1) Corporation tax. I greatly welcome the reduction in corporation taxes; 22% to 20% for the profits under £300k, 28% down by 1% per year to 24% in 4 years. The stated intent was to boost the attractiveness of business in the UK. Also, speaking for myself, less tax will enable us to invest more in Memset, growing the business faster and creating more jobs. However, these reductions in corporation tax will largely be offset by changes to capital allowances.

2) Depreciation & capital allowances (AIA). The limit on deprecation for tax purposes has been changed from 20% to 18% (5 years to 5.5 years). Given that IT equipment depreciates at more like >33% in real terms this is a bit of blow since capital-intensive IT companies will end have to pay more tax up front, which will further reduce our growth rates.

Therefore, while a little esoteric, this is certainly bad news for British managed hosting and cloud computing providers like Memset. It will also makes it harder for us to compete on the world stage, especially when the weak pound and the fact that all computer hardware is imported is taken into account. Our international competitors are allowed to depreciate their equipment at realistic rates and pay less for it. Unfortunately, IT seen as a service sector by government, and they do not appreciate that we are an industry with plant machinery that has a very limited shelf life.

Also, the Annual Investment Allowance (AIA) on investment in equipment has been slashed from £100k to just £25k which will especially hurt small IT and manufacturing companies. It was only increased from £50k to £100k in April, however, so in reality it is only a halving of what was already a pretty small allowance. From my perspective as an Infrastructure as a Service (IaaS) provider, this will probably discourage people from owning their own hardware so not necessarily bad news for us!

3) Loans for small businesses. The Enterprise Finance Guarantee scheme (EFG), which guarantees small business loans to mitigate the risk to banks, is being extended from £200m to £700m. However, the EFG as it stands is broken. It was supposed to help banks lend to entrepreneurs without requiring large personal guarantees, but the banks are not honouring that and still will not share any of the risk. The EFG needs fixing before it gets extended, but there may be a silver lining in the form of a vague promise to lean on banks to lend more to smaller companies.

The newly announced “Growth Capital Fund”, also supposedly intended to fill the growth capital gap, seems far too small a measure to be generally useful at only £25m.

4) Entrepreneur’s relief. As you would expect, I am pleased that the £2m entrepreneur relief being extended to £5m gains over a lifetime. Entrepreneur’s relief is a Capital Gains Tax (CGT) concession, limiting it to 10% when selling a company, up to a certain value over a lifetime, which replaced the old CGT taper relief scheme. Since CGT is being raised from 18% to 28% this is especially pertinent.

Although I’m not looking for an exit any time soon, this scheme is important to encourage new entrepreneurs and investors. To attract bright, talented people away from more normal, safe careers the allowance needed to be in that higher range – the old taper relief scheme was one of my motivators for starting Memset. It is worth noting that entrepreneur’s relief only applies where you own more than 5% of the business.

5) VAT. On a more personal note, I also welcome the VAT increase to 20%. Taxation at the point of spending is one of the fairest taxing methods since people can choose. Most essentials (food, rent, kid’s clothes) are already VAT free, and it is only 5% on gas and electricity. Essentially it is a tax on buying luxuries, and if you want to be a saver you don’t have to pay it.

Also, as we saw with the VAT reduction, a change of 2.5% in the headline price of consumer goods has little impact on consumer spending. It will not affect most businesses significantly either since we can pass is straight through. As for the admin burden of a change, having done it twice recently means we are well-practiced so it should not be an issue.

6) Government carbon commitment. Finally, snuck into the document is a commitment to cut government’s CO2 emissions by 10% between May 2010 and May 2011. I think this is great news; it is about time our government started leading by example. Also, I believe this could be a great opportunity for the IT sector as we enable many carbon-saving technologies (eg. teleworking for car transport avoidance).

Overall, I am pleased with this budget. It was tough enough to hopefully get us out of our enormous national debt, does not dramatically cut back on the public services from which we all (as opposed to just those supported by the state) benefit. It also supports businesses small and large, giving us a real chance to be the engine that will lift us out of financial troubles.

1) Pushing RBS and Lloyds to lend to small businesses. Despite a healthy, profitable and growing business, we have not been able to get borrowing from any banks under the EFG without providing personal director’s guarantees. We need banks to be willing to share at least a tiny portion of the risk, otherwise we may as well just extend our mortgages even more. As a cloud computing provider we are very capital intensive – our growth rate is limited by cash availability more than anything else. Without borrowing our growth rate is capped at what we, the directors, can afford to leave in the business.

2) Tax breaks for entrepreneurs. I’m pleased to see the increase in tax allowances, however the only significant of those is the freeze on capital gains (we feared it would return to 40%). Doubling the entrepreneur’s allowance to £2m is pretty feeble (Labour capped the old taper relief scheme at £1m, and it was one of the main reasons I started a business – it was a way to avoid 40% tax). The investment allowance doubling to £100k is also only really going to help micro-businesses. The increase in R&D enhanced allowance from 150% to 175% is also helpful, but pretty minor. However, overall the set of allowances means it financial sense for me to keep investing most of my personal wealth back into my business to help it grow as fast as possible rather than sticking it in BASIC countries.

3) More STEM places. I’m pleased to see that they are hearing our (high-tech sector’s) desperate need for science & maths graduates, but that must not come at the expense of university-based “blue sky” research! At present the budget states an intention to create 20,000 new STEM (science, tech, engineering & maths) places, but it looks like most of the money for that will have to come from further cuts to already-overstretched university budgets.

4) Tax breaks for the games industry. It is fantastic to see support for our computer games industry. I have long been frustrated with how much of our top computer programmer and design talent gets poached by foreign companies operating in friendlier environments. Online entertainment is undoubtedly one of the big industries of the future, and among a number of high-tech areas of growth like those identified in Intellect’s Making Britain GreaIT Again publication. It is vital that we support this technical-creative hybrid sector.

5) £6/yeay levy on phones towards superfast broadband. Nice concept, but no where near enough. Only 70% of British homes have broadband at present, and to get high-speed broadband to the majority of homes will cost in the region of £15-25bn pounds according to the likes of BT and the broadband stakeholder group. A fast digital infrastructure is vital to enable turn Britain into a innovation haven, supporting out high-tech industry

6) 15% increase in government contracts to SMEs. This is good news, especially since government contracts all too often are dominated by a small number of very large providers who deliver debatable value for money! However, government procurement processes are vastly over complex and often prohibitively expensive for smaller companies, which is often why the public sector end up paying a premium to the usual suspects. A change to this, at least in the ICT world, is the G-Cloud programme. It should enable smaller, more agile companies to interface with government and provide their services without the usual massive sales-admin burdens (I hope!).

In short, I was fearing that the baby would be thrown out with the bath water in this budget, with a drive to increase taxes and cut costs accidentally crushing the one area on which we are likely to depend for innovating our way out of national debt (high-tech SMEs). Given the likelihood of a hung parliament that was all the more important, so overall I think we can breath something of a sigh of relief.

An impressive amount for a technology startup with no clear means of generating revenue, so I thought I would do some calculations of my own:

Twitter has about 18-20 million users in the US, according to Mashable

Earnings, earnings, earnings

There are 300m people in the US and 750m in Europe. Let’s assume that the ratios are the same for Twitter users. Therefore, the total number of Western Twitter users (ie. people who would potentially pay for anything) in 2010 is:

(20m / 300 ) * (750 + 300) = 70m users

To justify a $1bn (£625m) valuation they need to be able to realistically generate at least 5% of that as profit (20x earnings multiple, which is basically unheard of outside blue chip corporates) ie. at least $50m/year.

Therefore, in round numbers, they need to be able to realistically expect (in future) to generate earnings (profits) of $0.70/year from each user.

So far, perhaps not unreasonable; once micro-payment systems start working properly one could imagine users paying a notional $0.10/month to use Twitter, or advertisers paying that per user, at least so long as Twitter is the only one of its kind.

Twitter ain’t so special

That is where we realise the valuation’s big flaw: Twitter is not doing anything special. To build another system that replicates their functionality would, in my opinion, take 2 good coders, 2 good system administrators and one good web designer 6 months, tops. Add in some management and marketing capability for operational running and if you are a generous employer your wage bill might be £500k/year ($800k).

What about hosting costs? Well what it boils down to is a large and very active database:

Assuming 100m users
100 reads & 10 writes per user per day
= 10 billion reads & 1 billion writes per day

Squeeze into 16 active hours (just looking at the West)
= 120,000 read & 12,000 write transactions per second

To host a system which is capable of those transaction levels you would need at most 100 1U quad-core machines loaded with RAM (eg 24GB), costing £200/month each, or £240k/year ($385k).

So, I reckon that Twitter’s operational costs should be under $1m/year. But what do I know, right? I’ve only been designing, building and hosting massively automated online business systems for a decade, not to mention being one of the UK’s leading tech entrepreneurs.

A more rational valuation

So why are Twitter’s investors valuing such an easily-and-cheaply replicable business so highly? I suppose that they are banking on a land-grab effect and user stickiness, but we have seen what is happening to MySpace’s diluted popularity faced by new competitors.

When faced with such valuations I fall back on common sense and base the valuation on a cost-plus revenue model, ie. “what would it cost to provide the service, plus a modest profit margin”? All businesses and markets eventually commoditise down to that price point after all, and such commoditisation can happen very rapidly in the online world.

Viewed from that perspective I estimate that Twitter’s services are probably worth about 1.4 cents per user per year at present (estimated $1m/y running costs divided by 70m users). Lets be really generous and assume that they are able to generate 50% profits on that (first-mover advantage etc), so we get $500k/year profit, which at our mentalistic 20x valuation ration would give a valuation of a whopping $10m (£6.25). Hmm.

But that can’t be right?

I admit, I am taking an extremist point of view, and commoditisation of this very new and innovative sort of service is almost certainly several years away. However, defaulting to a cost-plus business model does demonstrate the likely value of such services when the competition have all caught up, and in Twitter’s case it is not a terribly exciting outlook.

Further, the valuation is being extrapolated from a $50 million purchase for a minority share holding. That investment was possibly more about getting a seat on the board than about a real valuation of the company.

Finally, and call me a cynic, but most investors are in the business of making a large return on a high-risk investment with a short time-horizon. One of the ways that happens all-too-often in the technology sector is less about yields and more about a business’s price getting hyped as high as possible before the savvy investors get out. Some some poor sap is then left holding the baby when commoditisation or better-competition comes to bite, exposing the lack of substance behind the valuation and causing the valuation to tumble.

Eye of Google

That is Twitter’s fundamental problem, to repeat myself: It is nothing special. Google (for example) deserves its outrageous share capitalisations because they have a unique technology which gives them an indomitable lead in the market place. Twitter is little more than a non-realtime Web-based chat room, and its technology would be trivial to replicate. Expectedly, the behemoth that is Google has indeed turned its lidless eye on chat-like status-updates in the form of Buzz.

To my eyes, their strangle-hold on the consumer Web-services market remains unchallenged by the likes of Twitter. The only interesting thing I’ve seen, however, is that their master-plan to crush Microsoft by making the browser the new platform was perhaps hiccoughed by Twitter in the form of software like TweetDeck – an example of Web services reverting to local software clients. Perhaps the browser is not quite ready for everything we want to do just yet after all, but I doubt that will save Twitter from eventual relegation to the Web-stars twilight world along with the likes of friends reunited.

Part of the solution, not part of the problem

The ICT sector is regularly harangued about the “2%” figure – the amount of global carbon emissions attributable to ICT according to a Gartner report. That figure is oft-quoted alongside real dirty polluters such as the airline industry (who dump CO2 straight into the upper-atmosphere, bypassing many of the natural ground-level sequestration mechanisms), but what is often forgotten is that in exchange for our emissions (2-3% of total in the UK) we are contributing roughly 10% of UK GDP and 15% of national trade.

Further, we (the ICT sector) have our own house well in order and have committed to reducing our own emissions as I will describe shortly. However, of much greater important is what the intelligent use of ICT can do to reduce emissions in other sectors, as highlighted by several groups including GeSI:

“ICT can reduce annual global emissions by 15 per cent by 2020 and deliver energy efficiency savings to global businesses of over EUR 500 billion”
– Global e‐Sustainability Initiative (GeSI), SMART 2020: Enabling the Low Carbon Economy in the Information Age, June 2008

Even the panda-people (the World Wildlife Fund) have got in on the act; their report with Gartner titled “Saving the 1st billion tonnes” puts the intelligent application of ICT in 10 key areas (eg. smart grid, intelligent buildings and transport avoidance) as being key to reducing our collective carbon emissions:

“‘Green IT’ is an oxymoron, until you consider use of IT to ‘green’ business and society.”
- Simon Mingay, Gartner10

Example: Transport avoidance

Perhaps the most obvious way that ICT can help is in transport avoidance. As David MacKay illustrates in his excellent (and free!) book Without Hot Air, personal transport in the form of driving cars and flying in jet aeroplanes are two of the worst things we do as a nation, together contributing to over 40% of our total energy consumption.

Cars are the worst offender, consuming a whopping 40 kilo Watt-hours (kWh) per day per person (to put that in perspective, we use about 4 kWh/d each on lighting). Even with electric cars we still have to get the energy to run them from somewhere, and there are simply not going to be enough renewables to go around at current usage levels. The only way to significantly reduce the energy consumption attributable to cars & planes is to use them less, and that is where ICT comes in; for example by enabling home working (tele-working), even if just one day a week, and reducing travel to meetings with telepresence technologies.

Keeping our own house in order

Although we can help reduce carbon emissions elsewhere, we absolutely must do so in a sustainable manner, which is why we in the ICT industry are putting lots of effort into keeping our own house in order. Last year, Intellect UK (Britain’s high-tech trade association) release their High-Tech: Low-Carbon report , which articulates an action plan on how the UK technology sector is going to reduce its emissions.

Further, Digital Europe (formerly EICTA) has committed to reduce Europe’s ICT-related carbon emissions by 20% by 2020. Many of us think that target is achievable by 2015, but how can I be so sure of dramatic carbon savings when our collective use of ICT is increasing constantly?

A lot of the existing inefficiencies of the sector lie in the data centre, and that is also where I expect to see the largest efficiency gains. The UK, in particular the BCS Data Centre Specialist Group, has taken a global lead in advancing the field of energy efficiency within the data centre, and was instrumental in developing the European Union’s Code of Conduct for data centres, which stipulates a range of best practices for every layer of the IT service delivery stack (from mechanical & electrical to software selection).

Memset recently become the first British Web hosting provider become a participant to the Code of Conduct, and we encourage others to follow suit (which many already are). The Code is free, is not hard to do (I did ours in a day) and the best practices contained in it are designed to to improve efficiency which means saving money, so it is just good business sense.

Moore transistors please!

However, there is a much bigger effect that incremental improvements to data centre design, and that is the combination of Moore’s Law with virtualisation technology. The work done per Watt by servers has been increasingly roughly in line with Moore’s Law, ie. doubling every 18 months, and is expected to continue to do so. Now that virtualisation has reached the main stream it is being deployed en-masse, allowing legacy servers to be shut down and replaced with vastly more efficient virtual systems, usually consolidating physical machines by a factor of more than 10 to 1.

Take us as an example; this year we have deployed roughly 1,000 virtual servers. Each virtual machine (VM) would otherwise have been a physical server (or in many cases used to be before it was migrated to us), and in fact many people are still using cheap old tower PCs for cheap hosting, but thankfully that practice is dying out. A normal server or PC uses around 90-120 Watts continuously, whereas one of our Xen-based Miniserver VMs uses 5-10Watts, but does the same work. Taking into account cooling and other data centre inefficiencies lets just call it 100Watts saving in round numbers:

1,000 VMs x 100 Watts = 100,000 Watts
x 30.4 days x 24 hours = 73,000 kWh / month
x 430g / kWh = 31,400 kg CO2 / month

So just from what we have done in our little corner of the ICT sector, just with new customers and in just one year, we have helped avoid over 30 tonnes per month, or 360 tonnes per year, of carbon dioxide emissions. To put that in context, each British citizen is responsible for about 9 tonnes of CO2 emissions per year. Not bad for 18 people in Guildford!

Being green is just good business sense

When it comes to ICT services, especially in the data centre, the two things that cost you the most money also cause the most carbon emissions; manufacturing the hardware (the servers / computers) and electricity to run them. In short:

Green = Efficient = Lower costs

There really is no excuse for us as an industry not to improve our energy-and-carbon efficiency, and companies that don’t will end up with higher cost bases and ultimately will be driven out of business by their more efficient competitors.

Conclusion: Let ICT do its job

The Intellect Work Programme has estimated that the knowledge economy now employs 41% of the UK workforce, and that it will account for roughly 50% of GBP by 2010. Data centres are ever-more becoming the backbone of UK PLC, and a healthy ICT industry is vital for both cutting our carbon emissions (as described above) and for driving our economic growth in the next decade.

Further, the ICT sector already has its house well in-order, so it is important that any policy measures do not interfere with the industry’s growth. Unfortunately, well-intended but poorly-conceived legislation such as the Carbon Reduction Commitment, which in the next few months is being rushed through with little-to-no consultation with industry, threatens ICT’s ability to deliver on its promise of supporting a prosperous, more sustainable society. Hopefully the next government will just let us do our job.

Men and women have complementary strengths and weaknesses; we have evolved this way to avoid over-design and make best use of our resources. We are designed to work well in the smallest family units, and in the work place. Numerous studies have shown that corporations with gender-balanced teams at all levels of the organisation perform significantly better. Today’s technology industry is in dire need of the “softer” skills often associated with women.

An example is the multi-talented Sophie Johnston. Top of her year in Computer Information Systems at Liverpool University, she is now working as a junior ScrumMaster using the agile programming methodology. A ScrumMaster is an agile project manager who emphasizes facilitation, leadership and communication over traditional command-and-control activities, skills that women tend to bring to a team.

Earlier this year Sophie also helped dent the “IT Crowd” image of IT professionals, stereotypically seen as sandal-wearing blokes lacking social skills. She won the most votes in the Miss Universe GB competition, showing that brains and beauty can indeed come in one package, but that is still a surprise to many people in the industry. This achievement alone is not going to change the public perception but it’s a start.

The perception that “girls are not good with tech” is perhaps the toughest battle of all. As someone who has had the extremely unusual experience of seeing life from both sides of the gender divide I can assure readers that sexism is alive and well in our industry today, and the perpetrators are not always men. Where this attitude is doing the most harm is in our schools, with girls even today being discouraged from taking computing and ICT. It’s an alarming fact that the number of young women taking A-Level computing has fallen from 13% to 9% in the last 5 years. Ironically this is despite girls performing better than boys in GCSE and A-Level Computing and ICT.

When growing up my sister and I (as a boy, remember) were encouraged towards different topics – humanities and arts versus science and maths. Speaking with teenagers today I fear that the same stereotyping which encouraged my sister and me to take different paths two decades ago is still prevalent. I am confident that if my female brain had been born into a normal female body, rather than a male one, I would not be the successful technology entrepreneur that I am today since I would not have been encouraged in that direction.

My favourite geek-girl, Sophie, is the exception, not the rule to the rule; only 5% of her course was female. We desperately need to encourage more young teenage girls towards maths, science and technology, and that is something that each and every one of us can and should do something about. Leaving the gender issue aside, we need the girls simply to bolster the ICT professional workforce. In my capacity as an employer I am disturbed by how hard it is to find good ICT graduates of any gender and I can’t afford for it to be a constraint on the growth of my business. Above all persuading more Sophies to enter the industry is fundamental to the success of the UK technology sector and indeed UKplc. The wider industry needs to take up the cudgels.

Instead, purchase your software from one provider, but have a direct relationship with the host. Some of our customers are starting to do this with us and Zimbra. Zimbra is sort-of like Google docs, but open source, and they host it with us, and backup to a third-party host (which is cheap to do).

Good for resellers too

Managing the backup and hosting process might be a new way that resellers can differentiate their offering or add value to the supply chain as more and more businesses look to protect their data as they move to a Cloud Computing model. Ensuring ease of data migration between cloud providers is paramount for businesses moving forward.

By not being tied to one provider, a business could easily migrate to another host, or if Zimbra becomes unsupported, for example, they would not lose their data, and we would carry on hosting while they work with us to find a new software solution. If we fail, they still have their data and Zimbra can help them get set up again. We (the managed hosting provider in this example) would not own their data even if we did fail, but no harm in belt-and-braces.

Hosting commoditisation is here

Software providers cannot realistically compete in today’s commoditised hosting market place, and instead should stick to their strengths. This also applies to migrations – when moving customers between hosts there are now companies that specialise in the migration itself but have no interest in selling software nor hosting. One such company is SEM Solutions, with whom we have recently started working.

Another big win from supply chain disintegration is that you gain total price transparency; no more getting stitched up by one provider who is just whacking a huge mark-up on a commodity service like hosting (yes, I’m talking to you, local government CIOs .

Not only does it show you which bits cost what, thus allowing you to compare with the market rates, but disintegrating the supply chain also makes migration to a new Cloud / managed hosting provider easy since you just need to work with the software supplier to migrate to the new host, and are not tied in to one provider. Equally, since you own the data on the service (because you are buying the hosting direct), moving to a new software provider is greatly simplified.

Eating my own dog food

So, do I take my own advice? Yes; Memset is one of the fastest growing technology SMEs in the country, and all our business critical information and systems are hosted in the Cloud (or at least our little bit of it) and accessed over the Web. None of my staff have Microsoft Office, we do not pay for any software, and we do not need servers in our office for administration applications. Everyone has a laptop, and since all our systems and documents (we use a Wiki for the latter) are hosted online everyone can work from home without the complications of a VPN. We do not use any paper for internal communications either, thus minimising “the printer has broken” type problems.

We also use Trac project management and documentation management system for all our internal documentation, task and project management. It is free and simple to host yourself with any managed hosting provider. Simple, scalable systems like Trac have also made it easy for us to obtain and maintain our quality, security and environmental management systems (ISO9001, ISO27001 & ISO14001 accreditations).

The panel session was lively, and I raised a few eyebrows with my predictions that the Big Corps in software & broadcast were under major threat. I was particularly pleased when I managed to astound Mr. Paxman with some stats on women in technology – here is an excerpt from the Intellect blog on the conference:

In the final panel session, Jeremy Paxman (probably for the first time in his career) was stuck for words when Kate Craig-Wood, MD of Memset, indicated that there was a 23% gender pay gap in the IT industry. Paxman expressed a little scepticism over the statistic, but rest assured the figure is one oft quoted by Intellect and comes from an equalities and human rights commission report.

http://google.co.uk/search?q=the+definition+of+cloud+computing

Lets face it, Google is near omniscient (and probably already has a band of worshipers preparing for the birth of its sentience) so I must know my stuff! </gloat>

Ahem, anyway, when you get down to it, there are only really three differences between Cloud Computing and traditional IT infrastructure outsourcing:

1. Shorter contracts: Hours, days or weeks (at most one month) rather than months or years (usually at least 6 months for traditional outsourcing).
2. On demand: Near-instant scaling / adding of resources.
3. No up-front costs: The CapEx and installation is absorbed into the rental charges.

Modern “managed hosting” providers like my company are largely synonymous with “Cloud Computing” or “Utility Computing” providers; companies like mine will give customers anything from a virtual machine to a large dedicated cluster with a contract of one month and no setup fees. We are blurring the line between traditional IT infrastructure outsourcing (eg. EDS / HP at the big end, Rackspace at the small end) and “pure” Cloud providers like Amazon EC2.

Cloud Computing has been enabled by the ubiquity of Internet connectivity, since companies are no longer tied to owning their own data centre with hard-lines back to offices. Instead, the infrastructure can be pretty much anywhere, although usually you want it in the same country as your main operations.

So what becomes of the old-school big-corp IT outsourcers?

As for the impact on IT outsourcing businesses, that is simple: Cloud Computing is exposing the true cost of computer / server resources, which thanks to Moore’s Law is tiny. Cloud / Utility Computing providers are driving the comoditisation of compute & storage resource, thus eviscerating the outrageous profit margins enjoyed by the old-guard of IT outsourcing providers.

The Cloud movement has the potential to finally deliver on IT’s long-oversold promise of shared services and cheap, highly scalable process automation. In doing so, Cloud also threatens the livelihoods of the big IT consultancies / Systems Intergrators who have become better at selling their highly-paid peoples’ time than actual IT services.

The proof are the likes of Google, Xero online accounting and Zimbra Desktop (Outlook- & Google docs-like functionality, but open source and Web-based): They are delivering most of the IT services that businesses need at an extremely low price, thus demonstrating that:

1. Most of us want the same, simple things in terms of IT services.
2. IT resources are actually really, really cheap.

Sorry chaps, but it looks like the jig is up.

• What does it take to be really green?
• What needs to be in IT policies?
• How can we tell myth from truth in an emotive area?

The protagonists:

• Chair: BCS managing editor Brian Runciman.
• Tracey Rawling Church from Kyocera Mita
• Louise Richards, chief executive, Computer Aid International
• David Critchley, director of retail and professional services at Cisco
• Kate Craig Wood, managing director of Memset and a member of the BCS Data Centre SG

“The current design of the scheme will encourage transfers of carbon liability, rather than a net overall reduction in emissions across the UK.”

“The current design of the scheme will only encourage energy efficiency in a context of stunted growth. At the heart of this problem lies the proposed design of the league table, and the suggested metric to be used for ranking and recycling purposes.”

In this article I will look at how the CRC works in the context of data centres, why it will will not significantly reduce our carbon emissions, and how the it threatens to stifle growth and innovation in a sector vital for our economic and environmental health.

Data centres use in the region of 2.2-3.3% of Britain’s total grid power. While that is a considerable amount, ICT has been repeatedly identified as a key mechanism through which our society will reduce our carbon emissions. The World Wildlife Fund have identified ICT as the way to “save the first billing tons” of carbon, and the Global eSustainability Initiative SMART 2020 report has identified now the intelligent application of ICT can reduce our annual global emissions by 15% by 2020.

Data centres lie at the heart of ICT’s potential to reduce our collective carbon emissions. We, the ICT sector, are not the enemy; we are part of the solution to climate change.

Further, data centres are absolutely key to our national prosperity. Britain’s knowledge economy now employes 41% of the population, and will account for 50% of GDP by 2010. Data centres are the backbone of UK Plc, vital to the resilience of public services and the competitiveness of British business. The ICT sector, powered by data centres, promises to be one of the engines of economic growth which can lift us out of recession, and must be allowed to do so.

We are not idle about our The European IT industry, through Digital Europe (formerly EICTA) has already committed to reducing its carbon emissions by 20% by 2020. The UK has taken a leadership role in on data centre energy efficiency. The British Computer Society in particular has been a key player in the development of the EU Code of Conduct for Data Centres, and the globally-leading cost and energy data centre simulator (in partnership with the Carbon Trust). We, the UK data centre industry, have our house well in order.

The CRC scheme is part of the UK government activity seeking to cut carbon emissions by 80% of 1990 levels by 2050. The most effective way to achieve this goal is to encourage energy users responsible for emissions to reduce their energy consumption on the one hand, and adopt efficiency measures on the other.

However, the government’s scheme plans to allocate the entire carbon liability to the utility bill payer, irrespective of whether the bill payer is in fact using the energy, or a key player in the decision to use this energy.

The basic mechanism for the purpose of this discussion is that any organisation that consumes greater than 6,000 Mega-Watt Hours (mWh) electrical energy per year is automatically captured and all of the electrical (and some other) consumption of that organisation and all subsidiaries is totalled to represent the carbon of the organisation.

6,000 mWh per year is equivalent to a continuous load of 685 Kilo-Watts (kW), roughly 500 kW of IT equipment load in a moderately well-run data centre, which is around 5,000 efficient modern 1U servers (assuming 100W per server). For a poorly run monolithic ‘old school’ data centre with an excess of power and cooling infrastructure, using 3-4 year old servers it might be as few as 2,000 machines.

Operators will have their energy use base lined and then be required to report their energy consumption. The organisation then has to purchase allowances to cover the total carbon in a similar way to the power generators under the EU ETS6. This is intended to add direct financial incentives for the carbon associated with the electrical energy consumed by the data centre operator.

Data centre operators do have the ability to reduce the carbon footprint in newer more modern data centres, and by taking advantage of the relentless improvements in the energy-efficiency of IT equipment. They could contract out the carbon liability of the utility bill back to the customer. At Memset, we have that facility already; it is a trivial matter to put a customer’s approximate share of our total energy consumption onto invoices.

The customer would then would be incentivised to alter its behaviour and chose more energy-efficient criteria in the data centre. An example might be choosing to migrate older servers into a virtualised environment. Furthermore, the high price of energy is already an incentive for operators to encourage their customers to embrace more environmentally friendly solutions; electricity already accounts for roughly one third of our direct costs.

However, as the government’s CRC scheme places the onus to reduce emissions on the organisation which pays the electricity bill, not the end-user, responsibly organisations like us cannot pass the carbon down the supply chain and thus encourage our customers to reduce their usage.

As a result of this, it makes no sense to own your own data centre, and I expect to see a massive increase in data centre outsourcing. That will actually be a good thing for my business, but I so firmly believe that the CRC as it stands will be detrimental to our emissions overall that I am speaking out against it.

Outsourcing a corporate data centre or entire ICT department would, under the current
allocation approach result in the carbon also being outsourced. While clear ‘carbon dumping’ could otherwise lead to reputational damage, data centre outsourcing is a common practice; there would be no way of determining whether the outsourcing that might take place post CRC implementation was driven by genuine business reasons, or a desire to shift the carbon liability.

Furthermore, as energy costs in the UK are currently less competitive than in continental Europe, the additional carbon costs could encourage businesses to offshore. Data centres are by nature geographically flexible. Off-shoring to the continent is a realistic possibility, and the cost of running a data centre in the UK may tip the scales in its favour. This in turn will have wider implications for jobs in the UK, and data and application security.

That said, if organisations do outsource the bulk of their energy-consuming activities to more efficient third parties, the overall net emissions for the UK will reduce, and the CRC will have proved fit for purpose. However, the current design of the performance league table inhibits this from being the case.

The league table is an apparently simple mechanism for the processing and comparison of the carbon reported by each CRC organisation, but will actually create utterly perverse incentives.

The current proposals suggest that rankings in the table will be determined by two metrics: absolute growth in emissions, and relative growth in emissions. After the initial phase of the scheme, the former metric is expected to be weighted at 75%, and the latter at 25% (though it is unclear how DECC reached these figures). As a result, any business growth, even if accompanied by increased overall energy efficiency, could result in an organisation dropping down the league table!

For a data centre, our energy consumption is directly related to our revenues, and as previously mentioned the sector’s continued growth is key to supporting UK PLC and delivering ICT’s promise of reduced carbon emissions across society. The CRC as it stands will reputationally damage data centres who dare grow.

Further still, for companies like Memset that are already leading the market in terms of energy efficiency, and for whom the opportunities for improvement are very few, the CRC is quite simply unfair. It will have been much better to start out as being really bad and then to artificially manage a slow improvement in energy efficiency in order to maximise the league table position. We will look significantly worse than our horribly energy-inefficient competitors, which will result in the customers being mis-directed to use more carbon-intensive providers.

In summary, the CRC as it stands will encourage “carbon laundering” with the outsourcing (or even off-shoring) of data centre operations to avoid brand value damage, will inhibit the growth of one of the UK’s most important business sectors, and will encourage end-users to use the least efficient providers.

The CRC is already changing business behaviours in negative ways. We (as a managed hosting provider) were planning to invest in a leading, semi-experimental, “super-green” data centre in Surrey, which would incorporate a number of the latest innovations in efficient data centre design, and push the boundaries of the technologies further.

However, because the CRC penalises companies that pay the electricity bill it no longer makes sense for us to own and operate a data centre, since instead we can just rent space and power from an existing data centre and let their brand get hit by the league tables, not ours. In this case, the CRC has been directly responsible for stopping an award-winning leader in the field of green IT from investing in the next stage of innovation.

Further, as it stands the CRC may make it more economical to offshore part of our data centre operations; as long as the servers are within a hundred miles of their users it does not matter for 99% of applications.

This is especially frustrating since we already have the capability to account to our customers for their carbon usage (we have been able to do that since becoming Carbon Neutral!), so we could easily pass the carbon levy / “credits” along to our customers. That in turn would further incentivise them to minimise their indirect energy usage through us.

As the CRC stands it will make managed hosting providers with UK-based data centre operations (like Memset) less competitive to those not under the jurisdiction of the CRC (like Amazon EC2), regardless of how well-managed and how efficient we are.

The CRC at present creates the incentive to launder, rather than reduce, carbon emissions and rewards organisations good at playing the ‘carbon game’, not those who are most energy-efficient.

The legislation is a threat to UK skills and employment. From the British Computer Society’s review of the proposed CRC legislation:

“The combined impact of the incentives created by the CRC driving outsourcing of ICT and data centre services both within and outside the UK is likely to reduce the number of skilled jobs in this sector as well as removing the most significant opportunity afforded by this political will, the development in the UK of world leading, exportable skills and technology in energy constrained ICT. “

Finally, contrary to its purpose, the CRC threatens to impede growth and innovation in the data centre industry, and thus inhibit ICT’s ability to deliver the massive carbon savings so clearly identified by numerous reputable sources.