April 2003

Building The Business Case For IP Communications

BY MIKE KISCH

Today�s 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 business justification.

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:

� 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?

� 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.

� However, beware of �suboptimizing� 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.

� 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 organization.

� Include multiple �what-if� scenarios. Factor in possible deployment delays and deviations in costs and benefits. Acknowledging the potential for different outcomes buys credibility.

� Allow for pre- and post-deployment analyses, so management knows the project�s 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 fine-tuned.

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 month.

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 following profile:

� They operate a PBX or key system in each of many distributed remote sites, but wish to centralize their call processing and standardize calling features enterprise-wide.

� They experience frequent employee moves, adds, and changes (MACs).

� They are facing network changes in some sites or are planning to build new facilities.

Such organizations can directly measure cost savings in the areas of network administration, equipment, and maintenance, and monthly recurring toll charges and circuits. Let�s look at some specifics in each area.

STREAMLINED ADMINISTRATION

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

� 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.

� 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 savings.

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 day.

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 �previously too cumbersome to use.�

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.

CONCLUSION

Financial decision makers look favorably upon technology investments that generate both hard cost savings and strategic business benefits. In today�s 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 both.

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 company�s Web site at www.cisco.com.

[ Return To The April 2003 Table Of Contents ]