depending on the type of solution you want for your business, subscription services are as low as $5 per user per month. Doesn’t seem like allot, right? Wait. There’s more and it adds up.
In the above example we discussed the cost of installing and customizing your system to meet your needs and we provided a very rough estimate of what those costs could add up to. That range of expense is based on two primary challenges – the amount of data migrating to the new solution and the number of users. These costs will be higher as you add functionality. There’s a big difference in a system that just serves as an email relay and one that provides shared storage, business user collaboration, private instant messaging and conferencing – be that via text, video or voice or a combination of these communications functions.
If you have a need for 50 email boxes, your monthly subscription cost will be as little as $250 per month or $3,000/year. The cost of implementation of a cloud based infrastructure for technical support services will be between $100 and $400 per user as a onetime expense. There will be additional support expenses on an on-going basis, though these aren’t cyclical in nature.
(Beware Small/Medium Businesses: The Hosted/Cloud Based infrastructure consulting and services is currently focused on very large businesses and charging huge money for assistance. Smaller consultancies are ramping up to providing these services at Small/Medium Business prices/costs.)
So, for a 50 user business, the cost for the first year of IT infrastructure will come to approximately $9,000 and recurring expenses will likely be $5,000.
What else? Notice there’s no need to provide any support or to back up data as it is provided in your subscription expenses and hosting/cloud providers will do a much better job with backups than most small businesses do. Also, there’s no routine system administrative maintenance expense because the hosting/cloud services provider does this a routine part of taking care of their computing systems! Ka-ching!? Yep.
What about the managed services monitoring or your computers? Included. This is beginning to sound like a slam dunk, right? It is, but it’s a change and let’s face it; we all resist change. Here’s the five year cost analysis:
On Premise approach as described above $36,000 assumes a managed services approach to maintenance
Hosted Cloud approach described above $25,000
This isn’t a guaranteed estimate of what your business is going to spend over a five year period to provision basic computing infrastructure, but it’s fair estimate. Things that can affect these sums include having good or bad luck with the on premise server computer’s reliability and performance or having an especially dynamic business requiring many changes. In either approach you will bare expenses for consulting and services to make adjustments to the infrastructure to accommodate changes in the business.
What are some of the other benefits to both approaches? Well that’s an old school vs new school answer, but there are limited situations in which an on premise approach to IT provisioning is the only option, but financially hosted/cloud is by far superior in the private business sector. For government, these comparisons may have little value, but government is implementing more and more systems as virtual systems for the economic benefit described above.
For the “For Profit” enterprise, the use of Hosted/Cloud based systems introduces a cost basis that is considered an “expense.” If business finance and tax planning aren’t your strong suit (like me) expenses come off the top line of taxable income to the business and thus the owners of the business! Think of your IT subscription and services expenses as your electric bill. That annual sum is deducted from your gross profit before the tax man cometh!
To old schoolers, yes, there are tax deductions for you to bear the depreciation of your assets and your IT infrastructure is considered an asset, but when compared, the hosted/cloud approach wins because the expense is 100% deductible where depreciation is no more than 20% of the original capital equipment expense. Consulting and services fees in either approach are treated equally as services expenses. Consider that most County Governments and some State Governments charge owners of business assets a tangible property tax.
In simple terms here’s how these deductibles compare on your taxable income statements:
On Premise as described above: $7,200 year one $5,200 annually for four years
Hosted/Cloud Based as described above: $5,000 year one $5,000 annually indefinitely
Oh! One more thing…when the on premise system gets to be five years old, you’ll need to replace it and start the finances all over with inflated dollar costs. Hosted? True, fees will likely rise over the years, but when the service provider’s computers age, they are replaced far sooner than most small businesses replace their equipment at “their expense!”
In fact, most small businesses wait until their IT infrastructure is so worn, fragile and brittle that it is failing as a new computer system is ordered causing a lengthy period of system downtime and business disruption. We’ve seen it over and over. And we’ve seen it cripple businesses.
In our next blog installment we’ll tell you about the exciting things we are doing with the Hosted/Cloud based business computing infrastructure. We’re providing Fortune 500 scale technology to small businesses that are competing and winning in a crazy competitive world.
This is the blog of Neteffects Technologies, Inc. Visit us on the Internet at http://www.neteffectstech.com
