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Understanding IT Cost

By Peter Bye

White Paper

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Contents Introduction.................................................................................................................................................... 4

TCO analysis ................................................................................................................................................. 4

Cost components ....................................................................................................................................... 5

Model description ...................................................................................................................................... 6

Delivery ...................................................................................................................................................... 7

Sample results ........................................................................................................................................... 7

Comparison with IT industry metrics ....................................................................................................... 10

IT strategy cost analysis .............................................................................................................................. 12

Model description .................................................................................................................................... 12

Delivery .................................................................................................................................................... 13

Sample results ......................................................................................................................................... 13

Summary and more information .................................................................................................................. 16

About the Author ......................................................................................................................................... 17

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Introduction

Understanding the costs and benefits of IT is essential. Rational investment and strategic decisions are

impossible without this knowledge; the organisation is working in the dark.

There are two contexts in which the knowledge can be used. First, organisations need to understand

what IT contributes to the cost of delivering the products their business produces. A product could be a

physical entity, such as a vehicle. It may be less tangible, for example a bank account managed or an

insurance policy sold, or a public sector service delivered, such as processing a benefit claim. Each

organisation, public or private, will have a view of what constitutes its products.

Having an accurate picture of the cost and a breakdown into its constituent components has a number of

benefits.

A detailed understanding of cost enables comparison with peers and examples of best practice. It is

cost/performance that matters. If an organisation’s IT costs are twice the industry average that could

be a cause for concern. However, it may be delivering much better business outcomes because the

IT investment has given it a competitive edge. This is a major reason for measuring IT cost per

outcome, such as products produced, rather than just the cost.

As well as providing the basis for comparison with peers in the same business sector, knowing the

costs allows comparison with industry IT averages, such as cost per MIPS or per operating system

image for organisations of a similar size. Gartner, for instance, publishes global IT averages (its key

metrics) annually.

Management can focus on the biggest cost contributions for potential savings and not waste time on

small items. Costs sometimes believed to be a significant factor in the total cost can on analysis turn

out to be relatively minor contributors and vice versa.

The second context is where an organisation is considering a major change in the strategic direction of

IT. A typical example is moving from one system type to another, for instance moving applications to a

different operating system or replacing custom applications with a package. Understanding the cost not

only requires knowing the Total Cost of Ownership (TCO) of the current environment and the expected

TCO of the new one. The cost of the move and the impact on the business are critical, and often

underestimated, factors.

Unisys has developed analytical tools, referred to as models, for:

1) analysing the TCO of ClearPath® and other systems; and

2) comparing the financial implications of one IT strategy with another.

This paper describes the TCO and strategy comparison models, and ends with a summary and pointers

to more information.

TCO analysis

This section explains the TCO models Unisys has developed, describes how they are used and presents

a selection of results. It starts by describing the cost components including within the TCO.

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Cost components

The TCO of a system should include the components shown in figure 1. The primary contributors are

hardware, software and people. The figure shows four environments, spread over two data centres: live,

DR (disaster recovery), test and development. Although they appear in the figure as four separate

platforms, there may be more than one in each environment. For Windows, Linux and UNIX

environments, these may be logical representations. The assets associated with each environment could

include several physical and virtual servers, the costs for all of which should be included. Environments

may be combined, for example test and development, and in some cases the role of systems may

change. For example, a test and development environment may be used for DR if the live is lost.

Figure 1: Schematic of components used in TCO calculations

Table 1 contains more information on components that make up a TCO.

Component Explanation

Hardware, including firmware Systems and dedicated local storage, including maintenance and installation.

Software System software, including operating systems, virtualisation software, database managers, systems management software (from whatever source) and any other third-party software. Includes maintenance and support.

Disaster recovery The hardware, software, maintenance, and other facilities and services used for disaster recovery.

Personnel The full-time equivalents (FTEs) providing technical support, operations and their management and administration. Fully-burdened costs are required, not just salaries.

Facilities Power consumption and space for all systems, and other facilities costs, including office space and resources such as PCs.

Connectivity Inter- and intra-data centre communications equipment such as network products, as used between the components systems. It does not include general data centre LANs, or end-user external networks.

Applications Product licence fees, maintenance and upgrade fees, database and other storage costs, e.g. SANs. Personnel costs for applications development and support, and the facilities they use.

Table 1: TCO component details

PeopleSystem support & operationApplications development & support

Hardware

Dedicatedlocal storage

Connectivity(LANS, routers, telecoms etc.)

Live DR Test Development

Software

Site 1 Site 2

Applications

Storage (e.g. SAN) Storage (e.g. SAN)

FacilitiesPower & coolingSpace & equipment

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The TCO is calculated as the annual cost, not a one-off purchase cost. Costs such as the purchase price

of a multi-year licence are annualised.

It can be useful to separate the TCO including applications from the infrastructure part, which comprises

everything except the applications. The separation allows comparison of infrastructure costs with IT

industry averages. The cost including applications can be used for comparison with others in the same

business sector, for example the IT cost to produce a given product.

For mainframe installations, these costs are well known or can easily be calculated. There is generally a

long history of running mainframes so the principles of accounting for people and other cost components

are well-established. The relative simplicity of mainframe environments helps: the number of servers is

low and their functions clearly defined. This is less true for other system types. The proliferation of servers

and system images in distributed, virtual environments introduces complexity. It is not easy to include the

cost of all the TCO components, as software may come from many different sources.

Model description

Models were developed for ClearPath systems and have been extended to include other system types as

well as environments containing a mixture of systems. The models were reviewed in detail with a leading

analyst; their comments and suggestions have been included.

Table 2 shows the various models that can be built.

Type Description Key outputs

High-level TCO - ClearPath & other mainframes only

- Limited input + assumptions, rapid results

- TCO & distribution with and without applications

- Comparison with. IT industry averages cost per MIPS and MIPS per FTE

- Comparison with. business sector averages cost per business product(s)

Full TCO - ClearPath & other mainframes only

- Comprehensive input – no assumptions

- As High-level TCO but more precise

- Many options for ‘what if’ questions, e.g. variation in facilities costs

Other system types

- TCO for systems other than mainframes

- Comprehensive input – no assumptions

- TCO & distribution, with and without applications

- TCO & distribution including applications

- Comparison with.IT averages

Distributed environments

- TCO for distributed environments: ClearPath & other systems

- Comprehensive input – no assumptions

- TCO & distribution with and without applications

- TCO & distribution per system type

- Comparison with. business sector averages

- Comparison with IT averages

Table 2: TCO model types

The high-level TCO focuses on the major contributors to the cost, and makes assumptions about the

remaining components; the other models require all data, making no assumptions. The rationale for this

approach is based on the distribution of the costs. Published industry averages and Unisys experience

show that about 90% of the TCO comes from hardware, software and personnel. The remaining 10% or

so comprises the other components, that is:

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Connectivity

Facilities

Disaster recovery

Unallocated

Gathering the data required for the other costs can be very time-consuming. The high-level TCO uses the

hardware, software and personnel costs as input data. A percentage of the sum of these costs is then

used to cover the remaining items. The results are reasonably accurate. The same ClearPath installation

has been modelled using both a full TCO model and a high-level analysis, using the relevant subset of

data from the full model. The results were within a percentage point or two.

Variations are easily made, depending on the amount of information available. Consider the high-level

model, for instance. It may be easy to be more precise about the other components, for example DR

costs. In that case, the DR cost would be explicitly included in the model and the percentage for the other

components reduced.

Delivery

TCO models are delivered as a Unisys Advisory service. Unisys works with the client to gather the

required data. Checklists and guidelines provide detailed information about the data needed. Unisys then

builds the model and reviews it with the client. After incorporating any changes resulting from the review,

Unisys prepares a report and presents it to the client. As well as a summary of the results, the report

contains any recommendations arising from them. For example, a relatively high operations personnel

cost may suggest that more automation is required.

A TCO model may also suggest an Appraisal service, which is a complementary Unisys Advisory

service1. The Appraisal determines the current state and direction of an IT environment, the desired future

state to meet business requirements and recommends steps to close any gaps. In the case of a high

operations cost, for example, the Appraisal would explore in more detail the level of automation in the

installation and suggest possible changes to improve it. An Appraisal service can of course trigger a TCO

model. The two Advisory services together produce a detailed picture of the IT environment.

Sample results

A number of TCO studies have been carried out around the world. This section illustrates just some of the

output that can be obtained, using data from two typical organisations. An interesting point in both cases

is that, contrary to some perceptions, hardware contributes a small percentage of the ClearPath TCO:

under 10% in both cases. This is quite normal, and is reflected in other TCO models Unisys has

performed.

The first is a retail corporation, which operates a number of stores. It uses Libra systems for the major

applications. Figure 2 shows the cost distribution across the various components. The client chose the

cost per store as a business metric for comparison with competitors.

1 The IT state model and Appraisal are described in another White Paper ‘Understanding IT System State – Experiences from the ClearPath Appraisal Process’

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Figure 2: Annual cost distr ibution across all components. Hardware (5%) starts at just

after 12.00. The colours progress clockwise on the chart and left to r ight across the key.

The second example is a large organisation providing a critical assistance service to the public. It is an

example of a distributed environment, comprising several different system types. Figure 3 is a schematic

of the configuration.

Those requiring assistance contact the service, primarily by telephoning call centres. Details of calls are

entered in the C application and requests needing further action are passed to the A application, via the

ESB (Enterprise Service Bus). A then continues to manage the requested action. The B application

provides further data for both A and C. A shared infrastructure, including a SAN, VTL and systems

management supports all the applications. A second site provides DR, test and development facilities.

There are two versions of all the applications. One supports the live operation; the other is for training

(TR) users of the system. The Dorado system runs both live and TR in the same system; live and TR

have separate configurations for the other applications. Table 3 shows the various technologies used.

5%1%

26%

19%

11%

8%

3%

2%

1%0%

3%

1%

6%

2%

2%0%

7%

1% 3% 0%

TOTAL COST DISTRIBUTION (%)

Hardware Hardware maintenance Software Software maintenance

Other software and middleware Other software support Technical support Operations

Management /supervision Security Workspace & facilities Other factors

Application licence & support Storage (SAN etc ) and other resources Application development Application management

External application support & operations External liaison Workspace & facilities Oversight

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Figure 3: Configuration schematic , showing major components

Table 3 shows the various technologies used.

Component Technology used

Application A ClearPath Dorado

Application B Windows UNIX

Application C Windows, .Net

ESB Windows, Java EE

Shared infrastructure SAN, VTL, Wintel servers.

Table 3: Technologies used for each component

Figure 4 shows the distribution of the TCO across the component application systems, the ESB and the

shared infrastructure. Figure 5 shows the cost distribution for the Dorado system only. The client chose

the cost to manage an action resulting from a request as the business metric.

ESB

SAN

C B A

Live

TR

Live

Site 1

SAN

Site 2

Continuous backup

DR

Test

DEV

Shared infrastructure: SAN, VTL, systems management...

TR TRLive A

B

C

ESB

10

Figure 4: Annual cost distr ibution across component systems

Figure 5: Annual cost distr ibution for Dorado systems only

Comparison with IT industry metrics

Understanding TCO allows comparison with industry IT averages. Gartner key metrics reports are

published in December each year, with the number of the following year: the 2014 metrics were released

in December 2013, for instance. Mainframe (primarily IBM), UNIX, Windows and Linux operating systems

A38%

C19%

B24%

ESB6%

Infrastructure13%

Component system costs as % of total

2%

19%

10%

1%

28%

29%

4%3%

4%

Dorado total cost distribution

Hardware, Live, Test & DEV

Software, Live, Test & DEV

Maintenance & installation

Power

People: support & operation

People: applications

People: management &administration

Connectivity

DR system

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each have separate reports. Copies of any of them may be obtained from Gartner. The data used are

drawn from a wide sample of installations globally.

For ClearPath systems, two mainframe metrics in particular are of interest: the cost per MIPS and the

number of MIPS per FTE (full-time equivalent) personnel involved in operations, technical support and

their management. Gartner segments its samples into installation size bands: small, medium and large.

Application costs are not included.

The cost per MIPS is obtained by dividing the TCO by the number of installed MIPS. The MIPS in

question assume that there is no metering or other capacity on demand facility. Rather, the MIPS are

those which would be required to handle any peaks within the service level agreements. For example, the

peak time could be month or year-end report generation which must be completed within a specified

number of hours. Peak MIPS requirements vary according to the profile of the applications but are

typically around 2.5 times the average2. Lower numbers suggest a more cost/effective installation than

higher ones.

MIPS per FTE is a measure of efficiency. It is the number of MIPS divided by the number of FTEs (costs

are not involved). Higher numbers – more MIPS per FTE – indicate a more efficient IT organisation than

lower numbers.

An analysis of a number of TCO models from Europe, North and South America, and Australasia shows

that ClearPath systems are on average about 77% of the Gartner cost per MIPS for the installation size

and 160% of the MIPS per FTE. However, while ClearPath installations on average show better

cost/MIPS and MIPS/FTE than overall industry averages, these figures do not represent the true TCO

saving. A study performed some years ago by The Yankee Group3 showed that MCP and OS 2200

systems required about 20% of the MIPS used by other mainframes with a similar workload. Recent

cases where a direct comparison has been possible still show that a ratio of about 4-5. The efficiency of

the data model used for both MCP and OS 2200 (DMS II and DMS 2200) is part of the explanation.

Comparisons with the industry averages are a useful indicator of the relative position of the organisation,

and can provide valuable pointers to areas of potential improvement. For example, a relatively low

number of MIPS per FTE may indicate that more automation would be desirable. However, the cost per

MIPS and MIPS per FTE values must be viewed with caution, for the following reasons.

They should be seen in the context of the owning organisation. Factors such as service level

expectation, security and resilience requirements, and the amount and complexity of the work being

done all affect the TCO.

There are significant economies of scale. Very small installations show a high cost per MIPS and low

MIPS per FTE. Even a small installation requires a number of people with different skills.

The industry averages for cost per MIPS are published in USD. Exchange rate fluctuations therefore

affect the cost per MIPS for TCOs using other currencies. For example, the USD per GBP exchange

rate between 2008 and 2014 fluctuated between about 1.4 and 2.

2 The majority of ClearPath systems use metering or other capacity on demand for MIPS. Material providing detailed guidance for calculating the required peak MIPS value is available. 3 Contact Unisys for details of the report,

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IT strategy cost analysis

The models provide a means of comparing two possible IT strategies. Some examples are shown in table

4; there are many more possibilities.

Strategy 1 Strategy 2

1) Stay with existing ClearPath systems & applications Move ClearPath applications to another OS, or replace with packages or other applications

2) Stay with existing ClearPath systems & applications Move to ClearPath fabric-based systems and modernise applications

3) Move to ClearPath fabric-based systems Move ClearPath applications to another OS, or replace with packages or other applications

4) Move to ClearPath fabric-based systems & modernise application Move ClearPath applications to another OS, or replace with packages or other applications

5) Stay with internal ClearPath operation Keep systems and applications but move to Unisys managed services

6) Move applications from one OS to another Replace applications with packages or other applications using same or another OS

Table 4: Examples of strategies to be compared

Model description

An understanding of the financial implications of each strategy requires the following:

The TCO on completion – what may be regarded as the ‘steady-state’ TCO

The cost of the implementation process

The business impact

The model calculates the net benefit of one course of action rather than another, where benefit is

measured in terms of cost savings and business impact. A benefit may be negative, that is, a cost.

Consider, for instance, a case where one of the options is maintaining the status quo or perhaps just

moving to a new system release, while the other option is to move the applications to another operating

system. In the first case, the implementation cost will be limited and predictable, with low risk. The

implementation cost of the other option is for the conversion, which is frequently underestimated, often

grossly so. There may also be a negative business impact during the conversion. The combination of

negative business impact and conversion cost may dwarf any expected TCO reduction.

For each course of action, the model uses input data for expected costs and business impact per year

over a number of years. Items such as a licence renewal, which may be for a number of years, can be

taken in the year they occur or spread over the period covered. A variety of summaries can be produced,

including annual averages and year by year views for a selected period of between three and seven

years. (There must of course be data available for the period selected: if only four years of data are

provided, selecting a longer period makes no sense.)

Table 5 summarises the data required for each course of action. Items can be changed or new ones

added. All data are required per year for between three and seven years.

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Component Sub-component

Explanation

TCO Estate Hardware, software, connectivity, and facilities such as power and spacel.

Personnel The full-time equivalents (FTEs) providing technical support, operations and their management and administration. Fully-burdened costs are required, not just salaries.

Applications Product licence fees, maintenance and upgrade fees, database and other storage costs, e.g. SANs. Personnel costs for applications development and support, and the facilities they use.

Implementation - Hardware, software, personnel, training and delayed implementation costs.

Business impact - Revenue, end-user productivity, security breaches (risk) and compliance cost changes.

Table 5: Summary of data required for comparison model

Delivery

As for TCO models, comparison modelling is delivered as a Unisys Advisory service, perhaps

complemented by other Advisory services. Unisys works with the client to find and agree the two courses

of action and the necessary data required to build the model. The process is more complicated than just

TCO modelling. Consider for instance example 3 from table 4. One choice is staying with ClearPath

applications but moving to a fabric-based ClearPath system. This is well-defined implementation process

so gathering the required information about the continuing cost is straightforward.

The other choice in example 3 is to move the ClearPath applications to another operating system, or to

change to use other applications, for example a package. The alternative configuration has to be

determined and agreed before its steady-state TCO can be calculated. The cost of implementation must

then be decided, together with any business impact, to get a true picture of the financial implications of

the move.

As with the TCO model, Unisys prepares a report on the comparison, together with recommendations for

discussion with the client.

Sample results

The results shown are typical of the output the model can generate. The example installation is large, with

critical ClearPath-based applications. The choice modelled is to keep ClearPath applications but move to

a fabric-based ClearPath system, or to move the applications to run under Linux. The data are based on

a real case, apart from the business impact figures which, have just been chosen to illustrate the kind of

output the model can generate.

The ClearPath configuration is well-known, so its TCO data were straightforward to obtain. The

configuration of the alternative configuration was defined and agreed, together with the personnel and

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application requirements. The data for the two choices were then entered into the model. The cost of the

implementation for each choice was then calculated and added into the model4.

The business impact figures used to illustrate the model assume that the organisation expects its annual

revenue over the next four years to rise from USD 1,000M to USD 1,030M, assuming no IT changes. With

the proposed IT changes, revenue is expected to increase by an extra 1% per year for each approach,

due to improved flexibility in delivering new capabilities. However, there is a cost associated with each

course of action: USD 693,000 for the ClearPath approach and USD 46M for the Linux alternative. There

is also an expected negative business impact during the implementation of the Linux approach. Over the

first three years, revenue is expected to fall due to an inability to implement new features during the

move.

Table 6 summarises the data. The implementation cost for ClearPath is shown in year 1 while the Linux

cost is spread over four years.

Year Planned revenue

(1,000,000)

Implementation

cost (Linux)

Implementation

cost (ClearPath)

Revenue impact

(Linux)

Revenue impact

(ClearPath)

1 1,000 15,000,000 693,000 -5% 1%

2 1,010 15,000,000 0 -5% 1%

3 1,020 10,000,000 0 -1% 1%

4 1,030 6,000,000 0 1% 1%

Table 6: Summary of implementation and business impact data

Figure 6 is generated by the model and summarises the four-year effect of the two approaches.

Figure 6: Summary of four year view of the two approaches

The column headed ‘Linux benefit’ shows the difference in cost between Linux and ClearPath for the

various components. A negative value is a cost rather than a benefit. Thus, the Linux TCO (estate,

personnel and applications – see table 5) is just over USD 8M lower than ClearPath but, when the

4 The processes for determining alternative configurations and implementation costs vary according to the case in question, but there are recognised industry approaches and data sources to help. Unisys would be happy to discuss the subject with clients who are interested.

Four-year cost ClearPath Linux Linux benefitEstate 32,907,047 16,860,756 16,046,290

Personnel 14,525,957 17,895,464 -3,369,507

Applications 44,144,443 48,621,951 -4,477,508

Implementation cost 693,000 46,000,000 -45,307,000

Estate & Personnel 47,433,004 34,756,221 12,676,783

Estate, Personnel & Applications 91,577,447 83,378,171 8,199,276

Total: Estate, Personnel, Applications & Implementation 92,270,447 129,378,171 -37,107,724

Business impact 40,600,000 -100,400,000 -141,000,000

Net impact 51,670,447 229,778,171 -178,107,724

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conversion cost is included, the Linux cost is over USD 37M higher than ClearPath. The business impact

shows that the revenue loss due to the implementation of Linux would be USD 100.4M compared with a

gain of USD 40.6M for the ClearPath approach. The difference is therefore USD 141M. The net impact of

a move to Linux, including implementation, is just over USD 178M.

Here are two examples of the charts the model can generate. Figure 7 shows the cost profile over the

four years while figure 8 shows the cost saving, the business and net benefits. Again, a negative benefit

is a cost.

Figure 7: Costs and Linux cost savings of the two approaches

Figure 8: Cost savings, business and net benefits of the Linux approach

There are many options for summarising the data; the above are just a few examples. As with the TCO

model, many ‘what if’ questions can be asked, and assumptions changed and questioned.

-20,000,000

-10,000,000

0

10,000,000

20,000,000

30,000,000

40,000,000

1 2 3 4

Chart 1: costs and cost savings

Linux cost ClearPath cost Linux cost saving (-ve = extra cost)

-80,000,000

-70,000,000

-60,000,000

-50,000,000

-40,000,000

-30,000,000

-20,000,000

-10,000,000

0

1 2 3 4

Chart 2: cost saving, business and net benefits

Linux cost saving

Linux business impact

Linux Net impact (cost saving + business impact)

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Summary and more information

TCO and IT strategic direction modelling provide senior management with the essential financial

information for improving current IT economics or making strategic decisions about IT direction. The

modelling services can be combined with complementary Advisory services such as the ClearPath

Appraisal to create a rounded view of the state of the IT environment, together with recommendations for

enhancements.

More information about Unisys ClearPath products and services can be found at:

http://www.unisys.com/unisys/theme/index.jsp?id=16000034

The White Paper ‘Understanding IT System State – Experiences from the ClearPath Appraisal Process’

can be found at

http://www.unisys.com/unisys/ri/wp/detail.jsp?id=1120000970016610167

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About the Author

Now an independent consultant, Peter Bye was a senior system architect in Unisys, based in London. His

special area of interest is networked computing, including communications networking, middleware, and

architectures. He has many years of experience in information technology, working as a programmer,

analyst, team leader, project manager and consultant in large-scale customer projects in banking,

transportation, telecommunications and government. He has also worked in software development

centres, during which time he spent two years as member of an international standards committee

working on systems management.

He has worked for extended periods in Sweden, Denmark, Finland, Norway, the USA, France and Spain,

as well as the UK. He has presented at a wide variety of conferences and other events and is the author

of a number of papers on networking, systems management and middleware. He is the co-author of a

book on middleware and system integration – IT Architectures and Middleware: Strategies for Building

Large, Integrated Systems (2nd Edition) – which was published by Addison-Wesley.

Some recent white papers include:

ClearPath as an Open System

ClearPath Systems with Fabric-based Infrastructure

Unisys ClearPath Systems: Integrated Hardware/Software Stacks

Delivering value: the Economics of ClearPath Systems

and various white papers on service-oriented architecture and ClearPath systems.

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For more information visit www.unisys.com

© 2014 Unisys Corporation. All rights reserved.

Unisys and ClearPath are registered trademarks or trademarks of Unisys Corporation. All other brands and products

referenced herein are acknowledged to be trademarks or registered trademarks of their respective holders.

Printed in the United States of America 08/14 14-0381