The Robert Frances Group believes IT executives should be employing the new generation of storage solutions like the IBM Storwize V7000 storage systems. To know more about the IBM Storwize V7000, visit: http://ibm.co/TaLb6Q.

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The Advantages of
Leasing IBM Storwize V7000
Storage Systems
Cal Braunstein
CEO and Executive Director of Research

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Table of Contents
Executive Summary .................................................................................................................................. 3
Hyper-Efficient Storage ............................................................................................................................ 3
The Value of Leasing ................................................................................................................................ 4
The Methodology ...................................................................................................................................... 6
Lease vs Purchase ..................................................................................................................................... 7
TCO Findings............................................................................................................................................ 7
Detailed Findings ...................................................................................................................................... 8
Conclusions ............................................................................................................................................. 10
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Executive Summary
RFG believes IT executives should be employing the new generation of storage solutions that offer
advanced storage management capabilities – like the IBM Storwize V7000 storage systems – in their
target system environments. In that the total cost of ownership (TCO) differential between leasing and
purchasing is minimal although the first-year savings impact is substantial, IT executives should
seriously consider leasing the storage. Finance and IT executives should understand the value
proposition of storage leasing and work with their storage vendor or third party lessor to structure a
package that best meets current business, financial, and IT objectives.
Business Imperatives:
 The new generation of modular, highly automated storage systems is solving an age-old storage
management problem. Storage systems of the past required an enormous amount of administrator
interaction, which meant companies had to expand staffing continually to keep up with the rapid
growth of storage capacity. The latest solutions like the midrange Storwize V7000, bundle in
storage management features that enable capacity to expand without the constant need for
personnel augmentation, manual optimization management, or reconfigurations. Additionally,
Storwize V7000 Unified system supports both block and file storage, managed from a single
console. IT executives should evaluate the advantages of the different storage technologies in the
market today and select the ones that provide the most advantageous storage management features
and best match the workload characteristics required for the data usage model.
 The traditional hardware purchase model results in storage remaining in operation for a lengthy five
years or more. Keeping storage drives in a data center for more than three years may make good
accounting sense but is a poor business practice. Storage arrays more than three years old may drive
up operational costs, increase operational complexity, slow the adoption of new technology,
consume excess power and space, and fail more frequently, which could cause revenue losses. IT
executives should structure and gain buy-in for business plans that refresh technology every three
years.
 Leasing should be given serious consideration in today's economic environment, as most
companies' IT investments are capital constrained and IT still has to address storage capacity
demands that are increasing at a double digit rate. Finance and IT executives should work with their
preferred storage vendors to evaluate what leasing program would best map to the enterprise's
business and financial requirements.
Hyper-Efficient Storage
A number of midsized companies and larger enterprises have come to realize the advantages of
modular, high performance, highly automated storage systems such as the Storwize V7000. Unlike the
storage systems of previous generations, these systems enable IT organizations to significantly reduce
the overall total cost of ownership (TCO) of their storage operations. For example, the Storwize V7000
provides storage management capabilities such as automatic event management, auto disaster recovery
and fallback, automatic tiering between solid state and hard drives, local and remote mirroring,
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snapshots, non-disruptive data migration, thin provisioning, and external virtualization of
heterogeneous disk systems. These features greatly reduce the amount of administrator intervention and
lost or wasted capacity, and therefore improve productivity. In previous generations of storage, nearly
all of these management tasks required human intervention. Thus, it was not unusual for an
administrator to be responsible for less than one terabyte (TB) of storage. With a Storwize V7000, an
administrator can easily handle 50 TBs or more of storage.
The modularity of the Storwize V7000 enables it to provide a large amount of storage in a small,
environmentally friendly footprint. In a single compact rack, a Storwize V7000 storage system can
support a control enclosure and up to nine expansion enclosures, with each enclosure housing either 12
or 24 drive bays. Thus, a fully populated Storwize V7000 can contain up to 240 drives with a
maximum of 360 TB of raw physical storage capacity.
While a Storwize V7000 is economical, financing any hardware acquisition can be a challenge for
organizations in today's tough business and economic environment. With leasing rates as low as zero
percent and the ability to bundle hardware, software and services into the monthly payments, IT
executives should consider leasing as a viable alternative.
The Value of Leasing
RFG has identified 14 advantages that can be realized by leasing. As all companies will not be able to
utilize these, IT executives should understand the options and determine which ones are applicable and
most relevant to their equipment purchases.
No down payment required - 100 percent financing. One of the primary concerns facing enterprises
today is the funding needed to acquire storage and other capital purchases due to the large up-front
capital expenditures. Leasing eliminates the down payment expenses – which for a purchase deal could
be up as much as 20 percent of the overall cost – thereby protecting budgets from a big first year
financial hit.
Bundling and deferrals. Many lessors are willing to structure the leasing payments to cover software
and services as well as any "soft" items that one may desire to bundle into the financing. Thus, lessees
are not burdened with undesired or unexpected up-front fees or down payments. Moreover, in some
cases, initial payments can be deferred for a period of months, which could mean deferral of payments
into the next fiscal year.
Credit line or capital preservation. Equipment leasing (unlike a financed purchase) has no impact on
corporate credit lines or capital. Thus, leasing allows the company to preserve cash or the credit lines
for revenue-generating business activities or new business opportunities.
Cost of capital. The cost of capital is high with the exception of a few large corporations, ranging
anywhere from six to 12 percent in the U.S. This can add significant costs to the total cost of the
acquisition. Whereas, vendors that have their own leasing arms view leasing relationships very
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favorably, as they are seen as a more sustainable, profitable annuity. To advance leasing deals, vendors
usually offer extremely attractive interest rates to make the products more desirable and encourage an
ongoing relationship. Additionally, independent equipment financing companies are competing just as
aggressively for this business as well. Thus, IT organizations can get financing and leasing rates that
can approximate a zero percent lease.
Pay per use. Leasing is a pay-per-use model. Companies can write a single leasing contract but take
delivery of equipment as needed and only pay for the equipment once it is on board. Moreover, as
stated earlier, software and services can be bundled into the price so that fixed payments are preserved
and the added costs are included in the pay-for-use model. Thus, IT executives can view leasing as a
method of allowing the company to realize the value of the new hardware in concert with the
payments.
Fixed or flexible payments. Leasing payments normally are fixed over the life of the lease while many
other financial arrangements may have floating interest rates. In some instances, it may be desirable to
have stepped payments to support budgetary needs. Lessors can respond to these types of budgetary
requests, if needed.
Technical currency through short refresh cycles. Storage technology is undergoing a major shift in
architectural designs to support capacity and performance requirements as well as to address the new
environmental demands. The advances in the hardware and supporting software impact the overall
TCO, energy consumption, and footprint. Companies need to remain as current as possible to enjoy
these gains.
Fewer failures and outages. Current generation storage arrays are projected to have extended mean
time to failure (MTBF) rates – greater than 500,000 hours with some rated over one million hours – but
that is not a guarantee. The annualized failure rate (AFR) is a better operational metric. It is defined as
the relation between MTBF and the hours that a number of devices are run per year, expressed in
percent. AFR focuses on the total population of like storage components. A Google, Inc. study
observed there was an average AFR of 1.7 percent for drives in the first year of operation and that it
increased to six to eight percent in years three through five. The greater probability of failures means
the higher chances of an outage, which could result in lost revenues.
The ability to circumvent budget limitations. Hardware leasing is a pay-per-use option that allows
enterprises to spread the system cost over the optimized useful life of the equipment. Moreover, most
leasing vendors will structure lease payment streams to accommodate short-term or long-term budget
challenges, whereas purchasing requires a lump sum payment in year one or financing that increases
the cost of the purchase. It is also important to note the time value of money, which exacerbates the
costs of up-front payments. Finally, obtaining approval for a large non-revenue generating equipment
purchase could prove to be an extremely high hurdle that can be overcome through leasing.
Licensing and maintenance fees. Through the use of technology currency and proper asset
management software licensing costs are minimized and maintenance fees are eliminated. Licensing
fees are based upon the number of enclosures and the storage capacity; thus, there is an advantage to
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remaining current and using the latest, denser drives.
The end of End-of-Life Worries. End-of-life costs can be expensive, especially those that relate to
regulatory requirements for safe disposal. Leasing can assist with the management of end-of-life
services and can protect corporations from lawsuits and fines associated with improper disposal, as the
lessor maintains ownership throughout the lease.
Improved financial management. IT executives should be aware of the fact that financing and leasing
structures can affect corporate financial statements. Measurements such as debt-to-equity ratios, return
on assets, EBDITA, etc. can be effectively managed through judicious use of operating leases. These
ratios are important to banks, capital markets, investors, and executive management where
compensation could be based on how effectively these metrics are managed. Leasing is a tool that can
assist in financial management.
Avoidance of asset ownership. There are conditions under which added asset ownership is a
disadvantage for an enterprise. The reasons can vary from compliance and legal issues to liability
exposures to debt covenants to disposal risks. Leasing eliminates this exposure. Moreover, leasing
better insures more consistent turnover of technology within a 36 to 40 month range, which RFG finds
is a best practice. IT executives can construct leasing agreements that enable upgrades, swaps, and
other actions.
New business opportunities. Leasing allows corporations to keep capital or credit in reserve so that
the company can take advantage of new business opportunities as they arise.
The Methodology
RFG examined the costs of operating a Storwize V7000 storage solution with an initial raw storage
capacity of 25.5 TB of storage and growing at a 30 percent rate annually over a five year period. It was
also assumed that an average storage utilization rate of 60 percent could be attained and maintained
over the period.
For maximum performance it was assumed that a solid state drive (SSD) to hard disk drive (HDD)
ratio of approximately 13 percent was used. The initial HDD units were the 450 gigabyte (GB) 2.5 inch
drives while the SDD units were 300 GB 2.5 inch drives. Hence, the initial 25.5 TBs consisted of 50
HDDs and 10 SSD devices. As raw capacity was added, the SDD to HDD ratio was maintained. The
analysis assumes that the latest drives with the best densities on the 2.5 inch platters are used when
additional storage capacity is needed. Thus, for the purposes of the study, the 600 GB HDD will
become the standard in 2013, replacing the 450 GB drives. 900 GB HDDs replace those starting in
2014. Similarly, the 300 GB SDD are superseded by 400 GB and then 600 GB SDD units in the same
time frames.
RFG assumed the systems have the base Storwize software and external virtualization software
installed. In addition, RFG factored in a discount rate of 39 percent on all hardware and software
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purchases. Since these systems were deemed to be business-critical, the 24x7 maintenance package and
warranty service upgrades were factored into the analysis.
Lease vs Purchase
The TCO analysis was done over a five year period. On the leasing side, the original Storwize
enclosures and disk arrays are returned after 36 months and replaced by the latest generation enclosures
and storage drives. By swapping out the old hardware and moving to denser devices, it takes only four
enclosures to satisfy the capacity demands over the five-year period, with the exception of one year
when five are needed. Since the Storwize software is tied to the number of enclosures and not the
storage drives or total capacity, this is a key factor. Conversely, the purchase model assumes the
number of enclosures grows over the years and to a maximum of six in the fourth and fifth years.
TCO Findings
RFG finds that it is approximately three percent more costly to purchase the equipment than to lease on
a net present value (NPV) basis although on a constant currency basis it is only slightly more expensive
to buy the equipment and use it over a five-year period.
The TCO on the purchase side runs approximately $1,131,000 or on an NPV basis about $900,000. The
leasing TCO was less expensive by $24,000 on an NPV basis and ran about $1,130,000 and $877,000
respectively.
Figure 1. Cumulative Costs
Figure 1 shows leasing proves to be a more economical approach near-term and overall to the
acquisition of hardware when all the factors are taken into account. Moreover, the value is greater than
just the monetary savings as the storage capacity of the leased systems is denser with the ability to
handle more I/Os per second.
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Detailed Findings
An examination of the onetime charges associated with the acquisition and installation of purchased
storage is less than leasing and refreshing the storage. However, when the cost of the hardware
warranty and maintenance is included in the mix, leasing is less expensive by approximately $3,500.
More significantly, the first year outlays for purchasing the hardware and software are nearly three
times of that required when the storage is leased while the total costs for the first year show almost a
2:1 advantage when leasing is used. Thus, the company preserves $136,348 in capital and IT executives
are not burdened with justifying the first year budgetary bump.
In the purchased option there was a requirement for additional hardware and software maintenance fees
and increases in energy consumption. The additional software maintenance expenditures in the
purchase model exceeded $26,000 while the added hardware maintenance and warranty costs were
more than $19.000. In a comparable fashion, power and cooling charges increased by about $3,500
over the five years in the purchased model.
However, due to the leasing model requirement to return equipment after three years and replace it with
newer hardware, the hardware costs were higher by $13,500. Since this also meant the turnover of
enclosures, the software (which is linked to an enclosure's serial number) had to be re-licensed. This
increased leasing costs by more than $30,600 and acted as an offset to the software maintenance costs
incurred in the purchase model. Facilities and administration costs were the same regardless of how the
equipment was acquired.
Figure 2. Leasing Savings over Purchase
Figure 2 demonstrates the offsets with the biggest savings achieved by using a leasing model being in
the areas of software maintenance and warranty costs. However, the software maintenance fees were
more than offset by the need to reacquire the software licenses at the end of the lease period for the
enclosures. Additional savings were also achieved in power and cooling.
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A factor not included by RFG is the increase in “uptime”. In most companies the monies lost due to
additional outages far exceed any of the other parameters. In addition to uptime, productivity gains
were not included as these are intangible costs that may not be meaningful to all executives.
Figure 3. Detailed TCO Summary
Figure 3 shows the added expenses borne in the first year by purchasing the hardware as compared to
the apportioned costs associated with leasing. Furthermore, while the savings on constant dollars are
minimal, on an NPV basis the savings approaches three percent. It also shows how leasing lessens the
variability in budgetary planning and thereby makes it easier to attain executive buy-in.
year 1 year 2 year 3 year 4 year 5
Purchase option
Hardware Yearly Cost $ 152,445 $ 36,773 $ 41,121 $ 45,055 $ 43,305
Deployment $ 1,419 $ 426 $ 553 $ 719 $ 935
Provisioning $ 1,000 $ 1,000 $ 1,000 $ 1,000 $ 500
Warranty $ 8,232 $ 2,016 $ 2,016 $ 14,187 $ 15,429
Administrator Costs $ 59,012 $ 79,076 $ 105,254 $ 139,383 $ 183,853
Administrator Training $ 1,020 $ 1,367 $ 1,819 $ 2,409 $ 3,178
Software $ 49,410 $ 16,470 $ 16,470 $ 16,470 $ -
S/W Maintenance $ - $ 9,882 $ 13,176 $ 16,470 $ 19,764
Power And Cooling $ 1,172 $ 1,543 $ 1,934 $ 2,327 $ 2,572
Facilities $ 4,000 $ 4,000 $ 4,000 $ 4,000 $ 4,000
Total Per Year $ 277,709 $ 152,553 $ 187,343 $ 242,020 $ 273,537
$ 430,263 $ 617,606 $ 859,626 $ 1,133,163
NPV $ 900,704
year 1 year 2 year 3 year 4 year 5
Lease option
Hardware Yearly Cost $ 47,856 $ 59,399 $ 72,308 $ 69,522 $ 83,117
Deployment $ 1,419 $ 426 $ 553 $ 2,138 $ 1,361
Provisioning $ 1,000 $ 1,000 $ 1,000 $ 1,000 $ 1,000
Warranty $ 8,232 $ 2,016 $ 2,016 $ 8,232 $ 2,016
Administrator Costs $ 59,012 $ 79,076 $ 105,254 $ 139,383 $ 183,853
Administrator Training $ 1,020 $ 1,367 $ 1,819 $ 2,409 $ 3,178
Software $ 17,651 $ 23,535 $ 29,419 $ 29,419 $ 29,419
S/W Maintenance $ - $ 9,882 $ 13,176 $ 6,588 $ 3,294
Power And Cooling $ 1,172 $ 1,543 $ 1,934 $ 788 $ 658
Facilities $ 4,000 $ 4,000 $ 4,000 $ 4,000 $ 4,000
Total Per Year $ 141,361 $ 182,244 $ 231,479 $ 263,479 $ 311,896
$ 323,605 $ 555,084 $ 818,563 $ 1,130,459
NPV $ 876,827
Annual differences $ 136,348 $ (29,691) $ (44,136) $ (21,459) $ (38,359)
Cumulative differences $ 106,657 $ 62,521 $ 41,063 $ 2,704
Total NPV difference $ 23,877
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Conclusions
Switching to modular, highly automated, storage systems like the Storwize V7000 is something IT
executives should consider when replacing existing midrange storage systems. Advances in storage
technologies are occurring rapidly, which makes retention of previous-generation storage solutions a
costly proposition. Since the growth in stored data is expected to remain greater than 25 percent for
years to come and IT support costs will remain constrained, the future of storage will be modular,
inexpensive, highly automated storage systems. IT executives can expect the TB/administrator ratio to
be in the 100+TB range and growing. This is the only way data administrator costs can remain
controlled; and systems like the Storwize V7000 enable this advancement to occur.
Leasing proves to be a more economical approach to the acquisition of hardware when all the factors
are taken into account. More importantly, leasing provides organizations with the flexibility to satisfy
changing business requirements without impacting IT's budgetary constraints.
RFG believes the conventional wisdom of extending the life of purchased storage systems may make
sense from a CFO's financial perspective but from an IT operational approach it is not a best practice
and should be discontinued. Moreover, the new generation of hyper-efficient storage systems must be
acquired if IT executives are to satisfy the rapid growth in data volumes and required storage capacity,
while maintaining flat storage budgets. The TCO model proves that a well structured leasing program
could save an enterprise three percent or more over five years while significantly lowering first year
outlays. Finance and IT executives working with their preferred storage leasing vendor should
construct their own lease versus purchase models and evaluate if and where the leasing model works
for them. Additionally, they should determine which leasing structure best meets the company's
business, financial, and technology requirements.
IBM Corp. sponsored this study and analysis. This document exclusively reflects the analysis and opinions of
Robert Frances Group (RFG), who has final control of its content.
All rights reserved. The Robert Frances Group, 46 Kent Hills Lane, Wilton, CT 06897. Telephone 203-429-8951
www.rfgonline.com. This publication may not be reproduced in any form or by any electronic or mechanical
means without prior written permission. The information and materials presented herein represent to the best of
our knowledge true and accurate information as of date of publication. It nevertheless is being provided on an
"as is" basis.
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