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Feature Article
January 2001


The TCO Value Proposition


There is general consensus within the communications industry that VoIP is the technology driving the next generation of enterprise telephone systems. Multiple vendors, including start-ups and established PBX or key system suppliers, are in the process of marketing and selling their first generation of VoIP products. There are many drivers that make convergence technology more feasible to IT professionals -- a change in a company's business environment such as a move or acquisition; or a "right-sizing" of a business, for example. Now that Y2K compliance is no longer as an issue, many companies have the ability and/or the resources to evaluate the value that IP telephony brings to the table.

In order to make an accurate evaluation, IT professionals will need to review the anticipated applications enabled by IP telephony, while CIOs must examine the costs. An IP-based infrastructure for voice enables new IP-centric applications that could not otherwise have been easily implemented within a traditional PBX system. Total cost of ownership (TCO) reduction enhances this picture for many IT decision-makers today.

Research analysis indicates that there is a significant up-front investment in the technology required to migrate to IP telephony for most organizations (e.g., network upgrades to add additional bandwidth and quality of service support). However, over a multi-year migration program, TCO can be reduced, particularly for multi-site organizations and those with rapid growth and a dynamic user community.

Depending on the size of your enterprise and your goals, IT and Telecom managers can review the realistic financial implications and benefits of a converged IP voice and data network. This article provides the return on investment (ROI) for typical single and multi-site organizations migrating to VoIP over a three- to five-year period. In addition, while toll bypass can result in savings for some organizations, the real cost savings from IP telephony are a result of decreased capital and support costs over the long term. These include:

  • Reduced capital infrastructure to support a single network;
  • Consolidation of support skills and personnel required;
  • Simplification of, and reduced cost of, moves/add/changes (MACs) of personnel; and
  • Easier integration and support for home office/teleworkers.

In order to provide a cross section of organization types and their potential ROI in migrating to VoIP, three different enterprise models will be discussed. These scenarios have been chosen to represent relatively common business cases that can be found in the commercial world today. They are:

  • Large multi-site enterprise with a North American corporate office, adding two new branch offices in North America and the UK. Migration over 5 years.
  • Small-to-Medium multi-site enterprise with a North American corporate office, adding one new branch office in North America. Migration over 4 years.
  • Small-to-Medium standalone enterprise. Migration over 3 years.

Certain factors will affect the overall costs and benefits to organizations wishing to undertake the transition to VoIP capability. The analysis requires individual input into the following categories in order to properly evaluate the benefits for a particular environment: Corporate environment; financial information; and facilities.

Scenario 1
Large Multi-Site Business Enterprise

This analysis looks at a typical scenario in a large corporation with expansion of new offices. Key model inputs that determine this model are:

  • 1,000 employees in year one, growth of 20 percent per year;
  • Opening small branch office in North America in year two;
  • Opening a small European/UK office in year three;
  • Savings of one voice network employee in year four;
  • Analysis over a five-year period;
  • 20 percent of the long-distance calls are for inter-site traffic; and
  • 14 percent of their support staff labor spent in managing moves.
TABLE 1. Large, Multi-Site Business Scenario (Scenario 1)
Year 1 Year 2 Year 3 Year 4 Year 5

I M P L E M T A T I O N   C O S T S

Capital Costs $300,800 $363,552 $430,902 $503,337 $581,414
Staff Costs $8,046 $10,132 $13,324 $17,166  $23,970
Facilities Cost $19,248  $45,761  $83,057  $113,491  $150,266
Total Costs $328,094  $419,445 $527,283  $633,994  $755,650


Capital Savings $-     $270,000 $291,600 $314,928 $340,122
Staff Savings $63,000    $149,778 $253,155  $428,929 $592,105
Facility Savings $61,200     $120,960 $179,950 $238,854 $298,377
Total Savings $124,200  $540,738   $724,705  $982,711 $1,230,605
Return on Investment (62)%  29%  37%  55%  63%

Scenario 2
Small-to-Medium Multi-Site Enterprise Business

This is a typical scenario in a small-to-medium sized corporation, including also the expansion of new small branch offices. Key model inputs, which determine this model, are:

  • 200 employees in year one, growth of 20 percent per year;
  • Opening small branch office in North America in year two;
  • Savings of one voice network employee in year four;
  • Analysis over a four-year range;
  • 20 percent of the long-distance calls are for inter-site traffic; and
  • 14 percent of  their support staff labor spent in managing moves.
TABLE 2. Small-to-Medium Multi-Site Business Model (Scenario 2)
Year 1 Year 2 Year 3 Year4

Implementation Costs

Capital Costs  $37,600   $45,444 $53,863  $62,917
Staff Costs  $3,092  $2,850  $2,838  $2,302
Facilities Costs  $2,406  $8,485  $10,743  $14,624
Total Costs  $43,098  $56,779   $67,444 $79,843


Capital Savings  $-  $27,000  $29,160  $31,493
Staff Savings     $7,875 $19,441 $32,372 $94,863
Facility Savings  $7,650  $15,120  $22,494  $29,857
Total Savings  $15,525  $61,561  $84,026  $156,212
Return on Investment    (64)% 8% 25%  96%

Scenario 3
Small-To-Medium Standalone Enterprise

This is a typical scenario in a small, single site corporation. Key model inputs that determine this model are:

  • 100 employees in year one, growth of 20 percent per year;
  • Analysis over a three-year range; and
  • 14 percent of their support staff labor spent in managing moves.
TABLE 3.  Small-To-Medium Standalone Enterprise (Scenario 3)
Year 1 Year 2  Year 3

Implementation Costs

Capital Costs  $25,064  $30,293  $35,905
Staff Costs  $2,856  $2,503  $2,339
Facility Costs   $1,604 $3,550  $5,865
Total Costs  $29,524  $36,345  $44,109


Capital Savings  $-  $13,500  $14,580
Staff Savings  $5,249  $13,196  $21,810
Facility Savings  $1,500   $3,240 $5,248
Total Savings  $6,749  $29,936  $41,638
Return on Investment  (77)%  (18)%  (6)%

Comparison of the results for the different business scenarios is given in the table below:

As detailed in Table 4, there is a significant up-front investment in the transition to VoIP. Depending on the characteristics of the organization, the positive return on investment may take two or more years before showing a net positive return, speaking strictly from a cost perspective.

TABLE 4. Comparison of Different Scenarios
Site Classification Year 1 Year 2 Year 3 Year 4 Year 5
Large Multi-site (62)%  29%  37%  55%  63%
SME Multi-stie (64)%  8%  25%  96%  
SME Single site (77)%  (18)%  (6)%    

The analysis shows that ROI is significantly affected by:

  • Cost per user of data and voice networks.
  • The amount of MACs that the company supports in a year.
  • The growth rate of the organization.
  • The amount of intra-site communications currently incurring toll charges.

The easiest justification for transition to VoIP is where the applications enabled provide unsurpassed convenience to the user, or when there is a clear cost-benefit to make the change. Cost savings in migration to VoIP come from several different areas.

The first is savings from the easier relocation of people. With dynamic allocation of IP addresses, it is possible for personnel to simply plug a phone in at a new location and still receive the full suite of functionality for which their phone had originally been configured. This type of savings will be important to clients who have a very dynamic organizational structure where people are constantly moving. An example of such an organization would be an engineering or consulting company where people are structured into project teams.

Infrastructure Reduction
The second area of savings results from reductions in required infrastructure. Ideally, in a new building environment, this would mean having to install the wiring for only one type of network, and realizing the associated savings in wiring closets. In an existing office facility, it means not having to spend money on a PBX for a new branch office or major expansion. Telephones could be installed by users at the branch office and managed centrally in headquarters. No skilled technician is needed at the remote site to install or configure a PBX or the phones.

Long-Distance Savings
A third potential area of savings is with reduced toll-charges. This is most significant with a user community that has a number of branch offices and/or a large component of voice/fax traffic between offices.

Staff Efficiencies/Converged Skill Sets
The fourth area of cost savings is through staff efficiencies and convergence in skill sets. This would typically benefit organizations where the size of the support staff is sufficiently large enough that a reduction in IT personnel could be achieved through reduced workload. In the case of smaller offices, the work-load can justify one person with a standard skill set, rather than two underutilized people, one specializing in voice networks and the other in data networks.

Less tangible savings are in the area of scalability. The iPBX is only involved in the call setup. Voice is switched in the IP network. This implies that the system can grow much more flexibly than conventional TDM-based systems.

Remote Access
Finally, the move to VoIP will also provide benefits to telecommuters. Telecommuters and road warriors can access their office computing environment and voice facilities over the same wide area IP network. 

Gayle Moss is product marketing manager, for the IP telephony division of Mitel. Mitel Corporation is a designer, manufacturer and marketer of telecommunications products.

[ Return To The January 2001 Table Of Contents ]

The New Model For Distributed Customer Care


In the near future we will likely see the true global e-business economy mature to the point where a significant volume of business-to-business and business-to-consumer communications and commerce takes place via the Web. Customers will be the real power brokers in the e-business economy because they will be able to do business with virtually anyone, anytime, and anywhere.

Although the global, digital economy is developing rapidly, there is still quite a distance to travel. As you prepare your business and your IT infrastructure to support an e-business model, you must also begin preparing your organization for a new level of customer communications and management capabilities.

The Changing Enterprise
The call center has traditionally been the central point of contact between a business and its customers. Typically consisting of a group of dedicated agents closely supervised at a single location, the responsibility of the call center organization is to handle incoming calls and initiate outbound calls. The performance of call center agents, who are usually engaged in sales or support issues, is usually based on the quantity of calls completed during the course of a business day.

The traditional call center model has worked well over the years, but there are several reasons why this model needs to change in order to meet the requirements of the enterprise competing in a global economy:

  • Customer care is becoming a mission-critical requirement and a core business process.
  • The responsibility for customer care extends beyond the boundaries of the call center.
  • Enterprises are making changes that will enable faster, more effective customer response.

All of this leads to a requirement to create a new model for building and managing customer relationships. This model must take the "center" out of call center. Rather than managing customer contact through a centralized organization and function, the responsibility for customer care in the e-business economy ultimately belongs to virtually everyone in the company, including employees in sales, marketing, support, order processing, operations, finance, and engineering. This new distributed customer care model requires a shift from "quantity of customer touch" to "quality of customer touch." In such cases, these location-independent knowledge workers with unique skill sets need to be available on an "as-needed" basis in order to participate in a customer-care issue. The issue will often be totally unrelated to a specific sales transaction, but if managed properly, will ensure a continued revenue stream from a happy customer. The key point is the ability to distribute this function.

Delivering a real-time, total response capability will result in increased customer satisfaction and stronger long-term customer relationships. This is possible only through a distributed customer care strategy enabled by distributed voice and data applications that are integrated on the knowledge worker's desktop.

A New Model For Customer Care
Implementing the type of distributed, location-independent customer care capabilities described here is possible using traditional PBX technology, yet the inherent cost and complexity make it a very undesirable or impractical solution for most companies. This is true not only in terms of the problem of distributing and integrating voice communications, but also in the difficulty of seamlessly integrating the customer care application into the process. This is why many companies are looking to IP communications as the newer, preferred solution.

There are important differences between a pure IP communications platform and a traditional PBX switch with add-on IP capabilities. These hybrid, IP-compatible systems merely add IP line cards and trunk cards into an existing PBX switch. While add-on cards provide users with VoIP, the switching is still handled by the PBX, and therefore all IP communications must be converted between IP and circuit switching. While this type of system may offer some benefits, the real efficiencies occur through the implementation of a pure IP architecture. For example, a PBX can be made IP-compatible by adding an IP trunk card for toll bypass. Unfortunately, if your company has multiple sites, you still need to manage a separate PBX with an IP gateway trunk card at each location. Furthermore, the customer care application must be deployed separately at each location.

A far easier, and much more elegant solution is to leverage a single IP voice and data network infrastructure in the LAN, and across the WAN, in order to unify all knowledge workers, voice services, and customer data applications into one integrated customer care process. This gives IT organizations the flexibility to dynamically create and modify multiple, knowledge worker-based customer care groups anywhere there is IP network access. This allows even home-based teleworkers the ability to function as customer care agents. In addition to improving customer relationships, the converged customer care infrastructure reduces costs, improves productivity, and provides a competitive advantage for virtually any size company. Adding a true converged application provides out-of-the-box integration and eliminates the need for complex CTI technology.

Companies must prepare now for the customer-care requirements of this new economy. The cost of retaining a customer is far less that the cost of acquiring a new customer. If your company's success depends on a strong, loyal customer base, then the time is now to begin managing those relationships with a converged, IP-based, distributed customer care solution.

Franklyn Jones is vice president of marketing at Shoreline Communications in Sunnyvale, CA. Shoreline delivers a Next Generation voice communications platform, unifying sites, people, and applications.

[ Return To The January 2001 Table Of Contents ]

LAN Telephony: Keeping It Simple, Economical, And Feature-Rich


A look at today's LAN telephony offerings should bring a screeching halt to any thoughts a telecom manager harbours about looking for a traditional PBX system.

LAN telephony products -- also referred to as VoIP or network telephony -- do away with the substantial cost-per-feature burdens of the older, legacy PBXs, while at the same time bringing a new measure of administrative simplicity to telecom management. Add to these an almost unlimited capacity to add new features "for free," and it's easy to see why increasing numbers of legacy PBXs are being overlooked in favour of the newer, data-centric LAN telephony systems.

In fact, telecom managers should evaluate LAN telephony products on the basis of how well they fulfill each of three basic criteria: Administrative simplicity, economy, and feature richness. To be considered among the best of today's LAN telephony breed, a product family must satisfy all three requirements.

Administrative Simplicity
One of the greatest and most visible benefits of a LAN telephony system is the way it converges with the typical company Ethernet LAN.

For most firms, the LAN telephony system components, including the phones themselves, become simple Ethernet ports in the local-area network. There is now a single Ethernet cable routed to each user's cubicle -- gone is the separate phone line, separate LAN line, as well as the many hassles of running phone lines to new offices, or splicing phone cables to switch users over to new phone networks.

Administrative simplicity shouldn't end in the wiring. In a best-of-breed LAN telephony system, the phones should possess self-discovery and auto-configuration features. This way, a user can unplug a phone from one office, go to a new office, plug in the phone, and instantly get the same phone number and the same features, including pre-programmed "speed-dial" numbers, as before.

Finally, administrative simplicity should extend to user programming and system management. Large, easily understandable feature buttons and browser-based programming software make it simple for users to program their own phones. The same browser-based functionality should be in place to make life easy for administrators who are managing the system and setting up new users.

Economy like never before Over the years, legacy PBXs gained a reputation for being expensive. Adding new features often meant either bringing in new hardware, or commissioning expensive software upgrades. Frequently, changing a major system component also required "forklift" upgrades of all related components.

Studies have shown that adding new features can incur per-user costs as high as several thousand dollars with legacy systems. One example is a telecommuting feature, making it possible to give the remote user all the benefits of his or her office system, from voice conferencing to computer-integrated telephony (CTI), as well as the actual office extension number. To outside callers, it appears as if the user is in the office, when in reality he or she might be at a hotel on the North Shore of Hawaii. In a legacy system, the cost of this feature, with its necessary extra phone converters and other hardware, can amount to several thousand dollars per user. By contrast, with a LAN telephony system, this feature comes at a very low extra cost, and requires no hardware beyond the user's own, on-location DSL router (or similar device).

This is today's reality, and in general, the future cost trend favors LAN telephony as well. While PBX ownership costs typically rise as new features, and especially new hardware, are added, Ethernet technology (the technology base for LAN telephony) regularly falls in price. For instance, in 1998 the average Ethernet network switch cost about $250 per port; two years later, that cost has dropped to under $100. At the bottom line, LAN telephony offers users an up-front cost savings of about 40 percent over traditional PBX-based systems, as well as regular, on-going cost savings as new features are added.

Delivering the features New features are the one area where LAN telephony should be held to the same standards as traditional PBXs.

Every 18 months or so, traditional PBX vendors come out with major new feature upgrades for their PBXs, and while many users don't want or need these features, they enable some companies to provide necessary services in more efficient manners. Many small firms that want to compete with larger companies know they must possess world-class phone systems, and upgraded IP services offer the same feature potential as those of the major PBX vendors. It is simply not enough for a new LAN telephony vendor to hit the market with a system that's simple to administer and inexpensive to own. The system must also have access to the feature power of the largest and best PBXs.

A system should possess call-management features ranging from multiple, multi-level auto-attendant capabilities to call center, call forwarding, and PC-telephony integration, as well as robust call-routing features, hunt groups, and automatic route selection (ARS). The system should also include voice-messaging features, from integrated voice mail and unified messaging, to multimedia messaging and off-site notification, where the phone system reaches out via pager, cell, or regular phone to alert traveling users to important messages.

Leveling The Field
By giving companies the three major benefits of simplicity, economy and feature richness, best-of-breed LAN telephony systems can help level the competitive playing fields. More than two million companies are expected to purchase new phone systems next year, and these cost-saving, value-added features offered through LAN telephony should persuade a look beyond traditional suppliers when implementing a new telecommunications system.

Ed Wadbrook is director of strategy and New Market Development at 3Com Corporation. 3Com Corporation enables individuals and organizations worldwide to stay connected by communicating and sharing information anytime, anywhere.

[ Return To The January 2001 Table Of Contents ]

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