I, personally, find Brent Ozar's blog[/url] very informative ,especially including the comments and the follow-up article. Those two articles combined give a neutral (if possible at all) point of view why you should or shouldn't go for virtualization.

Regarding your specific situation:

If you can get some figures in terms of I/O utilization as well as tempDB and CPU usage you might be able to support the argument that you need such a heavy machine as a dedicated SQL Server. That's step 1.

Step 2 would be to describe the reason why you need a Server of such a size (the c.u.r.s.o.r. *cough* nightmare with some figures could help).

Step 3 would be to get the users involved with a statement how much of a slow-down they're willing to take. 😉

A recommendation could be to get the vendor to speed up the app by replacing the messy code and based on that open the server for virtualization.

With transactions running for minutes, locking up the entire tables and kicking people out we'd consider immediate action as well. But the word "virtualization" is nowhere close to what we'd do... ("performance improvement" or "app replacement" would be much closer)...

If you virtualize under the current scenario you're facing the risk of even more users being kicked out and even lower application response time.