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February 14, 2000

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A Calculated Decision
There's a new cost equation for Windows 2000, but it doesn't work for everyone

By Aaron Ricadela

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et out the cost/benefit calculators. When Microsoft unveils Windows 2000 in San Francisco this week, the pitch will go something like this: More functionality plus easier administration, for the same price as Windows NT, equals lower cost of ownership and greater business value. It's a formula that adds up for some Microsoft customers-but not all.

At $400 or more per desktop for software, services, and training, an upgrade to Windows 2000 would cost a business with 1,000 PCs a minimum of $400,000-and, by some estimates, closer to $1 million. That doesn't even include the cost of server migration. So just what-and when-is the payback on that sizable investment?

There's no consensus. According to an InformationWeek Research survey of 200 IT managers at companies that plan to test or deploy Windows 2000, an optimistic one-third expect an immediate decrease in total cost of ownership on deployment, and nearly half anticipate lower costs within two years. But 27% are bracing for a near-term increase-and 18% think costs will be higher even over the long haul. The survey was completed last week; for more results, see here.

"Cost of ownership is the big question, and we won't know the answer until we change over the initial PCs and servers," says Bob Zoellner, a systems manager with integrator EDS who's on assignment at Kellwood Co., a St. Louis apparel maker. During the next two years, EDS will convert 500 PCs and 70 servers to Windows 2000, but Zoellner isn't expecting an immediate payback. "It will take a good two years before we can hope to see costs level out to something similar to what we're experiencing now with Windows 95 and NT," he says.

The uncertainty seems to be little deterrent. According to the InformationWeek Research survey, nearly three-quarters of respondents plan to deploy Windows 2000 widely on PCs and servers within 12 months, a rapid ramp-up. "It's the first release of Windows where the things that end users get excited about, and performance and reliability, are balanced by the things that IT people want organizationally-security, software deployment, management of the PCs," Microsoft chairman Bill Gates said in an interview in November.

Online retailer Nordstrom.com isn't waiting around. It has been running Windows 2000 in production on about 60 Web servers for a little more than a week. "We're moving so fast that it's almost like one day we decide we need Windows 2000, and the next day we start," chief technology officer Paul Onnen says. "With Internet companies, things move so fast that you don't have time to measure things or do a formal analysis beforehand-you just do it."

The E-retailer is already experiencing fewer system crashes and may be able to reassign at least one IT staffer from server maintenance to site productivity, a meaningful gain, Onnen says. More important, fewer system failures mean better online service. "We're measured on customer satisfaction, the number of people coming to our site, features to help them buy, and how easy it is to make returns," Onnen says.

chart This week, Microsoft will present case studies of Micronpc.com and military contractor United Defense that are intended to demonstrate Windows 2000's potential to lower PC ownership costs. Bottom-line results: IT budget reductions of 15% and downtime costs cut in half. Microsoft hired Gartner Group to audit the results.

In a second set of customer examples, Microsoft will make a bolder assertion-that Win2000's greater value comes from measurable business advantages. It will pitch a methodology it calls "rapid economic justification" that assigns dollar values to benefits related to the use of Windows 2000, such as increased worker productivity or faster time to market. "Some of the thinking among customers, analysts, and ourselves was that in addition to focusing on the cost portion of IT, you also have to look at the top-line revenue increase you get as a result of IT," says Deborah Willingham, Microsoft VP of marketing.

The studies of Panasonic Consumer Electronics, retailer Marks and Spencer, and others show upgrade costs of $900 per PC, but forecast return on investment of 400% during the next three years. Giga Information Group audited the results. Microsoft will release a toolkit to let customers crunch the numbers themselves. (Our survey puts the upgrade cost at $400 per PC, excluding hardware.)

Metrics that justify IT investment based on revenue contribution aren't new-consulting firms have been applying them for years. "We've tried to take some of that same kind of thinking and put it in a model that's straightforward for customers," Willingham says.

But even Microsoft's own customers are wary of using a Microsoft-supplied tool to measure Windows 2000 payback. "You have to be careful, because they're always interested in the positive aspects of that analysis," says Gregor Bailar, executive VP and CIO at the National Association of Securities Dealers. The company has seen performance increases on the 40 Web servers it has migrated to Windows 2000, and Bailar is bullish on prospects for lower costs. "We won't need to buy new machines as quickly, because we saw a 25% to 30% capacity increase" just by installing Windows 2000, he says.

Microsoft has long argued that its computing model, based on widely available, low-cost Intel systems, yields a lower cost of ownership than proprietary Unix environments. Windows 2000 advances that argument. For example, the new Active Directory enables management features such as SysPrep for cloning PC configurations across a network, and IntelliMirror, which lets users access their data on workstations around a network.

Lockheed Martin Corp., the $25.4 billion aerospace and defense contractor, plans to migrate 120,000 desktops and 700 servers to Windows 2000 during the next three to five years. "The full benefit of Windows 2000 is really when the servers and desktops are deployed together," says Massimo Villinger, chief technology officer at Lockheed Martin Enterprise Information Systems, the company's IT services arm. Lockheed Martin's rollout plan will capitalize on the benefits of Windows 2000 Server first. Villinger estimates, for example, that one of the company's four business units can drive 10% out of its costs by consolidating 200 servers down to half that.

More important, moving to Windows 2000 can accelerate the company's E-business capabilities by enabling an infrastructure for sharing purchasing information and design drawings with partners and reallocating IT staff from maintenance to product development. "We want to participate in the advantages of business-to-business E-commerce as quickly and aggressively as possible," Villinger says. "The advantage we see in Windows 2000 is that instead of spending time in day-to-day operations, we'll be able to devote more resources to rolling products out faster."

For all of Windows 2000's cost-saving features-electronic software distribution among them-bottom-line benefits may be hard to come by without adequate planning. "Windows 2000 isn't a magic bullet," says Michael Gartenberg, VP and research director at Gartner Group. "Your real bang for the buck is using Windows 2000 as the catalyst for a well-managed environment." Gartenberg estimates companies that enforce PC policies, train IT staff on remote software installation, and implement other controls can save up to 26% with Windows 2000.

chart But the up-front cost and complexity will cause some businesses to proceed judiciously. On Friday, Microsoft's stock dropped more than 5% on news of a Gartner Group report warning that some Windows 2000 rollouts will encounter compatibility problems with existing IT environments.

"It's kind of scary when they throw all these things at you, like Active Directory," says Tim Lassance, VP of IS at Heartland Financial USA Inc., a Dubuque, Iowa, financial-services company with more than $1 billion in assets. "Our total budget for IT is $250,000, with $80,000 to $100,000 for networks. We could spend all of that on Windows 2000."

Still, Lassance expects his cost of ownership to fall this year as Heartland replaces Windows 95 and 98 on about 500 desktops. "We're very dispersed geographically, so we want to be able to install software quickly and send out updates without sending people out," he says. The company wants a "cookie-cutter approach" when setting up computers at new branches. "You take a quantum leap with Windows 2000-that's going to be hard for some network staff," Lassance says. "But there will be a plan we have to stick to. Windows 2000 forces you to plan things out to get all the benefits."

Other uncertainties cloud the cost-containment picture. IntelliMirror, for instance, promises to cut down on "sneakernet" administration and was even called "zero-administration Windows" for a while. Yet 65% of IT managers surveyed by InformationWeek Research say Windows 2000 won't reduce their number of system administrators or related costs a year from now.

David Shomette, senior manager of IT administration and support for the Public Broadcasting Service, the non-profit TV network in Alexandria, Va., is among those expecting near-term costs to increase with Windows 2000. PBS plans to deploy Windows 2000 Professional across more than 600 workstations during the next few months. "I've never found cost of ownership to be less with newer versions of Microsoft operating systems because there's always a learning curve," he says. "When you implement a new package, you continue to pay for training and support-those are the real costs."

The need to train and certify IT staff for Windows 2000 ranked among the top challenges companies face as they migrate to the system (see story, p. 123). In all, 70% of respondents cited training as a challenge in the InformationWeek Research survey, topped only by application upgrades. "Skills is certainly an area of concern," says Lockheed Martin's Villinger.

There are other variables. If customers want 32-way processing, they'll have to wait for Windows 2000 DataCenter Edition, expected this summer. Analysts estimate the vendor will charge a high premium over the $4,000 price tag on Win2000 Advanced Server.

But as businesses try to keep up with the pace of the Internet economy, some are simply throwing caution to the wind when it comes to the cost analysis on Windows 2000. Forget cost; think opportunity. Says Nordstrom.com's Onnen, "I don't think total cost of ownership holds nearly as much weight as it did in the past."

--with additional reporting by Larry Greenemeier and Jennifer Mateyaschuk

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