1. Total Cost of Preservation Cost Modeling for Sustainable Services Stephen Abrams Patricia Cruse John Kunze University of California Curation Center California Digital Library CNI Spring 2012 Membership Meeting Baltimore, April 1-3, 2012

2. 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

3. 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!

4. 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 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

5. 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

6. 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

7. Number and unit cost of Producers Total cost of preservation 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

8. Total cost of preservation  Model is rich enough to represent the full economic cost of preservation  Implemented by a spreadsheet that captures all subsidiary costs

9. Total cost of preservation  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

10. 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

11. Cost of a single Producer Number of Storage units attributable to Producer Number of Producers Unit cost of a Producer Total cost attributable to a given Producer

12. Assumptions: Billing  Costs are billed for at the end of the period of service  The cost model should be revenue neutral

13. Pay-as-you-go cash flow Expense Income GG t = 0 123 G Cash flow diagram GGG Cost of a single Producer Cumulative pay-as-you-go price over time period T Pay-as-you-go price for a single Producer

14. 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 ($) Cumulative pay-as-you-go G (T ) Cumulative pay-as-you-go price over time period T… for “forever” as a function of time T

15. Assumptions: Costs over time Moore’s law, 1971 – 2011 Source: Wikipedia Kryder’s law, 1980 – 2012 Source: Wikipedia  The aggregate cost of providing preservation service decreases over time; and that decrease is uniform  Moore’s and Kryder’s laws $ $

16. 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

17. Discounted pay-as-you-go cash flow (1–d ) 2 ·GG(1–d )·G Discounting factor t = 0123 Expense Income Discounted cash flow (DCF) diagram G(1–d )·G(1–d ) 2 ·G Discounted pay-as-you-go price over time period T Cost of a single Producer Pay-as-you-go price for a single Producer

18. as a function of time T Discounted 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 ($) (1-d) t discount factor Discounted pay-as-you-go G (T,d ) Discounted pay-as-you-go G ( ,d ) Cumulative pay-as-you-go G (T ) … for “forever”Discounted pay-as-you-go price over time period T

19. 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.

20. 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

21. 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

22. Paid-up cash flow t = 0123 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 G Paid-up price for time period T Paid-up price Investment return Cost of a single Producer

23. as a function of time T Paid-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 ($) (1–d) t discount factor (1+r) t investment return Paid-up price, for T F (T,d,r) Paid-up price, for  F ( ,d,r) Discounted pay-as-you-go G (T,d ) Discounted pay-as-you-go G ( ,d ) Cumulative pay-as-you-go G (T ) … for “forever”Paid-up price for time period T

24. 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 < $ 5,216< $ 6,500 dr

25. 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)

26. 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 – 2011 Source: Wikipedia Kryder’s law, 1980 – 2012 Source: Wikipedia ? ?

27. 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 – 2012 Source: http://ycharts.com/indicators/30_year_treasury_rate 30 year treasuries, 1882 – 2012 Source: Robert Schiller ?

28. 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 d R so that 1–d R > 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 + R

29. 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”

30. 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 EasyDifficult ArchiveIntervention Producer Workflow Content Type Monitoring Storage

31. 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 EasyDifficult ArchiveContent Type ProducerWorkflow StorageMonitoring Intervention

32. Preservation forever  Some things are intended to last forever… Source: John Church CompanySource: United Artists

33. Preservation forever ?  Some things are intended to last forever…

34. 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

35. 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 2011 http://www.youtube.com/watch?v=_5lQxmyz3xY

36. 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

37. 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

38. 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

39. For more information Total Cost of Preservation: Cost Modeling for Sustainable Services http://wiki.ucop.edu/display/Curation/Cost+Modeling UC Curation Center http://www.cdlib.org/uc3 uc3@ucop.edu Stephen AbramsMark Reyes Patricia CruseAbhishek Salve Scott FisherJoan Starr Erik HetznerTracy Seneca Greg JanéeCarly Strasser John KunzeMarisa Strong Margaret LowAdrian Turner David LoyPerry Willett