Building The Business Case For IP
BY MIKE KISCH
Todayï¿½s business climate requires IT departments to develop comprehensive
cost-benefit analyses that identify specific cost savings and strategic
business advantages. CIOs are under extreme pressure to improve efficiency,
leverage existing investments, and, above all, cut expenses.
Given this environment, the need to build a solid business case for IT
projects has never been greater. And most organizations have a substantial
investment in TDM-based phone systems with which they are familiar and
comfortable. So implementing IP communications -- enterprise IP telephony
and associated integrated voice/data applications -- requires a defensible
Now that IP communications has some history under its belt in enterprise
deployments, IT departments are building better business cases, and IP
communications deployments are gathering steam. Worldwide IP telephony
equipment revenue is likely to reach $7.6 billion by 2005 and $15 billion by
2007, according to Framingham, MA-based researcher IDC.
FIVE KEY STEPS
Businesses are learning that building a successful IP communications
business case requires these primary actions:
ï¿½ Clearly delineate the value proposition of the investment as it relates to
business objectives. What does IP communications bring to the table that the
TDM infrastructure does not? How do these capabilities lower costs, ease
network administration, and improve business processes?
ï¿½ Devise a manageable migration plan with a rapid payback. This will
simplify development of the business case and accelerate project acceptance.
For example, the financial justification for IP communications is very
strong in sites facing expiring equipment leases, maintenance contract
renewals, and data network upgrades, as well as in new facilities.
ï¿½ However, beware of ï¿½suboptimizingï¿½ ROI calculations when cost-justifying
individual sites. A holistic view of a network that provides centralized
delivery and management of voice services to multiple branches demonstrates
a quicker return.
ï¿½ Use fundamental financial principles that allocate costs and benefits
over the term of the project. Use a financial model from a trusted source
and make sure the finance department approves it. This legitimizes the
project and increases the likelihood of building consensus within the
ï¿½ Include multiple ï¿½what-ifï¿½ scenarios. Factor in possible deployment delays
and deviations in costs and benefits. Acknowledging the potential for
different outcomes buys credibility.
ï¿½ Allow for pre- and post-deployment analyses, so management knows the
projectï¿½s effectiveness is being monitored. This is especially important for
phased deployments. As the IT department deploys IP communications, it will
learn how to best leverage the technology, enabling the business case to be
CALCULATING THE HARD COST SAVINGS
The ROI associated with migrating to a converged network will vary among
organizations. For example, Bethpage Union Free School District, which
serves 3,000 K-12 students on Long Island, New York, recently slashed its
voice costs by about 51 percent -- from about $123,000 to $61,000 per year
-- using IP communications. And Hardin-Simmons University in Abilene, Texas,
with about 2,300 students, reports savings of approximately $15,000 per
In general, the payback period -- accounting for measurable cost savings
only -- ranges from six months for greenfield installations to 18 months
when replacing depreciated PBXs. The payback when replacing newer PBXs in
various stages of depreciation might stretch to 24 to 28 months.
There are also common business drivers that dictate positive ROIs. Some are
more prevalent in vertical markets such as financial services, government,
retail, and education, but strong enterprise candidates generally fit the
ï¿½ They operate a PBX or key system in each of many distributed remote sites,
but wish to centralize their call processing and standardize calling
ï¿½ They experience frequent employee moves, adds, and changes (MACs).
ï¿½ They are facing network changes in some sites or are planning to build new
Such organizations can directly measure cost savings in the areas of
network administration, equipment, and maintenance, and monthly recurring
toll charges and circuits. Letï¿½s look at some specifics in each area.
This area holds substantial savings potential. Supercomputer-manufacturer
Cray, Inc., for example, attributes 64 percent of the $470,000 it saves
annually using IP communications -- in place at the company since 2000 -- to
reduced network administration.
Administrative cost relief can be measured as follows:
Less Expensive User Moves. Moving users costs an estimated $75 to
$135 per user, and a typical enterprise with 5,000 employees often performs
2,000 MACs per year. IP telephony basically eliminates the cost of a user
move, because the employee can simply reconnect the same IP phone elsewhere
on a LAN internetwork and automatically be assigned the same access rights
and profile. Sage Research, for example, recently conducted a survey of IP
communications customers, who reported now spending just minutes on MACs
that once consumed hours.
Reduced Cabling Costs. By daisy-chaining a PC to an IP phone and
supporting both devices with a common Ethernet cable, the savings in port
and cabling costs quickly accumulate. Industry consensus pegs the savings at
about $150 per drop.
Improved Productivity of Network Support Staff. IP telephony and
associated applications often run on standard server platforms, so in-house,
IP-knowledgeable staff can configure and maintain IP PBXs themselves. In
addition, centralized voice call processing and application management allow
support of the entire infrastructure from one or a few data centers.
REDUCED EQUIPMENT AND MAINTENANCE COSTS
ï¿½ Because remote sites piggyback on one or more centralized IP PBXs,
equipment and applications no longer must be purchased, installed, managed,
and upgraded at each enterprise location.
ï¿½ IP communications eliminates duplicate administration for separate
voice and e-mail stores and backup systems.
TOLL BYPASS/INTEGRATED ACCESS
Toll bypass of the circuit-switched public telephone network reduces
monthly voice usage charges, particularly in international locations where
cents-per-minute public phone network charges remain in double digits. The
toll-bypass factor, along with the savings associated with consolidating
voice and data access links, can account for as much as 25 percent of total
IMPROVING BUSINESS PRODUCTIVITY
Once operational, capital, and recurring toll-cost savings have been
computed, it is time to factor in new capabilities that IP communications
delivers. For example, enterprises can now leverage applications that take
full advantage of Web-based technology to improve employee productivity,
deliver better customer service, and streamline business processes.
Unified messaging, for example, enables users to manage all their incoming
messages -- voice mail, fax, and e-mail -- from a single mailbox. The
Radicati Group, Inc., a research firm in Palo Alto, California, estimates
this generates 25 to 40 minutes of additional productivity per employee per
In addition, once voice and video traffic are transformed into IP packets on
the corporate network, businesses can extend the reach of their customer
call centers across what might have once been prohibitive geographical
boundaries. This enables them to serve customers in efficient new ways and
for customer service agents to be distributed virtually anywhere, which can
reduce labor and real estate costs.
In addition, IP communications enable users to log into any IP phone and
that phone becomes theirs -- programmed with their own phone number and user
privileges. This boosts their productivity, because they can make and
receive calls from anywhere on the corporate network using the corporate
calling plan. They can also leverage their unified messaging and related
applications from anywhere without having to be tethered to a specific work
area. According to Sage Research, users gain up to four hours a week in
productivity because they use telephony features that the research firm says
were ï¿½previously too cumbersome to use.ï¿½
For example, mobile employees and customers alike can use their IP phones to
gain access to innovative, enhanced services driven by XML and other
Web-based technologies, affording the organization additional productivity,
sales, and customer service opportunities. These applications, for example,
could include inventory checking, hotel guest check-in/check-out, customer
self-service, directory access services, emergency notification broadcasts,
and a litany of other capabilities just waiting to be developed.
Financial decision makers look favorably upon technology investments that
generate both hard cost savings and strategic business benefits. In todayï¿½s
economy, priorities tend to fall on investments that save money. But
organizations know they cannot be shortsighted and avoid planning for the
future. A business case for IP communications should be able to demonstrate
Mike Kisch is a business manager at Cisco Systems, Inc. He develops
financial tools, best practices, and methodologies that help customers
better understand the financial implications of deploying Cisco solutions.
For more information, visit the companyï¿½s Web site at
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