Networking Costs

This segment is going to address the question, how much does a network connection cost? A later segment, presented by Dave Lambert, is going to consider the question, how can we go about paying for the cost of a network connection? Anyone viewing this CD will find it useful to have a printed copy of the spreadsheet that has been included in the CD.

As we consider what a campus network connection costs, we can form a useful analogy by comparison with the telephone system. The telephone system is based on mature technology. The equipment has a long lifespan and can be amortized over an extended period. The technology is very stable. And while I use the telephone more than my grandfather, I don't speak any faster than he did. Contrast that with a digital network connection. The technology is not stable; it's changing on a very rapid basis. The equipment has to be changed out every several years, which means it cannot be amortized over as long a period. Bandwidth utilization, as previously pointed out, is increasing rapidly -- a factor of ten every three and a half years. And finally and perhaps most importantly, the technology is intrinsically more complex. That means that maintenance costs are higher and user support and training is much more important. It's not surprising, therefore, that a campus digital network connection is going to be significantly more expensive than a telephone.

Several years ago, the Gartner Group, a very respected consulting firm, developed a total cost of ownership model for a network connection in a corporate setting; and what they found was that the annual cost of a network connection was slightly more than $3,200 a year, or $260 a month. Many of those costs are hidden to us. They're buried in departmental budgets. We don't really see those costs because they're personnel costs that are not explicitly identified. The Gartner Model found that 33% of the costs, the largest single component, was for the support of a user's application: application programs and their network applications. In this segment, we're going to develop a model that will try to estimate what campus networking costs really are. Now, this model is not going to include the cost of supporting applications. That was a cost that was included in the Gartner Model; we're not going to consider that as part of our model. We're going to make a number of assumptions. First of all, we're going to assume that the increased utilization of the network by individual users will be exactly offset by the improving performance/cost ratio of the equipment we purchase to put in the network. In reality, we know that assumption isn't quite true. We know that real costs really are going up slightly every year. We're also going to assume that the inflation rate is zero. Quite frankly, the only reason we've done that is to make the calculations much simpler.

The computer model that we have developed to project networking costs has five components. What I'd like to do now is to briefly identify what is included in each of these five components and then how they're organized on the spreadsheet.

The first component is the Intrabuilding Wiring. This component is the copper and the fiber optic within a given building. This is the wire that runs from the user's desk to, for example, a hub and the wiring that runs from those hubs and is aggregated into some kind of building switch or router. This component is almost entirely capital cost, although we have included a very small amount (one percent for ongoing maintenance of the building fiber. That amount includes not only cost for fixing the fiber and test gear, but a small amount for personnel as well.

The Interbuilding Wiring is generally the fiber optic that goes between buildings, and taken together, forms the campus backbone. Again, this cost is almost entirely a capital cost, and there has been a small amount included (again, one percent) for ongoing maintenance of the fiber infrastructure as well as the test gear and the personnel that might be needed to repair it.

The third component, the Intrabuilding Networking, is by far and away the most expensive single component of the project, if we look at it on a monthly basis, because this is the component that pays for the equipment within the building that sends the networking signals to the desktop and routes it to its destination. In other words, it includes the hubs, or the workgroup switches that aggregate traffic from a small workgroup. It includes the router or switch located in the basement of the building. These components are roughly proportional to the number of connections within the building, so they don't represent a true capital cost because they do become larger as we have more users on the network. There's also a component for personnel for support for the network. In the computer network, this is a variable that you enter, and we've calculated it using a number of different assumptions. The assumption that we would recommend is one FTE for every 600 users. That means that for a campus with 6,000 network connections, ten FTE would be devoted to supporting the users' network connection on that campus. At first glance, this may seem like an awful lot of support personnel. However, it represents fewer personnel than we actually see in today's networks where we have distributed Local Area Networks, because it includes the support that is currently buried and hidden in departmental budgets and largely unrecognized. We're also going to calculate this model based on some other assumptions, where we have fewer support costs.

The fourth component is the Interbuilding Networking, and this component includes the networking equipment that you find between buildings that form the campus backbone. So this would include large switches. It would include the routers. It would include the computers that provide domain name service. It would also include the personnel that provide the services necessary to support the campus backbone; again, things such as security, domain name service, fall in this section.

The fifth and last component in the model is the Network Operations and Planning, and this consists of a small amount of equipment for monitoring network operations. It includes the software as well. It includes the people that man the network operations center. It includes the people that have to be added to the Help desk to answer questions about the network, and it includes some personnel for planning.

As we look at the spreadsheet in detail, it's been organized such that the left-hand column indicates the item, and those are broken out into the five categories that I just mentioned. Immediately to the right of that, there is a column for Reference, and that's been included for your use if you want to make use of this spreadsheet at your campus to describe what you are projecting as a network cost to add references and explanations about things that you have included. The next three columns all deal with the cost of components. The first of them looks at the total cost; so, for example, if you buy a router and that router costs $50,000, $50,000 would be entered. The next column in that group tries to indicate what the useful life of that router is in months. So, for example, a typical useful life for a router would be 42 months, and so 42 months would be entered there. And the third column in that group breaks out the cost on a monthly basis. This has been done so that we can look at a steady state cost of the network, so it very simply is taking the one-time cost and dividing by the number of months of useful life to try to determine how much one would have to charge on a monthly basis to have a sustainable model. After those costs have been indicated, then there are additional columns to include, again, user information. How are these costs to be allocated? And the spreadsheet that you have has a couple of examples. For example, capital costs as represented by wiring could be entered as Capital. There's also identification made for costs that have already been incurred, and so that could be identified as Old Capital. So you can use those columns to identify to people on your campus how you're proposing to address funding those particular items.

Let's take a look at the first of these components in detail. That was the Intrabuilding Wiring. One of the things that we've done in each section is to include items for replacement costs, so, for example, in the Intrabuilding Wiring, I've included a column for the replacement cost for usable existing wiring. This is money that has been spent. We don't have to spend it again, but if we're trying to determine what the true cost of the network is, we have to include that value. We also have included the replacement cost for any usable wiring closets that have been added in the construction of the building. The next component, of course, is the one that we're most interested in, and that's the cost of new wiring. What has to be added in order to determine the cost of the new wiring? Unfortunately, the rules of thumb get to be pretty vague here. Typically, we see costs ranging from $200 to $2,000 per connection. That cost is determined largely by the age of the building, the architecture of the building, special conditions such as asbestos. Is the building a historic building in which modifications are very difficult? Well, as you try to develop these estimates, the question comes up: how many connections do you need? How many outlets have to be provided? In 1995, a number of leading institutions compared what was happening on their campuses, and they found that they had about 1.3 times as many data connections as they did telephones. In other words, for every telephone they had, they had 1.3 network connections. We also know that as you develop a wiring infrastructure, it's very difficult to achieve more than 80% utilization because the wiring outlet is never in the right place. Actually, it is in the right place most of the time, but you can't count on that more than about 80% of the time. So one can develop a rough estimate of the number of outlets that you need to develop, a very conservative estimate, by taking the number of telephones times 1.3, divided by .8 In addition to the cost of new wiring, you also have to worry about the cost of installing wiring closets, if the architecture that you are deploying requires these wiring closets. In the case of the Category 5 wire, the distance limitation is 90 meters. In that environment, you have to have many more wiring closets than in an architecture when the wire can be pulled over a larger distance. Many people are finding that the cost of building these wiring closets, which because of the nature of the high performance equipment that is located within these closets, these closets now require electrical power, they require security, they require air flow, and the cost of building these closets has turned out to be much higher than we had anticipated, even a few years ago. The final component that we have included under Intrabuilding Wiring is the annual maintenance cost, including test gear, for the equipment that's been identified in the model.

The Interbuilding Wiring component, again, consists of replacement costs for existing wiring. It also includes the cost of new wiring, which is usually fiber. It also includes the cost of any new ductwork, any new trenching that has to be done, as well as installing conduit. And it includes a small amount for the maintenance and testing of this infrastructure. This again was one percent.

In the case of the Intrabuilding Networking, we run into the first large non-capital expenses. Again, we've included a section for the replacement costs for usable existing network equipment. The next item, the workgroup switches, in the architecture that we've used in the model, is the largest single equipment component in the model. This consists of the switches that connect individual users to a building switch. We have a series of building switches as well. If you look at page two of the spreadsheet, what you will see is a detailed explanation of how the final costs are calculated based upon the number of buildings on campus and the number of anticipated users. We've included costs for the annual maintenance of each of these items based upon our actual experience in installing these switches; in one case, 11% and in the other case, 17%. The final cost is the annual cost for personnel. This is one component that is frequently omitted in superficial models looking at networking costs. We've made a number of assumptions in the model. The first is that we can try to reduce the personnel cost to some ratio based upon the number of actual users. For example, one number that we have used as an input variable is 600. In other words, 600 users per support person. So for a campus with 6,000 users, that would be ten FTE of support personnel within the building support structure. These are people that would support individual users with their connection. Now many people would say that we don't need that many; ten people is far more than we need. However, if we look at our current network environment where we have distributed LANs, it can be successfully argued that the number of FTE dedicated to supporting the network within individual departments substantially exceeds this number (600:1) in our current environment. So the 600:1 ratio represents what we feel is a way to gain economies over what we are doing now by providing centralized services.

The next component of the networking model is Interbuilding Networking. Again, we have included replacement costs for existing equipment. The new equipment has to be individually specified. In other words, we don't have any general rules of thumb for calculating this quantity because each campus is sufficiently unique that this has to be prepared individually. It also includes maintenance on the interbuilding networking equipment. It also finally includes a cost for personnel, and again, we have made the assumption that we can project this cost based upon the number of actual connections to the network. The number that we have built into our base model is 600 users per FTE of support personnel at the interbuilding networking level. Thus for a campus of 6,000, we again would have ten FTE providing these services. These services include, for example, a security officer to deal with security on the network, the person who maintains the domain name server, and the person who maintains the routers and sets appropriate routing tables.

The final component in the model is Network Operations and Planning. A relatively small component of this is the replacement cost for existing networking equipment. However, most of the equipment and software needed for monitoring a network has to be replaced on a fairly regular basis. Again, we've included an amount for the maintenance of this hardware and software. There's also a cost for connectivity to the rest of the world, the annual Internet connectivity fee. This varies widely from campus to campus, and also depending upon the size of the connection, the bandwidth of the connection. Typically, however, we currently see prices of around $30,000 a year for a T1 running to perhaps $50,000 a year for a multiple T1 connection, and, as the Internet 2 becomes a reality we can anticipate that those numbers will probably increase substantially. I would predict that they will stabilize to something on the order of a quarter million dollars a year for an OC3 connection. We've also included an amount for personnel. Specifically, we have included five FTE to man a 7x24 Network Operations Center, or NOC. A 7x24 facility is one that is available seven days a week and 24 hours a day. This particular component of the cost might be slightly less if the Network Operations Center could be integrated with an existing Operations Center. The other component of the annual personnel cost are the people that are going to be needed at the help desk. As we add these network connections, a lot of people are going to have problems and they're going to call the help desk, so we've included two FTE additional staff to provide those services as part of the help desk. And finally, we've included one senior network engineer to oversee the entire operation.

How do all of these pieces now come together in the model for a typical campus? The base campus that we've input into the model was one that has 6,000 network connections, and we actually looked at two specific situations; one where we said full personnel support. That was a model in which we used the ratio of 600:1 in both components of the Intra- and Internetworking costs. We also have a column where we talked about reduced personnel support, and what we have done in that case is that for Intrabuilding Networking support, which had been 600:1, we said, all right, let's put in 1800:1. Now, what that means is that for a campus of 6,000 users, instead of having ten FTE to provide support at the departmental and at the user level, we would have three people. In effect, that means that departments would be told that they then have to provide that kind of support on their own. The three FTE would be fully occupied training the trainers that would have to be hired and located within the individual departments. We've also identified numbers if we increased the number of network connections to 8,000, and again, we see that the total cost per user decreases. This is one of the features of the model, that there are real economies of scale to be gained by centralizing these operations and trying to make the network as big as possible.

For our typical campus of 6,000 connections with full personnel support, how do these costs break out by component? Over half of the cost is represented by the Intrabuilding Networking. This is the equipment that is located within a building that provides service to individual departments and users and the personnel that support that user. The next largest component is the Interbuilding Networking component, the campus backbone and the personnel that support it. The next largest component is the Network Operations Center at 12%, and finally, the combined capital cost of wiring is only 13%. As the network becomes larger, this 13% figure will decrease; if you have a smaller campus, the percentage represented by the capital wiring cost becomes larger. These cost components can form the basis for an analysis of how you pay for the campus network. For example, the campus wiring, which represents in this model 13% of the total cost, can be amortized over a ten to 15 year period, and is ideally suited for capital investments. On the other hand, the intrabuilding networking costs are largely driven by personnel costs, which are annual expenses, and by equipment costs that have recurring investments of roughly every three and one half years. How these costs are allocated will be the subject of a later presentation.

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