IBM i on Power Systems for Enterprise Businesses

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Management Report September 2014

IBM i on Power Systems for Enterprise Businesses Value of Resilience for Next-generation Analytics, Cloud, Mobile and Social Media

International Technology Group September 2014

IBM i on Power Systems for Enterprise Businesses: Value of Resilience for Next-generation Analytics, Cloud, Mobile and Social Media

Table of Contents Executive Summary 1

Overview 1 The Players 2 Costs Of Downtime 3 Severe Unplanned Outages 5 Security and Malware 6 Conclusions: The Third Platform 7

Risk Factors 8 Overview 8

Lessons Learned 8 …and Relearned 8

Supply Chain Disruption 9 Risk Demographics 9 Industry Trends 10 Reporting Implications 12

Financial Services 15 Risk Sensitivities 15 Availability and Recovery 15 Security and Malware 16 Data Breaches 17 Reporting Implications 18

Platform Differentiators 21 Overview 21 IBM i 22

Storage Support 25 Detailed Data 26 Company Profiles 26 Costs of Downtime 27

Supply Chain Companies 27 Financial Services Companies 27

Severe Unplanned Outages 28

List of Figures 1. Costs of Downtime per Hour – Supply Chain Companies 3 2. Three-year Costs of Downtime by Platform – Supply Chain Companies 4 3. Costs of Downtime per Hour – Financial Services Companies 4 4. Three-year Costs of Downtime by Platform – Financial Services Companies 5 5. Three-year Risk Exposure to Severe Unplanned Outages – Averages for Supply Chain Companies 6 6. Three-year Risk Exposure to Severe Unplanned Outages –

Averages for Financial Services Companies 6 7. Comparative Advisory Data – January 2008 through June 2014 7 8. Most Common Causes of Supply Chain Disruptions – Percent of Companies Reporting 9 9. Causes of IT Outages – Percent of Companies Reporting 9 10. Potential Costs of Outages – Manufacturing Companies 12 11. Risk Factors Cited by Supply Chain Companies – Examples from Recent Annual Reports 13 12. Cyberincidents Reported by Bank Executives 17 13. Data Breach Costs – U.S. Examples 18 14. Risk Factors Cited by Financial Services Companies – Examples from Recent Annual Reports 19 15. IBM i Single-level Storage Structure 22 16. IBM i 7.2 and IBM Power Systems Autonomic Functions 24 17. Company Profiles 26 18. Costs of Downtime per Hour Detail 28


IBM i on Power Systems for Enterprise Businesses: Value of Resilience for Next-generation Analytics, Cloud, Mobile and Social Media 1

Executive Summary

Overview What is the business value of resilience? Most organizations would agree on the importance of maintaining security, availability and recoverability for business-critical systems. Many, however, do not quantify the value of doing so.

This may be unwise. Resilience may vary between different types of business-critical solution, and – the subject of this report – the underlying platforms that support them. The bottom-line implications may be greater than is generally recognized.

The report compares costs of downtime, and potential exposure to disastrous system outages, for use of three platforms: the IBM i operating system on Power Systems hardware; Microsoft Windows servers with SQL Server; and Oracle Exadata Database Machine.

The focus is on two sets of business-critical systems: (1) core business systems; and (2) analytics, cloud, mobile and social media applications that depend upon interoperability with and/or data generated by these. In an interconnected world, the effects of a core system outage may spread rapidly across the entire enterprise, and extend to customers and partners.

Comparisons are for six companies operating supply chains (a manufacturer, a retail chain and an industrial distributor) or providing financial services (a bank, an insurance company and a services company. Companies range from $1 billion to $12 billion in revenues, and employ between 2,000 and more than 50,000 people.

Results may be summarized as follows:

• Costs of downtime – i.e., business costs due to outages – averaged 8.3 times higher for use of Windows Servers and 3.4 times higher for use of Oracle Exadata than for use of IBM i. This calculation is for planned outages and unplanned outages of less than three hours duration.

Lower IBM i costs of downtime represented three-year business savings of $2.3 million to $32.7 million compared to use of Windows servers, and $0.8 million to $9.3 million compared to Oracle Exadata.

• Risk exposure to severe unplanned outages of 6 to 24 hours duration over three years averaged 12.1 to 3.7 times higher for use of Windows servers and Oracle Exadata respectively than for use of IBM i. These calculations employ a standard probability/impact methodology.

These differences translated into $4.5 billion to $5 billion in lower risk exposure for use of IBM i compared to Windows servers, and $1.1 billion to $1.3 billion less than for Oracle Exadata.

Comparisons are between Windows 2012 servers with SQL Server 2014 AlwaysOn clusters on latest-generation Intel E5- and E7-based hardware; Oracle Exadata X3-8 and X4-2 systems with Real Application Clusters (RAC) and Data Guard; and IBM i 7.2 with IBM PowerHA SystemMirror for i clusters.

IBM i is supported on Power Systems, including new POWER8-based models. However, because IBM has to date introduced only entry level POWER8-based systems, the calculations presented in this report are based on use of POWER7+-based enterprise (large and midrange) systems.



The Players These may be summarized as follows:

• IBM i has a longstanding track record of resilience. Users routinely describe it as highly stable... extremely robust…completely dependable…rock-solid…entirely secure and the like.

This has been the experience not only of midsize businesses, but also of large organizations requiring enterprise-class capabilities. Among IBM i users are some of the world’s largest corporations, including members of the Fortune 100 and FTSE 100.

Among this group, IBM i typically supports core business systems. Examples include enterprise resource planning (ERP) systems, along with supply chain management, core banking and retail, and e-commerce systems. IBM i offers levels of availability, security and recoverability that exceed those of any competitive platform.

IBM i capabilities reflect fundamental characteristics of the system’s architecture and technology. Availability features are built into the IBM i kernel, and embedded into Power Systems hardware and firmware. IBM i is the most tightly integrated and automated operating environment in existence. The potential for system, operator or administrator errors is minimized.

Disaster recovery capabilities are again built into the IBM i kernel rather than – as is the case for Microsoft and Oracle solutions – implemented as software overlays. Kernel features are tightly integrated with IBM PowerHA SystemMirror and third-party failover and recovery solutions that have supported high-volume core business systems for decades.

• Windows servers have also been deployed to support core business systems. These have, however, tended to be smaller and less availability- and recovery-sensitive than IBM i equivalents, and typically experience longer and more frequent outages. This is particularly the case for planned outages for such functions as software upgrades and preventative maintenance.

Microsoft has recently introduced availability enhancements in SQL Server 2014. These include AlwaysOn clustering, which is based on the earlier Microsoft Windows Server Failover Clusters (WSFC).

Experiences with WSFC have shown that it is complex and limited in scalability. Failover and recovery processes may effectively handle simple, low-volume environments, but tend to be slower and less reliable for large transactional workloads and data volumes. AlwaysOn enhancements do not materially change this picture.

• Exadata systems have been aggressively promoted by Oracle for transactional applications. The core Exadata architecture is, however, optimized for analytical processing, and executes transactional workloads in a comparatively inefficient manner.

The Exadata platform and core tools such as RAC (failover clustering) and Data Guard (disaster recovery) are largely stable. Higher costs of downtime and risk exposure compared to IBM i on Power Systems reflect greater complexity of the Oracle environment – which increases failure risks – and requires frequent planned outages.

There are also differences in hardware resilience. Intel-based servers, as well as the Oracle Exadata platform, incorporate extensive reliability, availability and serviceability (RAS) features. Comparable features in Power Systems are, however, generally more sophisticated, and microelectronics technologies are more advanced.



Costs Of Downtime The comparisons presented in this report are based on detailed financial and operational data supplied by 64 companies employing Microsoft Windows servers, Oracle Exadata or IBM i to run core enterprise systems. Additional data on use of cloud, mobile, analytics and social media applications that would be affected by core system outages was drawn from these along with 23 other companies.

Based on this input, six composite company profiles were created. Average costs of downtime per hour for all affected applications were calculated for each company, and multiplied by numbers of hours of downtime for each of the three platforms for a three-year period. The focus was placed on underlying hardware and software platform outages, rather than application-level downtime.

For supply chain companies, costs of downtime per hour were as shown in figure 1.

Figure 1: Costs of Downtime per Hour – Supply Chain Companies

Calculations are for outages affecting core ERP and (in the case of the retail chain) merchandising systems, along with an EDI cloud operated by the automotive parts manufacturer; cloud, mobile sales and social media applications for the retail chain and distributor; and data warehouses for all three companies.

Calculations allow for cascading effects. In tightly integrated supply chains with few or no inventory buffers and real-time operations, experience has shown that the effects of disruption at any point may spread rapidly. They may continue to be felt long after service is restored.

Costs of data warehouse disruption are for lost productivity by executives, managers and professionals, analysts and others due to delays in obtaining current data generated by core business systems. Costs were allocated to one or more categories shown in figure 1 based on the role of users within organizations.

Overall three-year costs of downtime for different platforms are shown in figure 2.

SUPPLY CHAIN COMPANIES

Auto Parts Manufacturer

Outbound supply chain disruption Inbound supply chain & production disruption Customer penalties & remedial costs

1,305.3

Retail Chain

Lost sales Supply chain disruption SG&A costs

833.5

Industrial Distributor

Lost sales Supply chain disruption

685.2

$ thousands



Figure 2: Three-year Costs of Downtime by Platform – Supply Chain Companies

Financial services companies also experienced significant costs of downtime for disruption of core banking, insurance and services systems respectively. Calculations also allow for interruptions of mobile banking; social media marketing and account service; customer and partner clouds; and data warehouses.

Costs of data warehouse interruption were calculated in the same manner as for supply chain companies. Costs were particularly significant for the bank, where more than 2,500 users employed 100+ analytics applications.

Costs of downtime per hour, and overall three-year costs of downtime for these companies were as shown in figure 3 and 4 respectively.

Figure 3: Costs of Downtime per Hour – Financial Services Companies

For both groups of companies, the impact of core business system outages on other applications was striking. E-commerce systems, as well as next-generation solutions were affected. The ability to process customer transactions was interrupted. Queries went unanswered because current information was not available. Salespeople were unable to quote inventory availability and delivery schedules.

1.4

3.4

3.8

5.1

10.4

13.0

10.6

21.7

36.5

Industrial Distributor

Retail Chain

Auto Parts Manufacturer

Microsoft Windows Server Oracle Exadata IBM i/Power Systems

$ millions


FINANCIAL SERVICES COMPANIES

Bank Customer attrition Lost fee income Other costs

320.3

Insurance Company Lost income Other costs

164.4

Services Company Lost income Other costs

149.3

$ thousands



Figure 4: Three-year Costs of Downtime by Platform – Financial Services Companies

Data warehouse users were often obliged to operate with, at best, stale information. In all of the companies upon which calculations were based, analytics supported applications that ranged from CXO-level decision making, to cross-selling and upselling by customer service representatives (CSRs) and other front-line personnel.

Severe Unplanned Outages There is a great deal of evidence that, when severe unplanned outages occur, the bottom-line impact increases in a manner that is as much exponential as arithmetic. A 24-hour outage, for example, may not have four times the impact of a 6-hour outage. It may have 20 times more.

Experience with major supply chain failures has shown that effects may extend beyond operational costs and lost sales to include reputational damage, impaired corporate financial performance, share price declines, reduced investor confidence and other negative effects.

Financial services companies are equally if not more vulnerable. Customer attrition and remedial costs are likely to be substantial, reputational damage may be immediate and massive, and regulatory penalties and legal costs may be incurred.

For this report, potential costs of severe unplanned outages of 6, 12 and 24 hours duration were determined for the same applications and platforms as for costs of downtime. Calculations were based on user input as well as general industry data. Results were as shown in figures 5 and 6 respectively.

Risk exposure may require companies to make allowances in capital and/or operating funds. The largest bottom-line impact, however, will be felt if such outages occur. Presumably companies deploying core business systems on Windows servers and Oracle Exadata have greater risk appetites than IBM i users.

0.4

0.5

1.0

1.2

1.6

3.7

2.7

4.3

10.2

Services Company

Insurance Company

Bank

Microsoft Windows Server Oracle Exadata IBM i/Power Systems

$ millions





Figure 5: Three-year Risk Exposure to Severe Unplanned Outages – Averages for Supply Chain Companies

Figure 6: Three-year Risk Exposure to Severe Unplanned Outages – Averages for Financial Services Companies

A final point should be noted. Comparatively high Windows server costs of downtime and risk exposure are striking in that five nines (99.999 percent) availability is commonly claimed for this platform. There are several reasons for this disparity.

One is that such claims often refer to applications whose characteristics are significantly different from those of core business systems. The challenges of maintaining high availability for, say, email or collaborative networks are not the same as those for high-volume transactional workloads. A second reason is that claims typically refer to unplanned outages. Among Windows servers users, planned outages account for most downtime.

Security and Malware A further area of risk exposure should be highlighted. Hacking and infection by malware (malicious code) remain ubiquitous threats for all large organizations.

Companies that experience customer data breaches may incur fines and other regulatory penalties, along with costs of remedial actions such as notifications, monitoring for identity theft, query handling, and investigation and resolution of security flaws. Legal costs may also be substantial, and customer attrition and reputational damage may be massive.

In these areas, differences between IBM i and competitive platforms are not merely significant – they are dramatic. IBM i security incidents are rare, and malware infection is virtually unknown.

These strengths reflect the system’s object-based architecture. Objects are encapsulated in a manner that places strict controls on data as well as system code, making it extremely difficult for unauthorized instructions to execute. Capabilities are reflected in data compiled by Secunia, one of the industry’s leading security and malware authorities.

412.3

1,521.5

4,873.9

IBM i/Power Systems

Oracle Exadata Database Machine

Microsoft Windows Server

$ thousands

41.2

168.7

616.2

IBM i/Power Systems

Oracle Exadata Database Machine

Microsoft Windows Server

$ thousands



Figure 7 summarizes numbers of advisory notices issued by the company between the beginning of 2008 and the end of June 2014 for the most recent versions of IBM i, the two principal Linux distributions – Red Hat Enterprise Linux (RHEL) and SUSE Linux Enterprise Server (SLES) – and the Windows Server operating system

Operating System Windows Server 2012

Windows Server 2008

RHEL Server 5

RHEL Server 6 SLES 10 SLES 11 IBM i 7.1 i5/OS 6.x

Release Date October 2012

February 2008

March 2007

November 2010

July 2006

March 2009

April 2010

January 2008

Extremely critical 0 3 1 0 0 0 0 0

Highly critical 36 89 152 144 176 139 3 3

Moderately critical 10 44 225 136 90 90 0 6

Less critical 25 101 212 176 74 122 0 5

Not critical 3 11 78 55 18 23 1 1

TOTAL ADVISORIES 74 248 668 511 358 374 4 15

Source: Secunia

Figure 7: Comparative Advisory Data – January 2008 through June 2014

Oracle Enterprise Linux, the most commonly employed Exadata operating system, is not tracked separately. It is based on RHEL. Data was not available for the latest version 7.2 of IBM i, which was introduced in April 2014.

Conclusions: The Third Platform IBM i originated with the OS/400 operating system in 1988. It was designed to provide a simple, reliable, secure and easy-to-administer platform for core business systems. Although IBM has upgraded its technology base since that time, user experiences confirm that it has retained these characteristics. It enjoys an exceptional record of customer satisfaction and loyalty.

While the IT world has moved toward ever greater complexity, IBM i employs a fundamentally simple architecture that minimizes personnel overhead. It is the industry’s most resilient platform, and its strengths in security and malware resistance address pervasive, escalating challenges across a wide range of industries.

As the examples presented in this report demonstrate, IBM i fully supports extension of core business systems to mobile, analytics and social media applications, and the flexibility, cost and virtualization advantages of cloud computing have been enjoyed by IBM i users for decades.

Many observers expect that a third platform will soon emerge to meet next-generation challenges. Perhaps it is already here.



Risk Factors

Overview

Lessons Learned The bottom-line impact of outages has been documented in a wide range of industries, often over decades. In manufacturing, for example, it a truism that downtime costs money. In banking, the costs of outages affecting ATM, card processing and electronic funds transfer networks have often run to hundreds of thousands or millions of dollars.

Equally, retailers have long been sensitive to the effects of downtime for conventional merchandising and point of sale (POS) systems. E-commerce companies have learned that, in businesses operating on a 24/7 basis, even short outages impact the bottom line. Customers are only a few clicks away from competitors, and once they divert to these, they may not return.

…and Relearned Next-generation applications are proving to be equally if not more sensitive to uptime. Mobile users, for example, tend to lose interest if they cannot access websites within three to five seconds.

In mature economies, mobile users now routinely account for a quarter to a third of e-commerce sales, and the proportion is often higher in developing geographies. According to a recent report by PricewaterhouseCoopers, for example, 71 percent of Chinese used mobile devices to shop, compared to 32 percent of Americans. Percentages in other developing geographies are also higher than in North America and Western Europe.

Financial services companies also finding that younger users expect the same level of access to account service through social media that they enjoy through websites. This is, again, particularly the case in developing geographies.

Clouds are subject to the same dynamics. Business-critical systems delivered through clouds remain sensitive to availability and recoverability. Among companies that contributed to this report, clouds had been adopted to build relationships with large populations of customers and suppliers. In all cases, 24/7 availability was targeted.

Finally, analytics increasingly require continuous uptime. Business intelligence (BI) systems in large organizations may support thousands of users spread across multiple time zones and geographies, often working off-site. Among companies operating supply chains, decisions about ordering, stocking and deliveries may now be made based on real-time data.

Where next-generation applications depend upon interoperability with core business systems, the bottom-line impact of outages affecting these is magnified. A secure and resilient core architecture is mandated.



Supply Chain Disruption

Risk Demographics Supply chains are vulnerable to any number of risks. Since 2011, for example, major disruptions were caused by natural disasters (the Tohoku earthquake off the coast of Japan), extreme weather (Hurricane Sandy in the United States) and a variety of other events.

IT failures also rank as one of the most common causes of supply chain disruption. A survey of supply chain experts published by the World Economic Forum (WEF) in January 2012, found that information and communication disruption was cited by 30 percent of respondents.

Although information and communication disruption ranked as the fifth most significant trigger overall, it was ranked second among controllable risks. The distinction is important. Few supply chain or risk management executives would be penalized for failing to predict a tsunami. But potential exposure to IT-related disruptions is a great deal easier to measure, and to mitigate.

The prevalence of IT-related disruptions is confirmed by other sources. The 2013 Supply Chain Resilience Survey by the Business Continuity Institute, for example, found that IT and outages were the most commonly reported cause of supply chain interruptions, cited by 57 percent of respondents. Severe weather effects ranked first, cited by 59 percent. Figure 8 summarizes these results.

Figure 8: Most Common Causes of Supply Chain Disruptions – Percent of Companies Reporting

A breakdown of causes of IT outages from the same study shows that security and malware incidents, as well as production system shutdowns, were ranked highest by respondents who included 519 executives and managers worldwide. Figure 9 summarizes these results.

Figure 9: Causes of IT Outages – Percent of Companies Reporting

The results of a most other studies of this subject are consistent.

14%

17%

31%

33%

52%

57%

59%

Supplier issues

Civil unrest

Flood

Telecommunications outage

Power outage

IT outage

Severe weather

Source: 2013 Business Continuity Institute (BCI) Supply Chain Resilience Survey

20%

24%

31%

37%

Service provider outage

Upgrade/scheduled outage

Production system outage

Security- & malware-related

Source: 2013 Business Continuity Institute (BCI) Supply Chain Resilience Survey



Most businesses that operate supply chains address IT-related risk. The focus is typically on two areas: (1) disaster recovery mechanisms that enable organizations to survive loss of major production systems and/or entire data centers; and (2) security measures designed to resist hacker and malware attacks.

However, as a growing number of observers have pointed out, risk managers tend to address potentially high-impact, but low-probability events (black swans in risk management parlance). Often, exposure to lower-impact, higher-probability events – such as recurring operational downtime – is neglected.

Industry Trends The effects of supply chain disruption have been the subject of greatly increased attention since the mid 2000s. This shift been driven by a number of trends, including the following:

1. Integration. ERP systems have progressively expanded to integrate a broader range of transactional processes, as well as new analytical and collaborative functions.

ERP environments now commonly include customer relationship management (CRM), e-commerce, supply chain management (SCM), product data management (PDM) and product lifecycle management (PLM), supplier relationship management (SRM), BI and a wide range of other applications.

A core ERP outage would, at a minimum, oblige users to work with stale data. Salespeople could not access current inventory availability data, production and logistics scheduling would become problematic, and customer service systems and personnel would be reduced to using historical information. At worst, an outage could grind the entire company to a halt.

2. Globalization. Most large manufacturers, retailers and distributors operate internationally, or employ foreign suppliers, channel partners or both. Certain processes – including procurement, logistics and, in many cases, sales, order processing and customer service – now routinely occur around the clock.

The impact of disruptions tends to be greater for global supply chains. A delay in shipping from a local plant to a nearby distribution center, for example, may mean waiting for another truck. A delay in shipping from a Chinese plant to North America or Europe may mean waiting for the next ship.

3. Supply chain strategies. Adoption of just in time, lean and real-time operating models has further increased risk exposure. Strategies that improve efficiency also increase the impact of disruptions.

Inventory buffers have been progressively reduced. In consumer products and retail, this trend has been reflected in techniques such as Efficient Customer Response (ECR), Collaborative Planning, Forecasting and Replenishment (CPFR) and Vendor Managed Inventory (VMI).

Cycle times are declining. At the corporate or business unit level, for example, forecasting and planning cycles may be reduced from weeks to days, or to 24 hours or less. At the other end of the spectrum, cross docking means that there are few or no safety stocks at distribution centers. Other best practice techniques have similar results.

Automotive parts suppliers, for example, now receive continuous demand signals from their customers, recalibrate plans and forecasts, and initiate procurement, production and logistics actions in real-time.

Among retailers and their suppliers, shorter forecasting and replenishment cycles have become the norm. A decade ago, for example, sales for new products and/or promotions were typically monitored for the first 60 to 90 days. The norm is now the first two weeks, and many companies have reduced this to days or even hours. Inventories are increasingly monitored in real time.



In storefront retailing, the industry rule of thumb is 40 to 80 percent of stockouts result in lost sales rather than purchases of an alternative in-store product. Additional costs may be incurred for changes to store displays, backorders, restocking, markdowns and other actions. Online retail loss rates are even higher.

4. Cascading effects. There has been a growing body of research on this subject. The basic principle is that in lean, tightly integrated supply chains operating in real time, the effects of a disruption at any point may cascade rapidly, affecting other processes and extending to customers and trading partners.

A delay in delivering components to a plant, for example, might cause finished product deadlines to slip. This may in turn impact transportation schedules and warehouse operations, resulting in further delays and causing disruption to spread. The bottom-line impact is cumulative.

This significantly changes the costs of downtime equation. In the past, companies often calculated that, say, if annual sales were $5 billion, the cost of an hour of downtime was $5 billion divided by 8,760 hours per year = $570,000. In practice, however, the cost may routinely be four or five times higher, and in some cases more than ten times higher.

5. New technologies. Adoption of RFID also reduces cycle times for production, logistics and retail processes. The impact of 3D printing may be even greater. Early adopters in such industries as apparel and accessories, consumer products and industrial manufacturing have reported that cycle times for design, production and distribution may often be slashed to a matter of hours.

6. Customer expectations. Economic conditions, lean supply chain strategies and mounting competition have made customers less tolerant of supplier failures. Although the costs of operational disruption may be substantial, the largest bottom-line impact often involves the recipients of goods and services.

A customer who is affected directly (e.g., because an online self-service system is down) or indirectly (e.g., because supplier order management, production or delivery operations are disrupted) by an outage will inevitably be dissatisfied. Dissatisfaction may translate into immediate lost sales and longer-term customer attrition.

Even if customers are not lost, companies may be subject to late delivery and imperfect order penalties. It may be necessary to offer rebates, special discounts and/or other incentives to win back business.

A less visible, but potentially more significant erosion of confidence might also occur. Customers might hedge by diverting some future purchases to other suppliers, and might be reluctant to rely upon the company for future time-sensitive orders. No manufacturer wants to hear that customers consider them a high-risk supplier.

There is a further implication. Disruptions tend to raise error rates across any or all supply chain stages. This is particularly likely if there is a rush to catch up with backlogs. Results may include dissatisfied customers, remedial costs, legal and regulatory exposure and other negative effects.

An additional set of strategic costs may be incurred if outages are severe, protracted or both. Share prices may be affected. Other effects such as reduced brand value; increased risk provision; higher insurance premiums; and a variety of reputational, legal and compliance problems may be experienced.

Outages may thus have a wide range of potential cost impacts. Figure 10, for example, shows a representative list for manufacturing companies.



STRATEGIC COSTS

Charge against earnings Financial metrics/ratios Share price decline Share price volatility Cost of capital Increased risk provision Reduced brand value Insurance premiums

Damaged reputation § Financial markets § Customers/prospects § Banks § Business partners § M&A candidates

Impaired credit Liquidity exposure

Legal exposure § Customers § Third parties § Shareholders

Compliance exposure § Regulatory reporting § Impaired inspection § Impaired traceability

CUSTOMER-RELATED COSTS

Lost short-term sales Lost short-term profit Lost future sales/profit

Late delivery penalties Imperfect order penalties Product defect penalties

Customer rebates Buyback pricing/concessions Additional customer service cost

OPERATIONAL COSTS

Idle capacity § Overall supply chain § Procurement § Plant operations § Logistics/distribution § Transportation § Warehouses § Third-party services

Personnel costs § Idleness/underutilization § Reduced productivity § Additional work required § Overtime/shift premiums § Additional T&E costs

Finance processes § Delayed billing/receivables § Inventory carrying cost § Cash flow cost § Delayed close

Costs of change § Procurement change § Revised order processing § Special order cost § Production schedule change § Line change cost § Costs of logistics change § Supplier premiums § Expedited transportation § Additional handling cost § Additional inventory cost § Additional checking cost

Error-related costs § Order processing errors § Product defect § Specification error § Manufacturing error § Quality failure § Shipment error § Damaged product § Wrong packaging § Routing error § Wrong delivery time

Other costs § Lost promotional expenditure § Lost marketing expenditure § IT costs § Administrative costs § Overhead

Figure 10: Potential Costs of Outages – Manufacturing Companies

The potential significance of such effects was highlighted by a study by Kevin Hendricks of the University of Western Ontario and Vinod Singhal of the Georgia Institute of Technology.

After reviewing the financial results of more than 800 public companies that had experienced severe supply chain disruptions, the authors concluded that company stocks experienced 33 to 40 percent lower returns relative to industry benchmarks over a three-year period.

Other researchers have confirmed this picture. A 2013 study by William Schmidt and Ananth Raman of Harvard Business School cited research on 517 supply chain disruptions in 412 public U.S. companies.

The authors concluded that company stock prices were reduced by an average by 3.8 percent by internal disruptions, and 1.1 percent by external disruptions caused by such factors as earthquakes, storms and supplier failures. The disparity is striking. Financial markets tend to be tolerant if incidents are judged not to have been the fault of management, but a great deal less so in the case of self-inflicted wounds.

Reporting Implications Risks of supply chain disruption due to IT failures are widely recognized in statutory reporting. In the United States, for example, companies are required to identify significant Risk Factors in their annual reports and/or Form 10Ks.



Among manufacturers, retailers and distributors, representative comments in recent annual reports included those summarized in figure 11.

Figure 11: Risk Factors Cited by Supply Chain Companies – Examples from Recent Annual Reports

This raises an interesting question. Should not platform choices for core business systems, which materially affect risk exposure, be reported as Risk Factors?

Banks

A failure of a key information technology system could adversely impact our ability to conduct business. We rely extensively on information technology systems to conduct our business. If systems are damaged or cease to function properly, we may suffer interruptions in our ability to conduct business, as well as reputational harm, which may adversely impact our business, results of operations, cash flows & financial condition.

!!! We depend on the functional & efficient operation of IT systems to keep our business operating effectively. We rely on IT systems to make a variety of day-to-day business decisions as well as to track transactions, billings, payments & inventory. Our systems are susceptible to interruptions, including those caused by systems failures, malicious computer software (malware), & other incidents or disasters, which may be prolonged.

A large-scale interruption of our (systems) could adversely affect our ability to manage & keep our operations running efficiently & effectively. An incident that results in a wider or sustained disruption to our business could have a material adverse effect on our business, financial condition & results of operations.

!!! We rely significantly on information technology to operate our business, including our supply chain & retail operations. Any failure, breach, interruption or security failure…could harm our reputation or our ability to effectively operate our business. We are heavily dependent on IT systems across our supply chain, including product design, production, forecasting, ordering, manufacturing, transportation, sales, & distribution, as well as for processing financial information for external & internal reporting purposes, retail operations & other business activities.

Our ability to effectively manage & maintain our inventory & to ship products to customers on a timely basis depends significantly on the reliability of these systems. (If they) fail to operate effectively, delays in product fulfillment & reduced efficiency of our operations (may occur), Significant capital investments may be required to remediate the problem, & our results of operations & financial condition may be materially affected.

!!! Any material disruption of our information systems could disrupt our business & reduce our sales. We may experience operational problems with our information systems. Any material disruption or slowdown of our systems could cause information to be lost or delayed which could – especially if the disruption or slowdown occurred during the holiday season – result in delays in the delivery of merchandise to our stores & customers or lost sales, which could reduce demand & cause our sales to decline.

!!! A failure of our information technology infrastructure could adversely impact our business & operations. We rely upon the capacity, reliability & security of our information technology infrastructure & our ability to expand & continually update this infrastructure in response to the changing needs of our business. If we experience a problem with the functioning of an important IT system or a security breach of our IT systems, the resulting disruptions could have an adverse effect on our business.

A material breach in the security of our IT systems…or an inappropriate disclosure of confidential or customer information, could cause significant harm to our reputation, affect our relationships with our customers, (&) lead to claims against the Company. In addition, we may incur significant costs to protect against damage caused by these disruptions or security breaches in the future.

MANUFACTURERS



Figure 11 (cont.): Risk Factors Cited by Supply Chain Companies – Examples from Recent Annual Reports

Problems with our information systems could disrupt our operations, negatively impact our financial results & materially adversely affect our business operations. Our core merchandising, allocation & replenishment systems, if not functioning properly, could disrupt our operations, including our ability to track, record & analyze the merchandise that we sell, process shipments of goods, process financial information or credit card transactions, deliver products or engage in similar normal business activities.

The data generated by our core systems are consolidated into a comprehensive data warehouse application that was purpose-built to provide near real-time performance information across a broad spectrum of critical business metrics. All functions of the business have access to highly accurate & consistent information related to the various components of sales, inventory & margin from department to SKU level. Any material disruption, malfunction or other similar problems affecting (this application) could negatively impact our financial results & materially adversely affect our business operations.

!!! Disruptions of our computer systems could adversely affect our operations. We rely heavily on computer systems to process transactions, manage our inventory & supply-chain, & to summarize & analyze our global business. If our systems are damaged or fail to function properly, we may incur substantial costs to repair or replace them & may experience an interruption of our normal business activities or loss of critical data.

A breach of our information technology systems could…materially damage our reputation & brand, negatively affect customer satisfaction & loyalty, expose us to negative publicity, individual claims or consumer class actions, administrative, civil or criminal investigations or actions, & cause us to incur substantial costs, including but not limited to costs associated with remediation for stolen assets or information, payments of customer incentives for the maintenance of business relationships after an attack, litigation costs, lost revenues resulting from failure to retain or attract customers following an attack, & increased cyber security protection costs.

!!! A significant disruption in our computer systems could adversely affect our operations. We rely on our computer systems to manage our ordering, pricing, point-of-sale, inventory replenishment, customer loyalty program, finance & other processes. If any systems are damaged, fail to function properly or otherwise become unavailable, we may incur substantial costs to repair or replace them, & may experience loss or corruption of critical data, & interruptions or delays in our ability to perform critical functions, which could adversely affect our business & results of operations.

We are currently making, & expect to continue to make, substantial investments in our information technology systems & infrastructure. Upgrades involve replacing existing systems with successor systems, making changes to existing systems, or cost-effectively acquiring new systems with new functionality. Significant potential risks (include) failure to operate as designed, potential loss or corruption of data, cost overruns, implementation delays, disruption of operations, & the potential inability to meet business & reporting requirements.

Distributors

The proper functioning of our information systems is critical to the successful operation of our business. Interruptions in the proper functioning of information systems could disrupt operations & cause unanticipated increases in costs &/or decreases in revenues. If critical systems fail or are otherwise unavailable, our ability to process orders, maintain inventories, collect accounts receivable, pay expenses, & maintain the security of the Company & customer data could be adversely affected.

Disruptions or failures of, or security breaches with respect to, our information technology infrastructure could (also) have a negative impact on our operations. In the event of a security breach or other cyber security incident, we could experience certain operational problems or interruptions, incur substantial additional costs, or become subject to legal or regulatory proceedings, any of which could lead to damage to our reputation in the marketplace.

We develop & update processes & maintain systems in an effort to try to prevent this from occurring, but the development & maintenance of these processes & systems is costly & requires ongoing monitoring & updating as technologies change & efforts to overcome security measures become more sophisticated.

If a compromise of our data security were to occur, it could have an adverse effect on our operating results & financial condition, possibly subject us to additional legal, regulatory & operating costs, & damage our reputation in the marketplace.

!!! Disruptions of our information & communication systems could adversely affect the company. We depend on our information & communication systems to process orders, purchase & manage inventory, maintain cost-effective operations, sell & ship products, manage accounts receivable collections & service our customers. Disruptions in the operation of information & communication systems, whether over a short or an extended period of time, affecting one or multiple distribution centers, could have a material adverse effect on our business, financial condition & results of operations.

Cyber attacks or other information security breaches could have an adverse effect on our operating results & financial condition, subject us to additional legal costs & damage our reputation in the marketplace… As cyber threats continue to evolve, we may be required to expend additional resources to continue to modify or enhance our protective measures or to investigate & fix vulnerabilities.

DISTRIBUTORS

RETAILERS



Although manufacturers and distributors tend to focus on operational disruptions in reporting risks, retailers and their suppliers are also sensitive to data breaches.

The recent data breach affecting U.S. retailer Target, for example, caused the theft of personal information and/or credit card numbers for at least 70 million customers (some estimates are higher). When the news broke, the company experienced an immediate sales slump.

The company was also faced with the need to reimburse card issuers to cover fraud and the cost of issuing new cards, along with 68 class-action lawsuits by banks and consumers, investigations by state and federal authorities, and a congressional hearing. Remedial actions included providing a year of free monitoring and identity theft protection to all customers. Costs are expected to run to over $1 billion.

While events such as the Target breach tend to dominate headlines, companies in all industries face pervasive threats of hacking and malware penetration. These increasingly overlap. Attackers commonly seek to plant malware that will harvest information over months to years. Even if customer data is not compromised, other sensitive information may be lost, and damage to systems and software may occur.

Financial Services

Risk Sensitivities More than any other industry, financial services is sensitive to risk. Financial institutions are equipped with sophisticated risk management processes and systems. Cultures of risk awareness and mitigation are established.

Most companies have developed high availability, disaster recovery and security infrastructures over decades. Risk sensitivity, however, has its blind spots. While the importance of such infrastructures is generally understood, there is less awareness that the platforms around which they are built may themselves be risk factors.

In the largest banks, core systems are typically mainframe-based. But more banks – over 16,000 worldwide – employ IBM i in this role. According to some estimates, this makes IBM the #1 core banking system platform.

While the majority of IBM i installations are in developed countries, IBM i-based systems have enjoyed strong growth among financial services companies in Latin America, Eastern Europe, Southeast Asia, China and other developing geographies. In all regions, IBM i is generally recognized as offering mainframe-class levels of availability, security and recoverability at a significantly lower cost.

IBM i is supported by most of the major ISVs offering core banking and electronic funds transfer (EFT) solutions. It has also been widely deployed by insurance companies and other financial businesses.

Availability and Recovery The financial services industry has long been sensitive to outages. With the growth of Internet and mobile banking services, vulnerability has increased further.

Normal business hours no longer exist. As customer transactions and queries through all channels feed into core business systems, these experience activity at all hours of the day and night, 365 days per year. Any interruption of service, at any time, will affect customers. An outage during high activity periods may impact millions.

Apart from lost fee income, lost or delayed payments and other financial effects, customers may be lost. Even if defections cannot be attributed to a specific incident, they show up in overall attrition statistics.



Customer loss is magnified if it measured in terms of customer lifetime value (CLV). In banking, insurance and other lines of business, the effects are magnified by the growing numbers of products held per customer, and by the fact that relationships tend to become more profitable the longer they last.

Allowance should also be made for lost customer acquisition costs, which are routinely $200 to $400 per customer in developed countries, and are escalating in developing geographies. This expenditure is inevitably lost if a customer defects.

Severe outages may be exceptionally damaging. Over time, core-banking systems have developed links to a wide range of other systems within banking infrastructures. Disruptions may create cascading effects as severe and long lasting as those in supply chain companies.

In June 2012, for example, the U.K-based Royal Bank of Scotland (RBS) experienced such an outage affecting all branch systems, ATMs, debit and credit cards, online and mobile banking and call center operations. All channels and customer touch points were affected.

The outage left 17 million of the company’s 23 million customers unable to access account information, withdraw or transfer funds, or process payments for up to six days. Media coverage was massive and entirely negative. Political and regulatory intervention rapidly followed.

RBS is believed to have spent over $300 million on customer reimbursements, overdraft extensions and other remedial actions. The company was also obliged to extend hours at more than 1,200 out of 2,500 branches and double call center staff in order to handle customer queries.

The extent of customer attrition is unclear, although it is believed to run to millions of individuals. The impact was magnified by additional core system outages in March and December 2013.

Banking industry analysts agree that customer trust is becoming a critical important competitive differentiator. In its 2014 Global Consumer Banking Survey, for example, consulting firm Ernst & Young noted that:

The primacy of the bank’s relationship with its customers is under threat as never before. Demands and expectations continue to evolve…Emerging technology, and the increasing use of mobile devices for both banking and payments, are making it easier for new entrants to challenge the status quo and exploit areas of dissatisfaction and underinvestment.

Banks must earn the highest [emphasis in original] levels of trust in order to retain customers, win more business, and create genuine loyalty.

Such considerations should, clearly, play a more central role in IT strategies of some banks.

Security and Malware Financial services companies are the preferred target of the most sophisticated cybercriminals, including organized gangs operating worldwide. Other players include hacktivists promoting social and political agendas, and rogue nation states.

A recent survey of 250 bank executives commissioned by SAS, for example, found that only 16 (6.4 percent) reported no cybercrime incidents within the last two years. Figure 12 summarizes these results.



Figure 12: Cyberincidents Reported by Bank Executives

Totals do not include spam (which is normally stopped by firewalls), or phishing and other schemes that target customer PCs and mobile devices.

Botnets refers to networks of computers that have been taken over as bots or zombies for illicit purposes, while DDoS refers to Distributed Denial of Service, a form of attack typically launched from Botnets with the objective of crashing Web servers.

Insider abuse also appears to be expanding, and industry sources estimate that insiders now account for between a quarter and a third of all cybercrime incidents in financial services companies. Perpetrators range from low-level employees to high-level executives, often cooperating with external cybercriminals. Schemes routinely, again, operate for months or years.

Growing attention is also being paid to the threat of nation-state attacks. Rogue nations are capable of assembling and protecting larger numbers of computer specialists, and their activities may have access to greater resources and more advanced skills than cybercriminals. There are concerns that, at times of international tension, mass attacks may be aimed at the U.S. payments infrastructure.

Data Breaches Despite increasingly stringent privacy laws in most countries, data breaches remain pervasive.

In the United States, for example, major breaches were reported during 2013 and 2014 by JP Morgan Chase (records of 465,000 customers were compromised), along with Saint Mary’s Bank (115,775), Citibank (150,000 customers), American Express (76,000+ customers), TD Bank (17,000) and two credit unions (39,000 and 18,000). The Citicorp breach occurred over a period of four years.

Breaches are also believed to have affected at least 20 other banks. Numbers of customer records were not, however, disclosed for these incidents.

Costs of data breaches may be substantial, and may include some or all of the items summarized in figure 13.

16

4

17

22

24

71

88

91

None reported

Other

ID theft & fraud

DDoS attacks

Hacking

Botnets

Mobile malware

Malware

Base: 250 respondents Source: SAS Cyberrisk in Banking, 2013



ACTIVITY COSTS

Investigation & technical fixes Weeks to months using specialists at $1,000-$5,000 per person/day

Customer notification $0.20 to $6.50 per customer, depending on medium

Query-handling $10 to $25 per customer (call center)

Credit/identity monitoring $65 to $250 per customer per year, depending on quality of service

Other customer remedial actions (e.g., special offers, coupons) $15 to $500+ per customer

Reissue payment card $3 to $15 per card

Legal costs* Average legal defense cost: $574,984 Average legal settlement: $258,099

Fines & penalties $600 to $200,000+

Management, PR costs Variable

Customer attrition, brand damage Variable

Sources: *NetDiligence, Cyber Liability & Data Breach Insurance Claims, A Study of Actual Payouts for Covered Data Breaches, 2013 All others: International Technology Group, based on 2013 and 2014 incidents

Figure 13: Data Breach Costs – U.S. Examples

Companies that have experienced breaches report that customer attrition and brand damage represent the largest cost components. At a time when trust has become an important competitive differentiator, few experiences are as likely to frustrate customers.

Reporting Implications Risks of disruption and security due to IT failures and security breaches are recognized in statutory reporting by most financial services companies. Representative comments in recent annual reports and/or Form 10Ks included those summarized in figure 14.



Figure 14: Risk Factors Cited by Financial Services Companies – Examples from Recent Annual Reports

Banks

We could suffer a material adverse impact from interruptions in the effective operation of (our) information systems. Our systems could fail to operate as needed due to factors such as design or performance issues, human error, unexpected transaction volumes, or inadequate measures to protect against unauthorized access. These types of events could disrupt our ability to use our accounting, deposit, loan & other systems, & could cause errors in transactions with customers, vendors or other parties.

vvv Our information systems may experience an interruption A significant portion of our operations relies heavily on the secure processing, storage & transmission of personal & confidential information, such as the personal information of our customers. In the event of a failure, interruption or breach of our information systems, we may be unable to avoid impact to our customers.

vvv Failure of our operational systems could disrupt our businesses, damage our reputation, increase our costs & cause losses. Our business, financial, accounting, data processing or other systems may stop operating properly or become disabled or damaged. Although we have business continuity plans & other safeguards in place, (we) may be adversely affected by significant & widespread disruption to systems that support our businesses.

vvv System failures could materially affect (our) operations. Our necessary dependence upon automated systems to record & process transactions poses the risk that technical system flaws or employee errors, tampering or manipulation of those systems will result in financial loss or liability. If (our) financial, accounting, or other data processing systems fail or have other significant shortcomings, (we) could be materially adversely affected.

vvv We depend on information systems to conduct our business & could suffer a material adverse impact from interruptions in the effective operation of, or security breaches affecting, those systems. The occurrence of any failure, interruption or security breach of any of our information or communications systems could result in a wide variety of adverse consequences. This risk is greater if the issue is widespread or results in financial losses to our customers. Possible adverse consequences include damage to our reputation, loss of customer business, litigation (&) additional regulatory scrutiny. Litigation or regulatory actions in turn could lead to fines & penalties or reimbursement of customers.

vvv A failure in or breach of our operational or security systems or infrastructure could disrupt our businesses, result in the disclosure or misuse of confidential or proprietary information, damage our reputation, increase our costs & cause losses. As a large financial institution…we depend on our ability to process, record & monitor a large number of customer transactions on a continuous basis. As our business has expanded, & as customer, public, legislative & regulatory expectations have increased, our operational systems & infrastructure must continue to be safeguarded (against) potential failures, disruptions & breakdowns.

vvv A failure in or breach of our operational or security systems could disrupt our businesses, result in the disclosure or misuse of confidential or proprietary information, damage our reputation, increase our costs & cause losses. Business, financial, accounting, data processing, or other operating systems (may) experience failures, disruptions, & breakdowns. Information security risks for large financial institutions such as ours have increased in recent years in part because of the proliferation of new technologies, the use of the Internet & telecommunications technologies to conduct financial transactions, & the increased sophistication & activities of organized crime, hackers, terrorists, activists, & other external parties.

Additionally, the FRB (Federal Reserve Board), the CFPB (Consumer Financial Protection Bureau) & other regulators expect financial institutions to be responsible for all aspects of their performance. Disruptions or failures in systems that support our businesses could result in client attrition, regulatory fines, penalties or intervention, reputational damage, reimbursement or other compensation costs, &/or additional compliance costs, any of which could materially affect our results of operations or financial condition.

vvv If our information systems experience a disruption or breach in security that results in a loss of confidential client information or impacts our ability to provide services to our clients, our business & results of operations may be adversely affected. We rely on communications & information systems to conduct our business… Our businesses that rely heavily on technology, including our Investment Services business, are particularly vulnerable to technology disruptions.

vvv We depend on information systems to conduct our business & could suffer a material adverse impact from interruptions in the effective operation of, or security breaches affecting, those systems. We rely heavily on information systems to conduct our business & to process, record, & monitor our transactions. In recent years, we have seen more customer usage of technological solutions for financial needs & higher expectations of customers & regulators regarding effective & safe systems operation. The need to ensure proper functioning of these systems has become more challenging.

The occurrence of any failure, interruption or security breach of any of our information or communications systems could result in a wide variety of adverse consequences. This risk is greater if the issue is widespread…. Possible adverse consequences include damage to our reputation or a loss of customer business (&) litigation or additional regulatory scrutiny. Litigation or regulatory actions in turn could lead to sanctions, including fines & penalties or reimbursement of customers adversely affected.

BANKS



Figure 14 (cont.): Risk Factors Cited by Financial Services Companies – Examples from Recent Annual Reports

The growth of our direct banking business presents certain risks. Our direct banking business is dependent on our ability to process, record & monitor a large number of complex transactions. If any of our financial, accounting, or other data processing systems fail or have other significant shortcomings, we could be materially adversely affected… While direct banking represents an opportunity to attract new customers, it also presents significant risks (including) software & infrastructure failures & cyber attacks.

vvv Our business depends on the secure & uninterrupted operation of our systems & business functions. Our business is highly dependent upon our employees’ ability to perform, in an efficient & uninterrupted manner, necessary business functions, such as Internet support & 24-hour call centers, processing new & renewal business, & processing & paying claims & other obligations. The shutdown or unavailability of one or more of our systems for any reason could significantly impair our ability to perform critical business functions on a timely basis. This could result in a materially adverse effect on our business results, prospects, & liquidity, as well as damage to customer goodwill.

Insurance Companies

Our business is highly dependent upon the effective operation of our technology & information systems. We rely upon our systems to assist in core business operations including processing claims, applications, & premium payments, providing customer support, performing actuarial & financial analysis, & maintaining key data.

Systems failures or outages could compromise our ability to perform our business functions in a timely manner, which could harm our ability to conduct business & hurt our relationships with business partners & customers. The failure of our information systems for any reason could result in a material adverse effect on our business, financial condition, or results of operations.

vvv Our business is highly dependent upon the effective operation of our computer systems. We rely on these systems throughout our business for a variety of functions, including processing claims & applications, providing information to customers & distributors, performing actuarial analyses & maintaining financial records.

The failure of our computer systems for any reason could cause significant interruptions in our operations & result in a failure to maintain the security, confidentiality or privacy of sensitive data. Such a failure could harm our reputation, subject us to regulatory sanctions & legal claims, lead to a loss of customers & revenues & otherwise adversely affect our business & financial results.

vvv Any significant interruption in the operation of our systems could result in a materially adverse effect. The shutdown or unavailability of one or more of our systems for any reason could significantly impair our ability to perform critical business functions on a timely basis.

If sustained or repeated, such events could result in a deterioration of our ability to write & process new & renewal business, provide customer service, pay claims in a timely manner, or perform other necessary business functions, including the ability to issue financial statements in a timely manner. This could result in a materially adverse effect on our business results, prospects, & liquidity, as well as damage to customer goodwill.

A failure in or breach of one of our operational or information systems or infrastructure could disrupt our businesses. We depend on our ability to process, secure, record, & monitor a large number of customer transactions & confidential information on a continuous basis. System failures or breaches, including but not limited to cyber attacks, could result in a denial of service or misuse of confidential or proprietary information which could damage our reputation, increase costs, jeopardize existing business contracts or result in regulatory penalties.

We also face the risk of business disruption if system outages occur as a result of changes in infrastructure, introduction of new software or software enhancements, relocation of infrastructure, or failure to perform required services, which could have a material impact upon our reputation & our ability to retain customers.

vvv Technology & operational failures or errors could subject the company to losses, litigation & regulatory actions. It could take several hours or more to restore full functionality to the company’s technology or other operating systems in the event of an unforeseen event that could affect the company’s ability to process client transactions. (Such an event) might also negatively impact the company’s reputation & client confidence in the company, in addition to direct losses…Disruptions in service could result in substantial losses & decreased client satisfaction.

INSURANCE COMPANIES

OTHER SERVICES



Platform Differentiators

Overview IBM i and Power Systems represent the convergence of two major technology streams:

1. IBM i, according to the company, is employed by more than 150,000 companies. Although the installed base has decreased since the early 2000s, most of this has been due to system consolidation. Many organizations that had initially deployed AS/400s to remote sites later replaced these with larger centralized systems.

IBM i is supported by 850 software vendors, including leading suppliers of ERP systems as well as core business systems for banking, insurance, retail and other industries. Its ecosystem extends to business partners, user groups, online communities, service providers and consultants worldwide. It enjoys the highest customer loyalty of any major platform.

In terms of technological currency, IBM i incorporates the full function SQL-compliant DB2 relational database, Internet standards and interfaces to tablets and smartphones. It also supports a wide range of development languages, including C/C++, COBOL, RPG, Java, PHP, XML, IBM Rational Enterprise Generation Language (EGL) and others.

IBM’s policy on i technology upgrades is distinctive. As a general principle, the company introduces new i releases every two years and Technology Refreshes (TRs) – which may be applied in a simple and non-disruptive manner – every six months. This approach, which was widely requested by customers, avoids the disruptions caused by frequent version migrations.

The IBM policy contributes to higher availability levels. Downtime, as well as risks of severe outages, tends to be highest after such migrations.

The company recently reaffirmed its commitment to IBM i. Announcing the POWER8 generation of technology in April 2014, IBM indicated that would provide concurrent support for IBM i as well as AIX (the IBM version of UNIX) and Linux for all new Power Systems hardware. Enhancements to the IBM i environment are planned until at least 2026.

2. Power Systems are based on the IBM POWER reduced instruction set computing (RISC) architecture. Power Systems routinely handle enterprise-class workloads requiring high levels of performance and scalability – high-end models may be configured with up to 256 cores – and offer secure highly granular, real-time virtualization even in demanding, high-volume production conditions.

New POWER8-based systems deliver significant advances over previous generations of technology. Processor performance is accelerated, up to eight threads per core are supported (compared to four on POWER7+-based systems, and two on x86 servers). Memory and I/O features are also upgraded to support faster throughput.

According to Commercial Processing Workload (CPW) benchmarks, POWER8-based systems offer from 20 percent to more than two times higher performance than POWER7+-based models with the same number of cores. CPW is the standard performance metric for systems running IBM i.

For large companies considering whether to deploy new enterprise business systems on IBM i or competitive servers, or debating whether to maintain commitments to existing i-based systems, it is important to understand the distinctive characteristics of this platform.



IBM i Distinctive characteristics include the following:

• Core design. The core IBM i design is built around a unique object-based kernel in which all system resources are defined and managed as objects.

The kernel incorporates single-level storage capability – meaning that the system treats all storage resources, including main memory and disks, as a single logical entity. This capability, as figure 15 illustrates, is built into the core system design.

Figure 15: IBM i Single-level Storage Structure

Placement and management of data on all resources is handled automatically by the system, minimizing tasks that must be handled by administrators. This approach also enables high levels of configuration flexibility; and materially improves the efficiency with which processor and storage resources are used.

A further benefit of single-level storage is that integration and management of solid state drives (SSDs) is comparatively simple. No application changes are required.

Another kernel component, Technology Independent Machine Interface (TIMI) acts as a virtual instruction set with which applications interact, regardless of the instruction set of underlying processor hardware. The TIMI allows users to update underlying hardware platforms without recompiling applications software.

There are no Windows or Linux equivalents to single level storage or the TIMI.

2. System integration. In addition to core operating system functions, IBM i includes the DB2 for i relational database, file systems, WebSphere Application Server (WAS), Tivoli Directory Server, Java Virtual Machine (JVM) environments, and more than 300 tools handling system, database, storage, backup and recovery, communications, security, operations and other management tasks.

Software components are not simply bundled. They are implemented in a highly synergistic manner, and engineered to interact with each other simply and efficiently. For example, DB2 for i exploits the underlying object-based structure and single-level storage capabilities of the operating system.

SINGLE-LEVEL STORAGE

STORAGE MANAGEMENT

Objects

Main memory (RAM) Disk storage Solid state drive



Extensive testing is carried out to ensure that these goals are met. Testing extends not only to IBM hardware and software, but also to third-party solutions.

Equivalent functionality in Windows and Linux server environments requires that users acquire, install, configure and administer hardware and software products from multiple vendors. Integration and testing is less coordinated, and upgrades may not follow the same schedules. Deployment complexity and management challenges are increased.

In addition to increasing full time equivalent (FTE) administration staffing less integrated environments are more likely to degrade performance. Maintenance of availability, recoverability and security also become a great deal more problematic.

3. Workload management. Since its inception, IBM i has incorporated industry-leading workload management (in IBM i terminology, work management) capabilities.

IBM i subsystems leverage object-based architecture. Individual workloads or applications (e.g., ERP, CRM, e-mail, e-commerce) are described and managed independently. The system allocates memory, limits consumption of resources by individual workloads, and manages scheduling, tuning and other tasks automatically, based on user-defined priorities,

Subsystems are integral to the IBM i design, and may be employed independently of or in conjunction with PowerVM virtualization.

4. Simplification and automation. IBM i was designed to automatically handle a wide range of functions – including configuration, tuning, software updates, availability and security optimization and other common operational tasks – for which most other systems require extensive manual intervention.

High levels of automation are combined with streamlined, high-productivity interfaces. These allow administrators to perform system and database management tasks using fewer, simpler actions, in less time than for Windows- and Linux-based environments.

The most visible effect of automation is that it reduces FTE staffing (users report that IBM i typically requires two to four times fewer administrators than comparable Windows and Linux environments). Because of the tight integration of DB2 for i, moreover, administrators can typically handle database as well as system administration. Separate database administrators (DBAs) may not be required.

Other benefits may also be realized. A system that can determine workload requirements and reallocate system resources in a matter of milliseconds, for example, will use capacity more efficiently than one that is dependent on intervention by administrators. Automation also reduces the potential for human errors leading to performance bottlenecks, outages, data loss or corruption and other negative effects.

Core automation features have been reinforced by IBM autonomic technologies. Autonomic computing – meaning the application of artificial intelligence technologies to IT administration and optimization tasks – has been a major IBM development focus since the 1990s.

Four categories of autonomic functions – self-configuring, self-optimizing, self-protecting and self-healing – are implemented in IBM i. These functions, which represent one of the most advanced implementations of autonomic technologies within the IBM product line, are summarized in figure 16.



SYSTEM Self-configuring Self-protecting Connect automated services CPU capacity upgrade on demand Enterprise Identity Mapping EZSetup Wizards Hot plug disk & I/O Linux & Windows Virtual I/O RAID subsystem Switchable auxiliary storage pools Windows file/print services Windows dynamic storage addition Wireless system management access

Automatic virus removal Chipkill Memory Digital certificates Digital object tagging Enterprise Identity Mapping Integrated Kerberos support Integrated SSL support IP takeover RAID subsystem Self-protecting kernel Tagged storage

Self-optimizing Self-healing Adaptive e-transaction services Automatic performance management Automatic workload balancing Dynamic disk load balancing Dynamic LPAR, Dynamic SMT Dynamic System Optimizer, Expert Cache Global resource manager Heterogeneous workload manager Processor-memory affinity processing Quality of service optimization Single-level storage Workload Group Support

ABLE problem management engine Auto-fix defective PTFs Automatic performance adjuster Chipkill Memory, dynamic bit steering Concurrent maintenance Domino auto restart, clustering Dynamic IP takeover, clustering Electronic Service Agent (call home) First-failure data capture & alerts Service director

DATABASE Self-configuring Self-protecting Automatic collection of object relationships Automatic data spreading & disk allocation Automatic data striping & disk balancing Automatic disk space allocation Automatic distributed access configuration Automatic object placement Automatic self-balancing indexes Automatic tablespace allocation Automatic TCP/IP startup Graphical database monitor

Automatic Encryption management Automatic enforcement of user query & storage limits Automatic synchronization of user security Digital object signing Object auditing OS-controlled resource management

Self-optimizing Self-healing Adaptive Query Processing Automatic Index Advisor Automatic memory pool tuning Automatic query plan adjustment Automatic rebind & reoptimization Automatic statistics collection Auto Tuner, Cost-based Query Optimizer Caching of open data paths & statements On Demand Performance Center Performance monitoring & analysis

Automatic object backup/restore Automatic database object extents Automatic database restart Automatic index rebalancing Automatic journaling of indexes & objects Automatic rebuild of catalog views Automatic restart of journal processing Self managed database logging Self-managed journal receivers Systems managed access path protection

Figure 16: IBM i 7.2 and IBM Power Systems Autonomic Functions

5. Security and malware resistance. The strengths of IBM i’s object-based design are reinforced by tight integration of security functions with compiler, directory server and object-based file system structures. In contrast, security in Windows- and Linux-based environments is implemented in separate software tools and subsystems. The level of integration is significantly less.



The significance of these strengths is reinforced by two factors. One is that costs of protecting data are less than those for competitive platforms. The time and effort that must be spent on routine security and malware protection, and in patching, auditing and other tasks is a great deal less.

Companies have invested in information security for decades. The sophistication of cybercriminals continues, however, to evolve, as do the techniques and technologies they employ. In response, expenditures on security tools, personnel and services continue to escalate. IBM i provides an opportunity to break this cycle.

A second factor is that, most security authorities recognize, perimeter defenses are no longer sufficient to secure critical business data. Penetration has become increasingly common, and they do not prevent insider abuse. The trend is toward creation of data firewalls, which provide a further level of protection for the most sensitive data resources within enterprises. IBM i already provides this capability.

IBM i also contains a full IP security suite, including support for the principal industry security standards and encryption techniques, and extensive access control and audit facilities. Single sign-on is enabled using an industry-leading IBM autonomic technology, Enterprise Identity Mapping (EIM), which maps user IDs across all middleware and application components.

Specialized features further minimize risks of data loss in the event of an unplanned outage. These include Independent Auxiliary Storage Pools (IASPs), a kernel-based recovery solution, Remote Journaling (file and system changes may be automatically copied to a second server) and Save While Active (backups may be performed without taking systems offline).

A further capability, Live Partition Mobility, allows movement of active LPARs between systems without disrupting operations. Service interruptions of one or two seconds may occur due to network latency, but are rarely noticeable to users.

IBM PowerHA SystemMirror for i enables live failover clustering. The best practice norm for this solution is that operations may be fully restored within two hours with no data loss. Users have achieved mainframe-class failover and recovery even for complex large-scale workloads.

Storage Support System Storage DS8000, which offers the highest levels of performance and availability within the IBM storage product line, may be attached to IBM i systems. The DS8000 platform is commonly employed for the most business-critical mainframe- and UNIX server-based systems worldwide.

Easy Tier, IBM’s solution for automated storage tiering, is supported by IBM i for DS8000 as well as other IBM disk arrays. Easy Tier enables full-function tiering while minimizing the complexities with which storage administrators must deal.

Many IBM i users have deployed the company’s XIV Storage System. Built around an innovative parallel processing design, this system has demonstrated exceptional reliability, high-volume snapshot copying and disk-caching capabilities. Integrated software and low management overheads have also contributed to its popularity.

IBM i is supported by high-end EMC VMAX arrays, including latest-generation 100K, 200K and 400K systems introduced in July 2014. The company’s automated storage tiering technology, FAST VP (Fully Automated Storage Tiering for Virtual Pools), is supported for use with IBM i. EMC and IBM cooperate under an agreement first concluded in 2006.

A wide range of other IBM and third-party storage systems, including IBM FlashSystem and other vendors’ all-flash arrays are also supported.



Detailed Data

Company Profiles The results presented in this report were based on the company profiles summarized in figure 17.


Auto Parts Manufacturer Retail Chain Industrial Distributor Business Profile Tier 1 automotive parts manufacturer $9 billion sales 50,000+ employees 85 manufacturing & distribution centers

Hard lines retailer $6 billion sales 25,000 full-time employees 600 stores + Internet, catalog & call center channels 5 distribution centers

Industrial distributor $4 billion sales 7,500 employees 400 branches 10 distribution centers

Applications Automotive ERP system EDI cloud Data warehouse: enterprise asset management/inventory, supply chain, sales & operations planning, predictive failure, warranty & maintenance, workforce planning, global compliance & other applications

Core merchandise management, logistics management, finance & HR Internet & mobile online sales Social media marketing Data warehouse: merchandising, sales, inventory, replenishment & workforce analysis; multichannel & store-level applications

ERP system, e-commerce Mobile field sales Data warehouse: sales, supplier, inventory & financial analysis

FINANCIAL SERVICES COMPANIES Bank Insurance Company Services Company

Business Profile Diversified retail bank $12 billion revenues $350 billion assets 30,000+ employees 1,300 branches & sales offices + ATMs, Internet & mobile banking services

Property & casualty insurer $3.5 billion revenues $6 billion assets 5,000+ employees 4 million customers Agent, Internet & call center channels

Loan processing services $1 billion revenues 6,000+ customers 2,000+ employees

Applications Core banking, EFT/POS, card management, financial Internet & mobile services Data Warehouse: 100+ applications

Policy & claims management, finance & compliance Internet, mobile & social media account services, customer interaction center Data warehouse: customer, asset, risk management & compliance applications; CSR tools

Core processing, customer service, online billing & payments Customer & partner clouds Data warehouse: customer, financial & compliance applications

Figure 17: Company Profiles

Profiles were constructed using survey data from companies of approximately the same size, in the same industries, with generally similar business profiles. Companies employed IBM i, Microsoft WSFC or Oracle Exadata clusters supporting systems that could be realistically compared across platforms.

Data was collected on business operations including, where appropriate, vulnerability to cascading effects; applications employed including packaged as well as custom software; and workloads; availability experiences including frequency and duration of planned as well as unplanned outages; security and disaster recovery arrangements, and other subjects.



Costs of Downtime

Supply Chain Companies Costs were calculated as follows:

• Automotive parts manufacturer. Costs included lost sales; idle and underutilized capacity; handling of delivery delays; additional inventory carrying costs; costs of change for procurement, production and logistics processes; customer billing and payments delays; late delivery and imperfect order penalties; and costs of remedial actions such as rebates and discounts required to win back customer business.

Costs were divided between inbound supply chain and production disruption, consisting of costs incurred between supplier queries and factory release; and outbound supply chain disruption, consisting of costs incurred between factory release and customer delivery.

Categories correspond to the Source and Make and Deliver segments respectively of the Supply Chain Operations Reference (SCOR) model developed by the Supply Chain Council. Inbound supply chain and production disruption calculations include costs of scheduling, setup and other production changes.

Costs of downtime for the company’s EDI cloud were included in inbound supply chain costs

• Retail chain. Costs included lost sales; supply chain disruption (including the same components as for the automotive parts manufacturer); and selling, general and administrative (SG&A) costs including reordering, restocking and (in storefront outlets) display changes.

Costs of downtime for mobile sales and social media marketing applications were included in lost sales.

• Industrial distributor. Costs of downtime include lost sales due to inventory shortages, inability to process customer queries and orders and related effects and supply chain disruption costs, including the same components as for the automotive parts manufacturer and retail chain.

Costs of downtime for customer and partner clouds were divided between both categories, and comparable costs for mobile sales applications were included in lost sales.

Values were based on user input as well as published material such as financial reports and presentations.

Financial Services Companies Costs were calculated as follows:

• Bank. Costs included customer attrition (lost customer income), lost transaction fees (including ATM/debit fees, and fees for transactions conducted online and through call centers) and other costs, including lost interest, lost customer acquisition expenditure and productivity loss by branch, call center and other customer-facing staff during outages.

Costs of mobile banking outages were included in customer attrition and lost fee income.

• Insurance company. Costs included lost premium income due to customer attrition, missed sales opportunities and payment delays; and other costs, including lost interest, lost customer acquisition expenditure and productivity loss by customer interaction center staff.

Costs of downtime for social media marketing and account service were included in lost income.



• Services company. Costs include lost fee income, customer attrition and other costs including lost interest and productivity loss by customer interaction center staff.

Costs of downtime for customer and partner clouds, and for social media marketing and account service applications are included in lost fee income and customer attrition.

For all three companies, costs of customer attrition were calculated based on appropriate CLV values. Costs of data warehouse downtime were included in the Other category. Published materials were again employed.

Breakdowns of costs per hour are shown in figure 18.

Cost Category Outage cost per hour Cost Category Outage cost

per hour

SUPPLY CHAIN COMPANIES FINANCIAL SERVICES COMPANIES Auto Parts Manufacturer Bank Outbound supply chain disruption 809.54 Customer attrition 117.39

Inbound supply chain & production disruption 207.74 Lost fee income 149.36

Customer penalties & remedial costs 288.03 Other costs 53.5

TOTAL ($000) 1305.31 TOTAL ($000) 320.25 Retail Chain Insurance Company Lost sales 460.92 Lost income 157.9

Supply chain disruption 265.54 Other costs 6.46

SG&A costs 106.99 TOTAL ($000) 164.36

TOTAL ($000) 833.45 Industrial Distributor Services Company Lost sales 330.83 Lost income 96.8

Supply chain disruption 354.40 Other costs 52.52

TOTAL ($000) 685.23 TOTAL ($000) 149.32

Figure 18: Costs of Downtime per Hour Detail

Severe Unplanned Outages Costs for these were based on two sets of calculations:

1. Probabilities of 6-, 12- or 24-hour outages for each platform for each company were calculated based on user input as well as general industry data for the frequency and severity of outages for platforms.

2. Projected business impacts were calculated for 6-, 12- and 24-hour outages for each company. Calculations included the same components as for average costs of downtime per hour calculations, although the proportions of different components varied, in some cases significantly.

For 12- and 24-hour outages affecting financial services companies, costs also include customer notification, query- and complaint-handling, along with customer reimbursements, extended overdrafts and payment deadlines, and other remedial costs.

The probability of severe unplanned outages was then multiplied by projected business impact; e.g., if the probability of a six-hour outage was 0.15, and the cost of such an outage was $12.23 million, the calculation was 0.15 x $12.23 million = $1.835 million.

All values for costs of downtime as well as severe unplanned outage exposure were for the United States.



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International Technology Group (ITG), established in 1983, is an independent research and management consulting firm specializing in information technology (IT) investment strategy, cost/benefit metrics, infrastructure studies, deployment tactics, business alignment and financial analysis.

ITG was an early innovator and pioneer in developing total cost of ownership (TCO) and return on investment (ROI) processes and methodologies. In 2004, the firm received a Decade of Education Award from the Information Technology Financial Management Association (ITFMA), the leading professional association dedicated to education and advancement of financial management practices in end-user IT organizations.

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Copyright © 2014 International Technology Group. All rights reserved. Material, in whole or part, contained in this document may not be reproduced or distributed by any means or in any form, including original, without the prior written permission of the International Technology Group (ITG). Information has been obtained from sources assumed to be reliable and reflects conclusions at the time. This document was developed with International Business Machines Corporation (IBM) funding. Although the document may utilize publicly available material from various sources, including IBM, it does not necessarily reflect the positions of such sources on the issues addressed in this document. Material contained and conclusions presented in this document are subject to change without notice. All warranties as to the accuracy, completeness or adequacy of such material are disclaimed. There shall be no liability for errors, omissions or inadequacies in the material contained in this document or for interpretations thereof. Trademarks included in this document are the property of their respective owners.

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