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CNI Spring 2012 Membership Meeting Baltimore, April 1-3, 2012. Total Cost of Preservation Cost Modeling for Sustainable Services. Stephen Abrams Patricia Cruse John Kunze University of California Curation Center California Digital Library. Outline. Goals Prior work - PowerPoint PPT Presentation
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Total Cost of PreservationCost Modeling for Sustainable Services
Stephen AbramsPatricia Cruse
John KunzeUniversity of California Curation Center
California Digital Library
CNI Spring 2012 Membership MeetingBaltimore, April 1-3, 2012
Outline Goals Prior work Modeling preservation activity Total cost of preservation
Pay-as-you-go price model Paid-up price model
Conclusions Questions and discussion
http://wiki.ucop.edu/display/Curation/Cost+Modeling
Source: Getty Images
Goals Understand costs in order to plan for and implement
sustainable preservation services Investigate the possibility of paid-up pricing in order
to address Boom-or-bust budget cycles Fixed-term, grant funded projects
Source: www.sharedidiz.com/
End date!
Prior work Nationaal Archief (2005)
http://www.nationaalarchief.nl/sites/default/files/docs/kennisbank/codpv1.pdf
LIFE (2008)http://www.life.ac.uk/
KRDS (2010)http://www.beagrie.com/krds.php
DataSpace (2010)http://arks.princeton.edu/ark:/88435/dsp01w6634361k
Jean-Daniel Zeller (2010)“Cost of digital archiving: Is there a universal model?”8th European Conference on Digital Archiving, Geneva, April 28-30, 2010 http://regarddejanus.files.wordpress.com/2010/05/costsdigitalarchiving-_jdz_eca2010.pdf
Rosenthal (2011)http://blog.dshr.org/2011/09/modeling-economics-of-long-term-storage.html
}Identification of granular cost components
}Assumption of annual decrease in aggregate cost, i.e., discounted cash flow (DCF)
Critique of DCF approach
Key assumptions Consider only the costs incurred by the preservation
service provider Costs of content creation by collection managers are out
of scope
Costs can be categorized unambiguously as fixed or marginal, and one-time or recurring One-time costs can be annualized over the effective
lifespan of the activity or system component
Cost model components
System, composed of various
Services for necessary/desirable functions, running on
Servers, deployed by
Staff, in support of content
Producers, who use
Workflows to submit instances of
Content Types, which occupy
Storage, and are subject to ongoing
Monitoring and periodic
Interventions
Number and unit cost of Producers
Total cost of preservation
ViMjSkCWmPnATCP
Fixed cost of System
Number and unit cost of Workflows
Unit cost and number of
Content Types
Number and unit cost of
Storage
Number and unit cost of Monitoring
Number and unit cost of
Interventions
System component subsumes Services
and Servers
Staff costs are subsumed by other
components
Total cost to service
provider
Total cost of preservation
ViMjSkCWmPnATCP
Model is rich enough to represent the full economic cost of preservation
Implemented by a spreadsheet that captures all subsidiary costs
Total cost of preservation
ViMjSkCWmPnATCP
Model is rich enough to represent the full economic cost or preservation
But service providers can customize the model to exclude components whose costs are not recoverable or are subsidized as a matter of local policy
Assumption: Cost allocation Cost of the Archive, Workflows, Content Types,
Monitoring, and Interventions are “common goods” Equally beneficial to all Providers Properly apportioned across all Providers
Cost of a single Producer
SkPn
ViMjCWmAG P
Number of Storage units attributable to
Producer
Number of Producers
Unit cost of a Producer
Total cost attributable to a given Producer
Assumptions: Billing Costs are billed for at the end of the period of
service The cost model should be revenue neutral
Pay-as-you-go cash flow
Expense
Income
GGt = 0 1 2 3
GCash flow diagram
G G G
TGGTGT
t
1
0
)(
Cost of a single Producer
Cumulative pay-as-you-go price over time period T
Pay-as-you-go price for a single
Producer
Cumulative pay-as-you-go price
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
$16,000$14,000$12,000
$10,000$ 8,000$ 6,000$ 4,000$ 2,000$ 0
Year (T)
Cost
($)
TGGTGT
t
1
0
)( )(G
Cumulative pay-as-you-goG (T )
Cumulative pay-as-you-go price over time period T … for “forever”
as a function of time T
Assumptions: Costs over time
Moore’s law, 1971 – 2011Source: Wikipedia
Kryder’s law, 1980 – 2012Source: Wikipedia
The aggregate cost of providing preservation service decreases over time; and that decrease is uniform Moore’s and Kryder’s laws
$$
Assumptions: Costs over time The aggregate cost of providing preservation service
decreases over time; and that decrease is uniform Moore’s and Kryder’s laws State-of-the-art tools and understanding Productivity increases
Discounted pay-as-you-go cash flow
(1–d )2·GG (1–d )·GDiscounting
factor
t = 0 1 2 3
Expense
Income
Discounted cash flow
(DCF) diagram
G (1–d )·G (1–d )2·G
tT
t
dGdTG )1(),(1
0
Discounted pay-as-you-go price over time period T
Cost of a single Producer
Pay-as-you-go price for a single
Producer
as a function of time TDiscounted pay-as-you-go price
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
$16,000$14,000$12,000
$10,000$ 8,000$ 6,000$ 4,000$ 2,000$ 0
Year (T)
Cost
($)
dd T
GdTG 11),(dGdG ),(
(1-d)t discount factor
Discounted pay-as-you-goG (T,d )Discounted pay-as-you-goG (,d )
Cumulative pay-as-you-goG (T )
… for “forever”Discounted pay-as-you-go price over time period T
Discount factor d is the weighted sum of the expected changes in
number and unit cost of individual components
Weighting factors ω are the proportion that a particular component contributes to the aggregate cost G, e.g.
)()( CCWmWAA dddddd )()()( SkSPPViVMjM ddddddd
GnA
A
GnWm
W
Drawbacks to pay-as-you-go pricing Only viable for Producers with reliable annual
funding sources Boom-or-bust budgeting or the termination of
funded project work can interrupt this funding Any interruption in proactive preservation care can
lead to irretrievable data loss
Assumptions: Investment return Preservation service providers can carry forward
budgetary surpluses across fiscal years Surplus funds can be invested with the return
supplementing the surplus
Paid-up cash flow
t = 0 1 2 3
Expense
Income
(1–d )2·G(1–d )·G
F r ·F
F Surplus (1+r )·F –G
r ·[(1+r )· F –G ]
(1+r )· [(1+r )·F –G ]–(1–d )·G
r ·[(1+r )·[(1+r) ·F–G ]–(1–d )·G ]–(1–d )2·G
(1+r )·[(1+r )· [(1+r )· F –G ]–(1–d )·G ]–(1–d )2·G 1
1
0 )1(1),,(
t
tT
t rdGrdTF
G
Paid-up price for time period T
Paid-up price Investment return
Cost of a single Producer
as a function of time TPaid-up price
0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30
$16,000$14,000$12,000$10,000$ 8,000$ 6,000$ 4,000$ 2,000$ 0
Year (T)
Cost
($)
drrdr
T
TT
GrdTF
)1()1()1(),,(
drGrdF
),,(
(1–d)t discount factor
(1+r)t investment return
Paid-up price, for TF (T,d ,r)Paid-up price, for F (,d ,r)
Discounted pay-as-you-goG (T,d )Discounted pay-as-you-goG (,d )
Cumulative pay-as-you-goG (T )
… for “forever”Paid-up price for time period T
Paid-up example
Pay-as-you-go price, G $ 650 (1 TB) Discount factor, d 5% Investment return, r 2% Term, T 10 years Paid-up price, F $ 4,725
Year Income Expense Surplus0 $ 4,725.00 – $ 4,725.001 $ 94.32 $ 650.00 $ 4.285.322 $ 83.39 $ 617.50 $ 3,764.213 $ 72.70 $ 586.63 $ 3,262.294 $ 62.43 $ 557.29 $ 2,778.425 $ 52.53 $ 529.43 $ 2,311.526 $ 42.99 $ 502.96 $ 1,859.55
7 $ 33.79 $ 477.81 $ 1,422.538 $ 24.91 $ 453.92 $ 816.529 $ 16.33 $ 431.22 $ 401.63
10 $ 8.03 $ 409.66 $ 0.00
< $ 5,216 < $ 6,500dr
Coefficient of permanence It is useful to be able to transition from a pay-as-
you-go to a paid-up price basis If you’re currently paying G on a pay-as-you-go
basis, you can upgrade to a paid-up basis with a
one-time payment of F = G ·φ , where Princeton DataSpace, φ ≈ 30 (T = ) USC digital repository, φ ≈ 1.2 (T = 20)
dr
1
Problems with R&D TCP modeling is dependent on the predicative
reliability of r and d For d, extrapolate from Moore’s and Kryder’s laws?
Moore’s law, 1971 – 2011Source: Wikipedia
Kryder’s law, 1980 – 2012Source: Wikipedia
??
Problems with R&D TCP modeling is dependent on the predicative
reliability of r and d For d, extrapolate from Moore’s and Kryder’s laws? For r, extrapolate from 30 year Treasury bonds?
30 year treasuries, 2007 – 2012Source: http://ycharts.com/indicators/30_year_treasury_rate
30 year treasuries, 1882 – 2012Source: Robert Schiller
?
Model the risk Round up r and d, i.e., adding a fixed “risk premium” Add an additional risk component R to the formula
for G Its influence on the price can grow over time, reflecting
increasing uncertainty, by setting a negative discount factor dR so that 1–dR > 1 Note, however, that if the weighted sum d becomes less
than 0 and |d | > r then G (T ) will not converge to a limit
SkPn
ViMjCWmAG P
+ R
Recalibrate the model G and F do not have to be fixed values over time
Periodically recalculate based on current conditions (actual costs for G ) and predictions (r and d ), and apply prospectively
Retrospective service contracts remain “locked-in”
Hybrid price model Distinguish between costs that are (relatively) easy
to quantify and forecast, and those that aren’t Use the paid-up model for the former and pay-as-you-go
for the latter
Easy Difficult
Archive Intervention
Producer
Workflow
Content Type
Monitoring
Storage
Hybrid price model Distinguish between costs that are (relatively) easy
to quantify and forecast, and those that aren’t Use the paid-up model for the former and pay-as-you-go
for the latter
Bit preservation only
Easy Difficult
Archive Content Type
Producer Workflow
Storage Monitoring
Intervention
Preservation forever Some things are intended to last forever…
Source: John Church Company Source: United Artists
Preservation forever
?
Some things are intended to last forever…
Preservation for … A fixed term – 10 years? 20 years? – may be
appropriate for much content Give content an opportunity to prove its worth, as
evidenced by someone’s commitment to pay for its subsequent preservation
Embrace uncertainty The discounted cash flow (DCF) approach is
problematic on practical and theoretical grounds Difficulty in the setting fixed values for r and d that
realistically represent financial and technological trends over time
Stochastic modeling to determine the probability distribution of possible outcomes C.f., David Rosenthal, FAST ‘12
http://blog.dshr.org/2012/02/fast-2012.html
CNI Fall 2011http://www.youtube.com/watch?v=_5lQxmyz3xY
Understand the risks Possible outcomes…
We overestimate our costs and collect too much● Fund a higher level of service● Refund some portion
We underestimate● Ask for additional funds● Lower service levels● De-accession content – but at least it was preserved up to that
point and had a chance to prove its value, and gain an advocate
Conclusions Different customers have different funding capabilities
Flexibility in price models is important
Any price model is based on an idealization of the real world Assumptions matter
Knowing all of the costs is distinct from a policy decision to recover all of those costs
If investment return and discount factor can be reliably projected, then standard DCF/NPV methods provide a reasonable prediction of long-term costs
Looking for feedback
Thanks to our reviewers Lisa Baird, UCOP Raym Crow, SPARC Todd Grappone, UCLA Cliff Lynch, CNI David Minor, UCSD/SDSC Richard Moore, SDSC Michael Mundrane, UC Berkeley Jake Nadal, UCLA David Rosenthal, LOCKSS Mackenzie Smith UC Council of University Librarians /
Systemwide Operations and Planning Group Candace Yano, UC Berkeley
Have we missed something in our analysis, logic, assumptions, math, etc?
Are the objections to the DCF-based analysis substantial enough to invalidate this approach?
Are there better forecasting methodologies?
Even if we don’t have a perfect model, we need to move forward now with a “good enough” model
For more information
Total Cost of Preservation: Cost Modeling for Sustainable Serviceshttp://wiki.ucop.edu/display/Curation/Cost+Modeling
UC Curation Centerhttp://www.cdlib.org/[email protected]
Stephen Abrams Mark ReyesPatricia Cruse Abhishek SalveScott Fisher Joan StarrErik Hetzner Tracy SenecaGreg Janée Carly StrasserJohn Kunze Marisa StrongMargaret Low Adrian TurnerDavid Loy Perry Willett