HPC enables innovation and discovery. We all seem to agree on that. Is there a good way to quantify how much that’s worth?
Thanks to a sponsored white paper citing it, the annual “ROI of HPC” study from Hyperion Research is making the rounds again. It breathtakingly reports that organizations investing in HPC can expect a staggering, average return on investment of 4,300%: $44 dollars in profits and $463 in revenue for every dollar spent on high performance computing.
Let’s get this part out of the way now: Nothing in the corporate world has an average ROI of 4,300%. If there were such a thing, companies would do little else. The real goal of the study isn’t to measure actual ROI, but rather to make the case that HPC has quantifiable value. That brings up the interesting question: Does it?
The Real ROI of HPC
The true ROI of HPC investment isn’t nearly so high. The problem is, it is also terribly difficult to measure. The formula for ROI is simple: net profit over total investment. We have a good sense of total HPC investment, but for the types of projects in which HPC is deployed, this isn’t the same as total investment. There are costs beyond the HPC itself. I can’t sell an ice cream cone without ice cream, but I also can’t sell one without a cone, and what about the cost of the freezer?
ROI is therefore typically measured at the project or business unit level. We can assess the ROI of, say, opening a new store, or launching a new product line, but it’s hard to figure the ROI of individual expenses like computers.
For this reason, many companies will measure large investments against a corporate hurdle rate, maybe 12% or 15%, and will okay investments that are projected to beat it. Such calculations take into account the organizational discount rate, related to cost of capital, to account for the notion that a dollar today beats a dollar tomorrow.
Furthermore, any true ROI study measures marginal investment; i.e., the expected return of the next dollar spent. Going from zero to $100,000 will have a very different return than going from $100.0 million to $100.1 million.
Additionally, there’s a problem with addressing ROI at an industry level, because secondary demand stimulation (i.e., stealing market share) is zero sum. For certain investments, this can even lead to prisoner’s dilemmas.
Say Katherine and Mitchell operate competing lemonade stands on a beach, earning equal profits. If Katherine buys a sunshade, she can steal some of Mitchell’s customers, more than enough to pay for the sunshade. But if Mitchell also buys a sunshade, the profit shares don’t change, and no additional customers exist. Both spend money for no additional return.
All this is to suggest, (a) measuring ROI is complicated, (b) for something like HPC, it may be a flawed question, and (c) assuming companies are rational, the true ROI of HPC investments may be a healthy 20% to 40% (more than two orders of magnitude less than reported by Hyperion’s study).
What Can We Measure?
Companies that invest in HPC tend to continue to invest in HPC. There must be a financial reason why. This importance of HPC to U.S. industry was addressed in 2014 in a landmark Intersect360 Research study through the U.S. Council on Competitiveness, “Solve. The Exascale Effect: The Benefits of Supercomputing Investment for U.S. Industry.”
In that study, 86% of respondents agreed with the statement, “HPC is critical to the future direction of our business.” 79% agreed with “For some of our problems, HPC methods are the only practical solution.” (See Figure.) But despite the significant assertion of value, companies often found it challenging to justify HPC investments internally, and they put forward a diversity of arguments for the justification. 19% of the time it’s ROI, but this is mixed in with time to solution, inability to solve the problem by other means, and lowered costs, among others. (See Figure.)
This left me to ponder other evidence to prove the value of HPC. It turns out, Intersect360 Research has already been running a study on this, for more than ten years.
Intersect360 Research has been surveying HPC users regularly since our founding (as Tabor Research) in 2007. In most surveys, we gather HPC budget data, in bands of spending, for demographic purposes. There are hundreds of organizations that have answered our surveys multiple times. Many of them are publicly-traded companies. In total, we identified 58 public companies that have provided HPC budget data to Intersect360 Research in more than one year, 2007 through 2018. (This excludes several Indian companies traded on the NSE, BSE, or OTC of India, which resulted in dramatic outliers. Furthermore, we exclude 2019 and 2020 responses to allow analysis of post-survey performance.)
In the charts below, we map these companies’ share prices, taking one data point per year, against the Dow Jones Industrial Average, grouping the companies into three categories: those that reported increases or temporary increases in HPC spending, those that reported decreases or temporary decreases in HPC spending, and those with stable HPC spending, according to the budget bands in our surveys. The results are intriguing.
Relative Stock Price by Year with HPC Budget Changes, Intersect360 Research, 2020
Relative Stock Price by Year with HPC Budget Changes – Increasing Budgets Only, Intersect360 Research, 2020
Relative Stock Price by Year with HPC Budget Changes – Stable Budgets Only, Intersect360 Research, 2020
Relative Stock Price by Year with HPC Budget Changes – Decreasing Budgets Only, Intersect360 Research, 2020
I’ll cut to the punch line: Some companies do well, and some not so well. Visually, there’s no correlation between increasing HPC budgets and increasing stock prices. We need to look at the numbers more carefully.
As a group, these are all HPC users. If you invested $1,000 across this portfolio of companies beginning in 2005, it would be worth $2,671 today. Investing in the Dow Jones portfolio would get you $2,590. The HPC users pictured here beat the DJIA by 0.2% per year. On average, the group tracks the market.
The best subgroup is those companies whose budgets increased over the time span. $1,000 invested in that subgroup would be worth $3,347—that’s a measurable 1.7% better than the DJIA.
Can we conclude the increase in budget is the cause of the stock price growth? Not yet. We can also look at when the growth came: before or after the change in budget?
Across this data set, there are 82 points at which HPC budgets change from their previous bands—41 upward, and 41 downward. (This even distribution, it itself, implies there is no dramatic profit directly gained from HPC investment.) For each group, we looked at what happened to stock price in the two years prior to the reported change, and in the three years afterward.
On average, companies’ share prices do well—better than market performance—in the two years prior to a reported HPC budget increase. Conversely, average share prices are flat—worse than market performance—in the two years prior to a reported HPC budget decrease. There is a correlation between HPC budget changes and recent market performance.
This is no surprise. How many readers of this article have experienced this? Company does poorly one year; budgets get cut the next year. It’s commonplace. But here’s an interesting tidbit: Of those companies who reported budget increases, the recent stock price change was heavily polarized; some companies invested more in HPC when their stock prices were down sharply. This could be seen as an additional investment in HPC in order to change processes or to reduce costs.
Looking forward, however, there is no correlation. The three-year average stock performance of companies after an increase in HPC budget is no different from those following a decrease, a little below average market performance for the relevant years.
What It All Means
If there’s no indication that companies that increase their investments in HPC do better than companies that don’t, does that mean HPC isn’t worth it? Of course not. Just look at the Solve report. HPC is critical to those who use it. For many of these companies, HPC is part of the cost of doing business. At worst, it is the sunshades of the lemonade stands in the example above, spurring innovative competition that benefits consumers.
That said, any report that implies there is inherent automatic profitability in HPC investment (let alone 4,300%) is not only wrong, it’s irresponsible. Fortunately, most companies are managed intelligently, and we can assume that increases in HPC investment, on average, clear their hurdle rates. Companies keep buying HPC because they know it’s worth it, and more companies adopt HPC every year.