As I mentioned last year, I moved (officially) into management and started my MBA at NC State University. While I still do a ton of technical work, the MBA is opening my eyes to other ways to measure the network.
The summer MBA session started with a grueling 6-week, 3-credit hour, twice weekly Accounting course. But, all is not that bad. I spent a good part of today doing homework analyzing and interpreting financial statements using simple formulas to judge company performance.
All financial analysis comes from public company SEC filings such as the 10-K and 10-Q documents. For example, here is Cisco's most recent 10-K filing from last July. From this document accountants, investors, analysts, etc. will develop measures such as "Return on Equity", "Net Operating Profit Margin", and "Gross Margin". All good stuff to know about.
So, I got to thinking, why wouldn't some of these financial models work well for networking. I've written about network performance management, but what about network financial management?
For example, let's measure the capital investment in your network. Capital investment is the stuff - routers, switches, firewalls, etc. - that your organization has purchased, is in use in the network, and is being depreciated (probably over a 36-month term). Let's say each year there is $50,000,000 in depreciation for network equipment (that's a big network) and your organization's total sales is $39,540,000,000 (Cisco's sales in 2008). Then your "Gross Network Expense Margin" (my new term) is:
GNEM = $50,000,000 / $39,540,000,000 = 0.00126
This would tell you that network capital costs use .127% in sales dollars. Or $.00126 of every dollar in sales goes to the network equipment.
Now there are three ways to use this data:
This data, presented in the three formats above, could be a great way to demonstrate to senior management that the network is properly sized, needs cost cutting, or is possibly undersized and needs investment.
Here are some more I came up with. I'll use these dummy values as examples (yearly term):
Sales = $39,540,000,000 Profit = $8,052,000,000 Telecom Expense = $126,869,000 Network Capital Expense (Depreciation) = $50,000,000
Return on Network Capital Investment = RNCI RNCI = Profit / Network Capital Expense (Depreciation) RNCI = $8,052,000,000/ $50,000,000 RNCI = $161.04 Shows that every $1 spent on network hardware creates $161.04 in profit.
Return on Bandwidth = ROB ROB = Profit / Telecom Expense ROB = $8,052,000,000 / $126,869,000 ROB = $63.47 Shows that every $1 spent on bandwidth creates $63.47 in profit.
Return on the Network = ROTN ROTN = Profit / (Telecom Expense + Network Capital Expense (Depreciation)) ROTN = $8,052,000,000 / ($126,869,000 + $50,000,000) ROTN = $45.53 Shows that every $1 spent on the network creates $45.43 in profit.
And so on and on...there are many ways to divide and multiply the numbers by. The point is there are ways to value your network to senior management in quantitative terms that can be compared year-over-year with objective goals. It's just as powerful as showing a graph of the bandwidth utilization in the network. The network cost data can easily be attained from your corporate Finance department. The corporate sales and profit numbers are available on-line.
Happy accounting! ;-)
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Michael Morris is a communications engineering manager at a $3-billion high-tech company. His background is in enterprise WANs working with telcos and developing large-scale routing designs. He has worked on networks at government and corporate organizations, including networks at two Fortune 10 companies. In his current role, he leads a team of 10 engineers responsible for large-scale IT networking projects and architectural standards for data networks, storage area networks, IP telephony, contact centers, and security. Michael is CCIE #11733 and recently became one of the first three Cisco Certified Design Experts (CCDE) ever (#20080002). He has 11 years experience in networking and communications, including four years as a paratrooper in the U.S. Army. He has a bachelor's degree in MIS from the University at Buffalo and is working on his MBA from NC State University. In 2008, he was awarded the Network Professional Association (NPA) Professional Excellence and Innovation Award for his work on network architecture, templates and enterprise MPLS design.
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Return on Network Capital Investment = RNCI
This is interesting Michael:
Return on Network Capital Investment = RNCI
RNCI = Profit / Network Capital Expense (Depreciation)
RNCI = $8,052,000,000/ $1
RNCI = $8,052,000,000
Shows that the $1 spent on network hardware created $8,052,000,000 in profit.
Sincerely,
Brad Reese
BradReese.Com Cisco Refurbished
post hoc fallacy
I think this is a great way to look at things, but the examples in the second half of the blog entry fall victim to the post-hoc fallacy: just because a profit (or loss) followed an IT expenditure in no way demonstrates that the latter caused the former.
RE: post hoc fallacy
You are correct. I would never recommend you walk into the CFO office and say if you spend another $1 on the network you'll get another $45 in profit. You'll get laughed out of the office with instructions to report to building security with your belongings.
However, it can be used on a comparative basis between years and as a goal each year. If it makes you feel better, you can swap the numerator and denominator and use the percentage.
Mike
Neat!
Michael -
I start my MBA at Florida State in the fall. It's really neat that you've translated what you're learning in business classes to your specialization in networking. I'm going to keep these formulas!
Tom
Are these metrics useless?
Profits can fall badly without any connection to the network expenses (you still have to depreciate network equipment).
For example, profits in Q1 2009 felt 30% lower than Q1 2008, your ROTN decreased too. Can you sell back to the vendor your unused network equipment? No. What's the point of providing data on which you don't have control?
The best way will be to calculate percentage of budget spent on investments and not on support. You will get figure which will show how much you are spending on innovations and upgrades compared to depreciation and OPEX. If this value is too low, you should start worrying about it.
I really think that applying
I really think that applying accounting in data networking is a good idea. This is a great way to demonstrate to the management that the network is properly sized, needs cost cutting, or is possibly undersized and needs investment. Mesa CPA
I do agree with you there.
I do agree with you there. And that one needs a good program/system that can deal with the development or expansion of all documents relating to finances and the like.california merchant accounts
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