Applying Accounting Measures to Data Networking Financial Performance

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:

  1. Compare the value to previous years (vertical analysis) - is it going up (probably bad)? is it going down (good)?
  2. How does it compare to goals you set for your organization? Maybe your internal goal is .002; so you are doing fine controlling network capital expenses.
  3. Compare it across the industry - this would be very nice, but very hard to find out what other companies spend on network capital depreciation. However, I would bet there could be trade organizations, anonymous surveys, or research organizations that could provide this data anonymously. That way, if you're Cisco, you could compare your rate - .00126 - against other high-tech firms with a few large develop centers and many regional sales offices (Juniper, EMC, NetApp, Avaya, etc). You wouldn't want to compare Cisco to McDonald's as they are in completely different business environments.

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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