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Justify My Lab: Page 5 of 6

When building scenarios for a spreadsheet that illustrates the cost of downtime, historical data is your best predictor of risk and statistical relevance. For instance, if only one out of 10 hot fixes has caused a problem in your environment, then there is a 10 percent chance of a problem with future hot-fix deployments. Thus, if you've kept good records--or if you can reconstruct events from e-mails or work orders--you should be able to accurately represent probabilities in your business plan. If you don't have these records, there are administrators out there who do. Sage, an international organization for professional system administrators (www.sage.org), and similar organizations should be able to hook you up with people who can provide such data.

What about showing justification for lab testing projects that don't really have a quantifiable risk? That is, what if you've never done anything similar before and therefore don't have historical data to translate into probability of failure? It wasn't so long ago, for example, that there was no data on VoIP (voice over IP) rollouts. In such cases, you must perform a sensitivity analysis--a procedure that helps you discover how costs change as risk changes. In your spreadsheets, simply perform "what if" analyses using different failure rates--for instance, how 10 percent, 25 percent and 50 percent failure rates in your lab will affect your costs. Each percentage has a certain dollar payback to your organization. If changing the failure rate from 25 percent to 10 percent saves $15,000 annually, that means each percentage point of risk eliminated is worth $1,000 per year. So even if you can't predict the exact level of risk the lab would eliminate, you will be able to quantify how much each percentage of risk reduction translates into dollars. Since it's reasonable to assume that testing lowers risk by at least some amount, you'll be able to show a range of payback.

Finally, "business geek" techniques such as discounted cash flow (DCF, also known as NPV, or Net Present Value) analysis, which accurately represent any investment opportunity's total valuation, work well if you're talking about a lab investment. In particular, NPV--the value of future money, today, when taking into account future inflows and outflows of cash--discounts those flows (because money in your pocket today is worth more than money tomorrow) and factors in the time value of money. Several IT managers described their use of DCF to us, and while they refused to share their actual spreadsheets, they described the sheets well enough that, like the recipe magazines, we've re-created them for you (see "NPV of a Sample Lab").





NPV of a Sample Lab

click to enlarge


Besides being conservative, these analyses must be "lifetime value" propositions: They must take into account the fact that lab gear has a finite life; that the value depreciates over its useful life; and that it has some sort of salvage value at the end--close to zero in some cases, 10 percent to 30 percent of its original value in others. In our sample spreadsheet, we chose 27 months as the useful life of the lab, but yours may be longer or shorter, depending on the technology life cycle at your organization. For example, if you're swapping out servers and equipment every four years, four years makes sense for the useful life of a lab.

Net Loss?

You'll notice that our sample NPV analysis ends up costing the company money. Since the analysis is conservative, however, and doesn't resort to quantifying factors such as "lost worker productivity," it's an easy sell. (Would your company spend a net $7,000 on a mechanism to avoid major process snags?) While one of the managers we interviewed says that labs always have a negative ROI, this isn't always true. For example, if you scale our example spreadsheet to 1,200 users, the NPV is a positive $22,000. But negative NPV is something you should be prepared to defend, as long as it's within reason, particularly in a small-to-midsize organization.

"Cost avoidance doesn't count at our company," says one IT manager. "I completely agree that it should count, but I beat my head against that wall every day." But if cost avoidance didn't count, no company would ever invest in new manufacturing facilities or process improvement. After all, cost avoidance contributes directly to profitability. In your quest for lab facilities, keep that link to improved profitability in the forefront, and you'll eventually sell your proposal, if not at your current company, perhaps at the next, more forward-thinking one.