August 2002

The Tele-Utility Model For Converged Networks

BY PAUL REITMEIER

If you want convergence for your enterprise, statistics suggest that you are probably going to get it from your PBX vendor. A recent study, conducted by InfoTech, of 325 large and midsize enterprises showed a two-to-one preference for obtaining convergence solutions from voice vendors, rather than data vendors. This makes sense for a number of reasons but one aspect of the choice you may not have considered is that voice vendors may be in a better position to deliver convergence as a service, rather than a more traditional up-front capital expense.

With a �tele-utility� model, a single vendor takes over the responsibility of making your converged network capable of delivering voice and data at higher service levels required to support real-time applications. It�s outsourcing, to be sure, but with the added twist that the network that�s being outsourced is more horizontal than vertical.

PBX VERSUS NETWORK
In the past, a single vendor installed and maintained equipment for voice networks. This was a limited approach in some respects, perhaps the biggest problem being that it locked you into a vendor without much recourse for third-party solutions. If your vertical product didn�t handle something, you might not be able to buy an add-on solution from someone else.

But single-vendor lock-in did have the advantage of being perfectly straightforward. The enterprise owned its premise equipment, everything had come from a single source and therefore was interoperable (or at least it was clear who had to make it interoperable if it wasn�t), and maintenance was a relatively straightforward manner.

Convergence, while it has undeniable strengths, has the potential downside of muddying the waters somewhat. The converged scenario is more akin to the situation we�ve seen in the data networking world in the past several years. The environment is one where equipment comes from any number of separate vendors, each responsible for some horizontal layer of the overall infrastructure. In a modern network, Intel makes the processors, Microsoft makes the operating system, and desktop hardware comes from names like Dell, Compaq, HP, and IBM, while a Cisco, Enterasys, or 3Com makes the routers and switches tying all those desktops together. Hundreds (if not thousands) of different vendors create the application software; yet another set of vendors provides the management tools.

Convergence transforms the old vertical model into a horizontal model where communications infrastructure spans data, voice, CRM, workforce management, unified messaging, and virtually any application that an enterprise needs to thrive as a business. Companies increasingly reach for best-of-breed products, thus creating multivendor environments that can be difficult to implement without proper systems integration expertise.

Increasingly, much of this integration expertise is coming from traditional PBX vendors, who can deliver this expertise either as the primary integrator of a company�s converged network or as a specialist in real-time packet streaming, working hand-in-hand with a conventional data network service provider. Serious tele-utility providers need to be flexible about the role they play � in some cases an enterprise has already made smart decisions about outsourcing their data network such that tele-utilities are a way of building on that success; in other cases the tele-utility model will be driving the decision to move to a service provider and the PBX vendor may well take responsibility for the entire network.

TELE-UTILITY DRIVERS
For many companies, the cost of implementing a solution on their own is actually the same or less than contracting with a vendor under a tele-utility arrangement. Tele-utility isn�t necessarily cheaper, in other words, at least not in terms of up-front infrastructure investments. Other factors can shift the balance in favor of a tele-utility approach, however.

Hardware alone is not the answer. The future is a combination of hardware deployment, technology evolution, technology choices, and network management processes. For small companies, an important factor may be the growing complexity of communications and data networking solutions. It�s expensive and counterproductive to develop sufficient expertise in-house to support what initially looks like a less expensive hardware expenditure.

Small and large companies alike may find that their management strategies call for laser-like focus on core competencies. For most companies, keeping the network running is definitely not such a core competency. It�s critical, absolutely, but it doesn�t generate revenue. For a large enterprise telecom provider, of course, the network is the business.

A telecom provider can introduce economies of scale and expertise that tend to lower overall costs, particularly when you consider that the capital investment is only part of the financial picture. With tele-utilities, the provider can make investments to migrate the customer in total to a next-generation product, getting everyone on the same level of software and equipment. The provider can bring in extra help during rollout phases, then shift those resources elsewhere (to some other tele-utility customer) during the longer, quieter periods when the system is purring along with only routine administration. And the tele-utility provider may be able to deploy only what is required to support the actual number of users in the business � a critically important expense factor in today�s dynamic business environment.

DRIVING OUT THE COST OF CAPITAL
For enterprises that are shifting toward the Economic Value Added (EVA) accounting model pioneered by Stern Stewart & Co., there is an even stronger incentive for considering a tele-utility model. As much as it is a change in accounting, EVA is a change in thinking about how a company should manage its resources. With traditional bookkeeping, the cost of capital investments is obscured by the fact that these expenses aren�t tracked alongside operating revenue and expenses. A company may clear a profit in terms of this year�s cost of doing business, but there�s still money tied up in equipment and having that capital tied up costs money. Only when the cost of the capital expenditures have been recovered does the company actually make a profit in the largest sense. Only then has the company made more money than it�s spent.

Coca Cola, Hershey Foods, Eli Lilly, and Sprint are just a few of several dozen large enterprises that have shifted to the EVA approach. Managers are forced to acknowledge (using real numbers, drawing down real account lines) that it costs money to deploy capital, just as it costs wages to employ people. For such corporations, it makes inordinate sense to think long and hard before tying up capital in equipment that doesn�t directly contribute to revenue. Off balance sheet equipment contracting for the use of it as part of a service offering has immediate benefits. First, there�s an infusion of cash that can be redeployed for core business processes. Second, telecommunications is no longer a capital expense, but an operating expense. Both consequences are desirable under an EVA model (and since there is considerable consensus that the EVA approach reflects a business�s financial position more accurately with respect to its market valuation, the results are desirable even beyond fulfilling the model�s aims). Longer term, the deployment of the hardware and support resources required to support only the exact number of users at a specific point in time reduces expenses. Risk sharing with the tele-utility provider can effectively double the financial benefit.

BEYOND BASIC COMMUNICATIONS
Once a customer has taken the initial steps of outsourcing voice and data infrastructures, the tele-utility provider can map out a sensible and effective migration to a converged IP infrastructure. While bringing in next-gen capabilities, the provider can also help its customer navigate the complex terrain of network-based applications and offer unique network support. Companies can examine the business needs beyond their basic communications requirement, examining their business flow to find strategic areas that can be addressed on a project-by-project basis.

A company may find it benefits from adding collaboration applications to its portfolio, for instance, or it may leverage a converged network�s inherent advantages in supporting unified messaging systems. The aforementioned InfoTech report projects that fully one half of employees at mid-sized businesses will use unified messaging by 2005 (up from only about five percent today).

The key point here, however, is simply that a tele-utility customer has options. Furthermore, since metrics for establishing and surpassing performance baselines are a key part of tele-utility implementations, enterprises may find themselves in a better position than ever before to make sure they aren�t losing performance or reliability when undertaking new projects.

Paul Reitmeier is senior vice president of services at Siemens Enterprise Networks, a leading provider of integrated voice and data networks and solutions for enterprises. For more information, please visit the company�s web site at www.siemensenterprise.com.

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