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While the upgrade of VM hardware is supported for all your VMs, you should know that there is one exception—the vCenter Server Appliance (VCSA) itself.
You can't upgrade VM hardware on VCSA or even update VMware Tools on the appliance. It is not supported by VMware. All you can do is set a file-level backup schedule and check for updates from time to time. VCSA is a key component of the VMware infrastructure, so they don't want us to make any changes to this key management component.
Now, with vSphere 7, notifications of VCSA updates are shown directly within the UI of the vSphere client while working in the infrastructure view. You don't have to go to the VCSA admin UI (https://ip_of_vcsa:5480) to check for updates.
Let's talk about the upgrade of the virtual hardware and the update of VMware Tools. VMware Tools are updated almost every time you upgrade your ESXi hosts. The new ISO files, which are mounted during the installation process of VMware Tools, are available in the ESXi host's repositories; as such, all VMs must be updated with those tools via those ISOs.
What must be done before upgrading the VMware virtual hardware version? ^
Before you upgrade the virtual hardware, you should always create a backup or snapshot of your VM(s) and update your VMware Tools.
Once you have your backup, you're sure that you can revert to it if needed. After that, you can upgrade VMware Tools. For your Microsoft Windows VMs, if you upgrade the virtual hardware before you upgrade VM Tools, you might lose network connectivity because the setting of your NICs will be wiped out.
Upgrade VMware Tools for multiple VMs at the cluster level ^
Simply select multiple VMs in the VM view. Then right-click and select Guest OS > Install/Upgrade VMware Tools. Then choose whether you want to do an interactive update (manually follow up with the upgrade in each guest OS) or do an automatic upgrade.
Upgrade VMware virtual hardware version ^
You should always check whether the VM is in a healthy state. Ensure there are no inaccessible devices, such as CD-ROMs or hard drives.
To verify which virtual hardware is currently set, you can simply select a particular VM. The Summary tab shows the VM version label in the Compatibility field.
Then, via the Actions menu, simply chose Compatibility > Schedule VM compatibility upgrade.
The Assistant will show a disclaimer telling you that this change to the virtual hardware is irreversible and that you should backup your VM first.
When you click Yes, the next screen gives you options for the upgrade. The "Only upgrade after normal guest OS shutdown" checkbox prevents upgrades in case you have a host, storage, or network failure in between. If there is a High Availability (HA) event and the VM must be started on another host, the virtual hardware of this VM won't be updated. This prevents unexpected results if there is any guest OS file system corruption as the result of an HA event.
Check the default settings of VM upgrade at the cluster level ^
For individual VMs, the steps above are fine. But how about an upgrade when you want to upgrade multiple VMs within your cluster?
Select your cluster. Then select Updates > VM hardware > Check Status.
Then check the box next to the VMs you want to upgrade and click the Upgrade to match host link.
Then follow the assistant, which enables you to specify when you want to schedule the upgrade and also whether you want to take a snapshot of your VMs before the upgrade. If you keep the defaults, all snapshots will be kept forever. It's up to you to test your VMs, one by one, and delete those snapshots after verifying that your VMs perform smoothly.
These settings can be changed via the vSphere Lifecycle Manager itself. Just open the vSphere client, go to vSphere Lifecycle Manager (VLCM), and select Settings > VMs.
How do you know whether you need to upgrade VM hardware? ^
Each major release of VMware vSphere 7 offers some new features for VM workloads. For example, the latest vSphere 7 with virtual hardware version 17 included a Virtual Watchdog Timer and the Precision Time Protocol (PTP). However, if you know that you won't use those features, it is not recommended to upgrade. Think of upgrading VM hardware like changing a server's motherboard. You never know how the machine will behave.
Final words ^
These are the final steps you need to keep your VMware vSphere infrastructure up to date. You have your vCenter Server Appliance upgraded, your ESXi hosts upgraded, and now also your VM hardware (selective process) and VMware Tools upgraded to the latest version.
VMware releases security patches on a regular basis. Those security patches are not part of the upgrade, but simply help to keep all the infrastructure up to date. From time to time, there are also VMware Tools updates because new release of VMware Tools are not attached to new releases of vSphere and ESXi. Those updates usually include updated virtual network or storage controller drivers, which help with performance and stability of the VMs.