Executive Level Discussion on IP Telephony ROI

The following question is always present at the heart of every business purchase decision, “How much money is this going to make me?” There have been several methods created to evaluate this: Total Cost of Ownership, Return on Investment, Profit/Loss, Internal Rate of Return, Cost/Benefit Analysis, EBITDA, and various other methods are available to determine the financial impacts of a decision.

Return on Investment (ROI) is a favorite method of investment evaluation because of its applicability to all types of projects such as:

• Budget decisions
• Valuation
• Metrics
• Company performance
• Another benefit of ROI Analysis is the ability to answer primary questions for Executives, especially Chief Financial Officers, around business decisions:
• Required investment
• Return on the investment
• Payback period
• Time value of the money invested
• Impact on existing processes
• Competitive impact
• Risk involved (both organizational and technological)
• IT operation efficiencies
• Funding (capital expense vs lease)
• One thing to keep in mind is that ROI analysis is a tool, and as such is not intended to be precise due to the difficulty of exactly approximating the inputs, such as: length of project life, capitalization policy, depreciation rates, growth rate of the new investment,
• and the lag between investment outlays and cash inflow.
• The broader questions for Executives, with regards to ROI, need to focus on the following points:
• How do business initiatives map to the various IP telephony products and services?
• How do I quantify the value?
• What is the cost of doing nothing?

The great thing about IP telephony is that it maps very well to business initiatives such as: maintaining business continuity, facilitating User/IP mobility, improving worker productivity, securing the communications network, reducing system management costs, and unifying communications. Other business initiatives can be specified around various industries such as healthcare, education, hospitality, government, retail, etc.

The following diagram (Figure 1) shows a simple mapping of various IP telephony capabilities to business initiatives. As the reader looks from left to right, the investment in IP telephony increases. At the same time, the ability to realize a higher ROI also increases.

Figure 1: IP Telephony Investment vs ROI

An initial level of IP telephony deployment results in a converged network. This provides basic features such as toll by-pass, extension mobility, centralized management capability, the consolidation of voice and data circuits, and IP station, trunk and system fail-over. The next level of investment adds advanced features & capabilities. This includes capabilities for clustered survivability, Find Me/Follow Me, video conferencing, software based attendant consoles, and Wireless LAN. The final level is to add integrated applications. This level is where a customer really takes advantage of investing in IP telephony with capabilities such as: presence, collaboration, self healing networks, user location and asset location tracking, single sign-on, ad-hoc conferencing, and telecommuting.

Quantify the Value
To properly quantify the ROI potential, businesses will need to use the applications. While this seems automatic, sometimes ROI analyses can fall short of projections simply because the ROI model considered these applications, but the company was afraid, or simply failed, to use the applications.

When quantifying the value, there are several metrics. These items can be measured after a product purchase, or during a serious evaluation of IP telephony systems. The value is often measured in efficiency (reduced time spent performing similar tasks), cost savings, cost avoidance, and revenue generation. A key point to remember is that time savings without redeployment has no value. The time savings must be converted into a quantified value. One note, the results delivered by each of the vendors and products will vary. Be specific about the metrics used to quantify your ROI projections.

The following are some examples of realized benefits:

• A business project gets on-line faster
• An IT priority is accomplished
• A system to track customer needs meets the customer retention goals set
• A system that tracks customer revenue and improves productivity
• Status quo for the IT staff budget, but with improved performance
• Reduced IT staff overload, which will improve staff retention and reduce turnover costs
• Time to manage a telephony system is reduced by x%

Verify the Value
IP telephony has both tangible (hard) benefits and intangible (soft) benefits. Since there are many tangible and intangible benefits with IP telephony, the trick is to understand them all and then to convert as many intangible benefits into tangible as possible. One of the reasons that intangible IP telephony benefits start off that way is because the item is new or different from previous forms of savings and it takes time to quantify and characterize the benefits that the particular feature(s) may deliver.

Hard benefits (like a 30% reduction in programming time) are easy to verify. The savings can be measured and the cost reduction verified to save a certain amount of money. These are the savings that an ROI analysis will typically address.

Soft savings come about whereby the exact amount of savings cannot be measured empirically, but the buyer believes that there is a benefit of some kind. These are often intangibles like customer satisfaction, employee satisfaction, presence, etc.

The art of converting soft ROI to hard ROI is to understand how to convert the intangible to tangible. For instance, can an increase in customer satisfaction be tied to additional purchases? If not, can it be tied to less discounting, i.e. is the customer happy and less inclined to haggle over purchase price? Another correlation could be that a satisfied customer can be influential in providing a positive reference which could be worth thousands of dollars. Can employee satisfaction be tied to employee retention? A study from Forrester Research in February 2006 (Unified Communication Industry Study) concluded that an average employee turnover costs a business between $1,500 and $3,000 per employee. Once this data is correlated with the employee turn over rate, hard dollars can be calculated.

Other sources of value stem from productivity improvements due to IP telephony. Most of these benefits start off as being soft ROI but many become hard ROI over time as application is actually field tested. For instance, NEC’s MA4000 management product for IP telephony solutions was believed to save time (and therefore money) over the older tool. A time trial was conducted and the MA4000 was proven to reduce the amount of the programmer’s time by 68% over the older tool. The programmer used was an expert in both tools, so the test verified the time savings. The percentage reduction times the labor rate yields another source of hard ROI.

Further industry research is starting to verify savings for many of the new applications. For instance, one productivity improvement is Find me/Follow me capability. The Forrester study also showed that 75% of respondents could save time if they could reach a key decision maker when they needed. Of the responses, 52% believed they could save between 5 to 15 minutes per event, 21% believed they could save up to 30 minutes per event, and 27% could save up to 1 hour per event. The number of events per day depends upon the industry and business. If a conservative two events per week is multiplied by 15 minutes per event, this would result in 25 hours of productivity per person per year. Again, this would have to be verified for the particular industry. For instance, health care, retail, and sales personnel (of any industry) could have a much higher rate of incidence (possibly one to two events per day, not per week). By contrast, a general office worker in an Enterprise may have one event every two weeks. Lack of timely decisions results in lost employee time, lost revenue opportunities, and lost discount points in a sale.

Another example is Wireless LAN capability where mobile key people need to be contacted immediately (like nurses and doctors in hospitals). The Forrester study also found that 74% of health care respondents indicated that they could save time in making decisions if they could respond immediately to critical calls. Of this number, 39% could save up to 30 minutes per day, 14% could save up to one hour, and 21% could more than one hour. Again, this information can be verified by a business to see the values yielded for that specific business. This can then be correlated to hard ROI. Soft ROI is also available in the form of faster response times to patients, patient satisfaction, and any company metrics around response times or incident resolution.

Cost of Doing Nothing
This topic gets to the heart of ROI analysis when a customer is comparing different options. While business owners and managers typically focus on the cost of the new investment, they often overlook the currents costs of doing business.

An important, but critical, fact for Executives to address is that there is always a cost of doing nothing. If a required business purchase is delayed, the cost of doing things the old way will continue. Those costs could have been eliminated and the money spent on the product purchase instead. Generally, a decision to do nothing is because the decision maker does not perceive a significant Value Proposition for the investment versus status quo. This is why ROI is a good strategic planning tool. It creates an objective analysis that a decision maker can use to determine the value of any potential investment.

In the end, the amount of return on any investment will always be dependent upon how much the item purchased is used. With IP telephony the added value is mainly in the applications. Applications are what will reduce costs and/or increase revenue for the business decision maker.

Additional information is available in the full version of this article in the NEC Technologies & Trends Information Series under the title “Executive Level Discussion on IP Telephony ROI.”

Please see the UNIVERGE Solution Description on the SV7000 Product Marketing website for more information about how you can use NEC products and solutions to meet your business goals.

Published by NEC Unified Solutions, Inc.
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