What it costs

A framework for working it out, and worked numbers that are examples rather than findings.

North Canterbury · © John Stroh

Before you read this

  • What does this cost? — We do not know, and neither does anyone who has not built one. Anybody quoting you a figure for something that does not yet exist is quoting an aspiration.
  • So what use is this part? — A structure for working out your own answer, with every line named, and worked numbers to show the shape of the arithmetic.
  • Which number actually decides it? — One. Everything else ladders to it.
  • And where does the arithmetic usually go wrong? — In four places, all of them in year three rather than year one.

Before you read this (cont.)

  • Every figure in this part is marked ILLUSTRATIVE — They are placeholders showing the shape of a calculation, not estimates of anything. Replace all of them. If you quote one of them back to anybody, we have failed to mark them clearly enough.

The number that decides it

Cost per site to install and sustain for five years.

  • A minister and a board of trustees need the same figure. A funder asks for it in the first meeting. A member compares it to what they pay now.
  • Not cost to build. Not total programme cost. Not cost per member per month, which hides the sustaining problem in an average. Per site, over five years, because year three is where arrangements like this fail and a one-year figure conceals exactly that.
  • If you can produce this number honestly and it is defensible, you have a proposition. If you cannot, everything else is elaboration.

Four cost pools

Four cost pools and the one number that decides it FIG-16FOUR POOLS · KEEP THEM SEPARATE · ILLUSTRATIVE FIGURES ONLY 1 · Site capitalmachine, storage, installonce, owned by the member$9,500 2 · Site sustainingreplacement, updates,a visit, support$5,200 / year 3 · Cluster sharedpooled compute, exit drill,heterogeneity premium$70,000 / year 4 · The service people at the desk —model this one first $900 – $5,400 per member THE NUMBER EVERYTHING LADDERS TO Cost per site to install and sustain for five years — $9,500 + (5 × $5,200) = $35,500 Year three is where arrangements like this fail, which is why a one-year figure conceals the thing that matters. If your case only works at 5% escalation, you are betting on a forecast.
FIG-16 Keep the pools separate — mixing them hides the sustaining cost in an average. All figures illustrative, none an estimate.

Four cost pools

Keep them separate. Mixing them is how the sustaining cost disappears into an average and reappears as a crisis.

  • What sits in the member’s building, owned by them outright.
  • Compute node — $6,000 (ILLUSTRATIVE) · A workstation-class machine with a current consumer GPU
  • Storage and networking — $1,500 (ILLUSTRATIVE) · Basis: Local storage, boundary device
  • Installation and commissioning — $1,200 (ILLUSTRATIVE) · Basis: Local subcontractor, one day
  • Initial training, two people — $800 (ILLUSTRATIVE) · Basis: Half a day each
  • Site capital — $9,500 (ILLUSTRATIVE)

Four cost pools (cont.)

  • What moves this — Hardware falls in price and rises in capability; this line should shrink in real terms every year, which is the whole argument for measuring shares in capability rather than dollars. Organisations with existing server rooms need less. Organisations in remote districts pay more for the day.
  • The line that kills projects, because nobody budgets it.
  • Hardware replacement provision — $1,900 (ILLUSTRATIVE) · Basis: Straight-line over five years
  • Model and software updating — $600 (ILLUSTRATIVE) · Basis: Central cost apportioned
  • Remote monitoring — $300 (ILLUSTRATIVE)
  • One on-site visit — $600 (ILLUSTRATIVE) · Local rate, half a day

Four cost pools (cont.)

  • Support and escalation — $1,800 (ILLUSTRATIVE) · See pool 4 — this is the uncertain one
  • Site sustaining, per year — $5,200 (ILLUSTRATIVE)
  • Five-year cost per site: $9,500 + (5 × $5,200) = $35,500. ILLUSTRATIVE
  • That is the number. Every argument about this proposition is really an argument about that figure and what it buys.
  • Whatever a group of sites holds in common: pooled compute, the shared knowledge base, the exit-drill capacity, the boundary attestation.

Four cost pools (cont.)

  • Scale it per cluster and divide by members, and do not hide the exit guarantee inside it. Holding complete state at every cluster costs more than centralising. State the premium as its own line and defend it, because a guarantee absorbed into overhead is a guarantee an efficiency review removes.
  • Shared compute and hosting — $40,000 (ILLUSTRATIVE, per cluster per year) · Basis: Sovereign-qualifying provider
  • Complete-state premium — $12,000 (ILLUSTRATIVE, per cluster per year) · The cost of being able to leave — never fold this into the line above
  • Annual exit drill — $8,000 (ILLUSTRATIVE, per cluster per year) · Steward and operator days, plus remediation provision

Four cost pools (cont.)

  • Heterogeneity premium — $10,000 (ILLUSTRATIVE, per cluster per year) · Second model family and hardware generation
  • Per cluster, per year — $70,000 (ILLUSTRATIVE, per cluster per year) · Across 25 members ≈ $2,800 each
  • People at the desk. This is not the largest pool but it is the least predictable, and it is where the whole proposition is decided.
  • Model this before anything else — The economics rest on a ratio: how much routine work the local system handles unaided versus how much reaches a person.
  • 5% — 3 · $900 (ILLUSTRATIVE cost per member per year)
  • 15% — 9 · $2,700 (ILLUSTRATIVE cost per member per year)

Four cost pools (cont.)

  • 30% — 18 · $5,400 (ILLUSTRATIVE cost per member per year)
  • If your case only works at five per cent, you are betting the organisation on a capability forecast — Build it to survive three times your target rate. If it does, the model is robust; if it does not, you have found out for the price of a spreadsheet.
  • Two things reduce this pool that are not efficiency measures: members contributing accredited hours in exchange for entitlement, and a local system that improves as it reads more of the member’s own material.

Part E — Running an organisation where agents do the work

North Canterbury · © John Stroh

Segments — and they behave differently

Do not average across these. The averages are meaningless and the differences are the plan.

  • Public bodies — Ability to pay: High · Speed to decide: Slow · Assurance cost: High · Want evidence before piloting — real cost before revenue. They are the anchor because their requirements force the standard to be real.
  • Professional practices — Ability to pay: Medium · Speed to decide: Fast · Assurance cost: Low · Clear pain, understand recurring costs, decide in one meeting.
  • Schools and education — Ability to pay: Low · Speed to decide: Slow · Assurance cost: Medium · Procurement cycles, boards, term timing.

Segments — and they behave differently (cont.)

  • Community organisations — Ability to pay: Low · Speed to decide: Fast · Assurance cost: Low · Highest contribution potential, lowest cash.
  • Trade and small business — Ability to pay: Medium · Speed to decide: Fast · Assurance cost: Low · Largest by number, hardest to reach individually.
  • Geography — Cluster density decides utilisation and field-service cost simultaneously, and they pull in opposite directions. A dense urban cluster has good utilisation and cheap service calls. A dispersed rural one has neither, and is where the need is greatest. Model at least one of each; do not build a plan that only works in a city.

Risk lines, priced

Not a register. Lines in the model, with money against them.

  • Escalation rate above target — Effect on the model: Central pool inflates · Model at 3× target (ILLUSTRATIVE provision)
  • Field service worse than modelled — Effect on the model: Sustaining pool inflates · +25% on visits, years 1–2 (ILLUSTRATIVE provision)
  • A member cannot pay — Revenue loss, no cost relief · 5% of member revenue (ILLUSTRATIVE provision)
  • Base model becomes unavailable — Effect on the model: Substitution project · One-off, 6 weeks of engineering (ILLUSTRATIVE provision)
  • Slower member growth — Fixed costs across fewer members · Model at 60% of plan (ILLUSTRATIVE provision)

Risk lines, priced (cont.)

  • Hardware price does not fall — Effect on the model: Capability-pegged shares squeeze · Sensitivity, not provision
  • That last one deserves attention. If shares are measured in capability, falling hardware cost is what funds rising member entitlement. If prices stop falling, the mechanism stops working and the constitution has committed you to something the market no longer supplies. Model it before adopting the peg.

How to use this

  • 1. Replace every figure. All of them are illustrative and none is an estimate.
  • 2. Build the central pool first, at three times your assumed escalation rate.
  • 3. Produce the five-year per-site number and put it on the front page.
  • 4. Model two clusters — one dense, one dispersed.
  • 5. Keep the exit premium and the heterogeneity premium as their own lines, permanently.
  • 6. Publish what you find, including the parts that do not work. A costing that only closes under favourable assumptions is not a costing.

What we cannot tell you

We have not built one, so we have no measured figures. What is above is a structure and an arithmetic shape.

  • Two things would change it materially and neither is knowable in advance: what members will actually pay for the exit guarantee, and what the real escalation rate is once a local system has been reading an organisation’s own material for a year. Both are measurable within months of starting. Neither can be resolved by more analysis.
  • If you build this and measure either, publishing the number would be worth more to everyone else than anything in this part.

What we cannot tell you (cont.)

  • Published under CC BY 4.0. Every figure marked ILLUSTRATIVE is a placeholder. None is an estimate, a quote, or a finding.