D2 3 Computing e-Infrastructure cost calculations and business _models_vam1-final

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e-‐FISCAL: www.efiscal.eu EC Contract Number: 283449 of costing methodologies is heavily reliant on the industry on which the costing exercise is performed. For example, manufacturing companies can choose between a plethora of existing techniques such as process costing, job-‐order costing, standard costing, marginal costing, target costing, activity based costing 17 , etc. In electronic communications, the accounting method of LRAIC (long run average incremental cost 18 ) methodology that is rather not encountered in other business setting is highly demanded from regulators for regulated wholesale services costing. Service companies with high percentage of personnel cost, are more keen on adopting Activity Based Costing (Palaiologk et al., 2012 19 ). Also, the selection of the costing methodology depends on whether the performer of the costing exercise lies in or out of the company. Costing information is sensitive and companies as well as institutions are rather reluctant to disclose it in an analytical form. Therefore, external analysts can only rely on basic information and then apply a set of hypotheses and assumptions in order to conclude on a cost output. Finally, a costing exercise could follow either a bottom–up or a top-‐down procedure. The bottom-‐up (BU) approach develops the cost model on the basis of the expected demand for the service provision of the infrastructure and sets the infrastructure design and estimates the related costs on the basis of an engineering model. In a top-‐down (TD) model, the starting source of information is the cost actually incurred by the infrastructure derived from the institutions accounts. The most relevant costing methodologies in computing e-‐Infrastructures are TCO and FCA. Therefore we concentrate on these two in the following discussion. Esqmate all expected costs • Expected acquisiqon hardware cost • Maintenance and support • Power and cooling • Personnel Cost Assume useful life 4 years Esqmated expected cost/ 4 years = Expected Cost per year Figure 1: Graphical representation of a TCO case study how to make cost estimates at each stage with reference to construction projects. The method includes costs consideration from the initial appraisal to the completion and post-‐occupation phases, including the disposal of the asset. http://ec.europa.eu/enterprise/sectors/construction/studies/life-‐cycle-‐costing_en.htm. Therefore Life Cycle costing uses the main principles of TCO. 15 http://en.wikipedia.org/wiki/Total_cost_of_ownership 16 http://en.wikipedia.org/wiki/Full_Cost_Accounting 17 For an analytical review of the characteristics of the costing mythologies available please consult (Hilton, Maher and Selto, 2008). 18 http://en.wikipedia.org/wiki/LRIC 19 http://link.springer.com/content/pdf/10.1007%2Fs00799-‐012-‐0092-‐1 e-‐FISCAL : Financial Study for Sustainable Computing e-‐Infrastructures Deliverable D2.3 – Computing e-‐Infrastructures cost estimation and analysis – Pricing and Business models 22
e-‐FISCAL: www.efiscal.eu EC Contract Number: 283449 The TCO model has been used in literature (Nazir and Sorensen (2010), Walker (2009)) as a basis for calculating the costs of e-‐Infrastructures. TCO paradigm is a useful tool when the cost of a specific project is to be assessed over its useful life. The developers of such models adopt a forward looking stance covering all expected costs over the project’s lifetime. This cost is divided by the anticipated useful life to come up with a yearly cost. However, in order for this analysis to be precise enough, several details have to be taken into consideration as basis of the future cost estimates. Such details are very difficult to gather consistently across several organisations. PRACE intends to follow a TCO costing methodology in order to assess the cost of contributing infrastructure 20 . A graphical representation of TCO is found in Figure 1. On the other hand, Full Cost Accounting methodology is a typical costing methodology pertaining to all industries and sectors. It relies on actual cost accounting data information available within the cost accounting systems of organisations, i.e. it adopts a backward looking stance. Detailed actual data (in line item format) is attributed and allocated on the basis of specific algorithms and various costing procedures to services/products in order to come up with the “cost per unit” of the object being analysed. However, the reliability of the cost data depends heavily on the robustness of the cost accounting system. But even in the case of highly developed accounting systems, costs that are not funded by the organisation are not registered as parts of the total costs. FCA relies on actual cost accounting information (historical) available within the cost accounting systems of companies. Moreover, costs registered in accounting books are influenced by tax considerations (e.g. obsolete infrastructure not used any more would keep on being depreciated). Nevertheless, FCA is a very useful tool for organizations to control costs and assess performance. Information streaming from FCA can also assist pricing decisions. A graphical representation of FCA is found in Figure 2. Salaries Depreciaqon Electricity Cost …… Asribuqon or allocaqon through allocaqon keys (e.g. m2, FTEs) Calculaqon of Services’ cost General Ledger Department 1 Department 2 Service A Service B Service C Figure 2: Graphical representation of FCA 20 This exercise had not been completed by the end of January 2013. The cost categories intended to be included are presented in section 3. e-‐FISCAL : Financial Study for Sustainable Computing e-‐Infrastructures Deliverable D2.3 – Computing e-‐Infrastructures cost estimation and analysis – Pricing and Business models 23
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