Multiply that sum by 4.5— consultant math.

Embrace it.
One night, a marquee client asked me to draft a 9-figure capital cost estimate for a new data center.

By 8 a.m. the following day.
For their Board.
I laughed.
And then I did it.

That night, I developed a formula that can make a defensible estimate of large and complex capital costs in a few minutes. Beyond capital costs, it has some other uses…. it’ll regrow hair, wash the car, help with the M&A.
Privileged perspective #1 of 52

The late-night call. The important client.
It was after 9 p.m. I got an urgent call from an iconic brand. A cherished client of the firm I worked for—products on display in every grocery worldwide. I was curious. People sometimes call a consultant this late, but never with boring problems.

The question.
My client explained. There was an unexpected meeting with the board the following day. Several high-profile IT disasters were in the news; the board urgently wanted to avoid that sort of publicity... these were career-changing events for the executives involved. So they wanted to know, "How much to build a second data center? Something to take over if the first one broke?"

My callers—themselves stumped—suggested that I, as the global head of PwC’s Disaster Recovery practice and regularly suggesting a second data center, I might be able to answer the question. And please, could I get them the answer by 8 a.m. the next day?

I thought, "No. That's impossible."

But I said, "Yes", as I’m a consultant.

The usual approach to this question is months of digging into accounting books, spinning scenarios, and back-and-forth negotiations with finance, infrastructure, and the board.

While we chatted, I worked out an answer to the question. I could tell my client how much a second data center would cost, that night.

The answer.
It was untested. It is risky to answer capital questions without proper study. Any answer would be materially significant. It could damage relationships, careers, and shareholder trust. They felt they could not delay the board. I was reticent to give them my answer, even to let them know I was thinking of something. Out of sympathy and the likely futility of stalling the answer until I could study their request, I gave up my answer. The Consulting Math.

I asked, "Can you get out of your finance system by morning the total of your annual support contracts for your existing data center?"

They said, "Yes. Not a problem."

I said, "Great. Multiply that sum by 4.5. That is the cost of a second data center."

I explained my thinking and waited for them to sort their thoughts and emotions, knowing that a simple number was a lot to digest. I heard them work it out and come to a point of acceptance. I heard relief. They had their answer. They could face the board.

f(x)=4.5x. Consulting math looks like math. Sounds like math. Is math.
The answer I came up with was f(x)=4.5x, where x is the line-item total of annual support contracts for the existing data center. The logic I offer is simple.

• Total data center cost = Cost of Assets + Interconnection Costs + Integration Costs
• Total Cost = (3 x Annual Support Contract) + (0.2 x 3 x Annual Support Contract) + (0.3 x 3 x Annual Support Contract)
• Total Cost = 3x + 0.6x + 0.9x
• Total Build Cost = 4.5x

Why this formula for this client at this time?

• Anything with a support contract was live—this gave me a rolled-up bill-of-material for a new facility without needing any detail from a bill-of-material
• Buyers and sellers were at the time negotiating support contracts to ~30% of the purchase price—so I knew the asset replacement cost
• Their 3-year depreciation schedule aligned to support contract lengths—no worries about what was on and off the books
• My experience said interconnecting two data centers costs about ~20% of owning one—the client quickly confirmed
• Integrators generally assumed a flat ~30% of the hardware/software purchase price for integration—I knew the implementation costs
Therefore, f(x)=4.5x.

Why couldn't we pull the costs from the books?
Why couldn't I pull an asset inventory and total the cost column? Try it.
If you have an accurate asset inventory that contains just live assets and not stranded assets, consider yourself lucky for the people who assembled it. And if it has prices in it, Wow! It's not that this is impossible. Not that people haven't built and maintained a live asset and cost database (I've done it). But it's rare. You'll have months of work and meetings to get to such a list. In my experience, you're better off pulling support costs from the finance system—because you will most certainly have those rolled into one line item.

That's it. A word of caution: This is a rapid estimation technique. Ensure you understand and adjust it to your context before using it. (See the Disclaimers.)

Where else might this be useful?
M&A Due Diligence? Absolutely.
I've seen where this could have saved billions in post-deal write-downs.
Want to know if you're buying a massive debt dressed up as a profitable SaaS or Cloud company. Or anything where revenue generating equipment investments are a big part of the deal. It will look appealing on a few fronts: excellent asset ratios; exemplary efficiency. Heavily dependent on infrastructure but free of lease and cloud costs because the product you’re buying is hosted in its own data centers, on its own equipment. Sweet!

But what’s the sellers exit strategy? Has it been to fully depreciate their hardware and canceling support contracts to inflate their balance sheet through a mechanism you won’t check. (Let's say we're talking even $500M in infrastructure. That's over a $130M inflation on the financial statement annually.) It’s happened; and it’s been missed by the due diligence team.

Annual maintenance contract costs in a company on a 3-year depreciation schedule should be about the same as one year's depreciation 3 or 4 years ago. And this should be a quick number to pull for a check during due diligence.

If the number doesn't add up or it's non-trivial to get a number, consider that you may be buying a debt that will come due very soon.

Privileged Perspective #1.
Thoughts or ideas on this?
This is part of a series I’m doing on privileged perspectives from over 500 projects delivered to over half the Fortune 500.

I'm happy to do a chat and virtual coffee. Just reach out.

Regards
Robert Synak
PwC Global Disaster Recovery Practice Lead, 2010-2019

#BackOfANapkin #PrivilegedPerspectives

Disclaimers
While this publication offers general insights, it's essential to remember it's not a substitute for professional advice. Before making decisions based on the content here, seek specific professional advice tailored to your situation. No representation or warranty (express or implied) is provided regarding the accuracy or completeness of the information contained in this piece. Robert Synak, any affiliated persons or organizations, along with affiliate members, employees, and agents, do not accept or assume any liability, responsibility, or duty of care for any consequences that may arise from actions or decisions made (or not made) based on this publication.

The views expressed here are Robert Synak's, they are not presented to suggest they represent, or are endorsed or shared by, any organization or individual Robert Synak has been associated with, past or present.