The Changing TCO Model for IP Telephony

Total Cost of Ownership (TCO) is typically one of the most important factors to consider when making a business purchase. In today’s market this is especially true as business models and TCO models are different from what they used to be – even just five years ago. So why the change and what exactly has changed?

To answer these questions we must back up and review the concept of TCO. The customer emphasis on cost of ownership is straight forward. The lowest TCO of any given purchase has the following benefits:

• A lower TCO contributes to the customer’s bottom line
• A lower TCO allows the customer more investment for core business initiatives
• A proper TCO analysis will identify any hidden costs in a purchase

Total Cost of Ownership Overview
What makes proper TCO analysis a challenge is that many factors figure into the Total Cost of Ownership of a purchase for a customer; not just the initial product costs. Typical TCO components for enterprise and Small-Medium Businesses (SMBs) include the following:

• Initial and subsequent product purchase costs
• Cost to maintain and administer the system as well as software upgrades
• The ROI of the products, applications, and services
• Length of usable Product Lifecycle before being replaced
• Additional value that the solution provider contributes
• Infrastructure upgrades that must be implemented
• Financing plans
• Depreciation schedules
• Increased company revenue generation due to the purchase
• Training costs for the products
• Outsourcing of specific tasks

When all TCO components are included, the total costs will far exceed the initial product purchase costs. In older TCO models, this is very important as your total cost could end up being double or triple the initial product purchase costs.

Changes in the TCO Model
One of the more intriguing aspects about TCO analysis in the current technical climate is how the models have evolved from the previous era. The old TCO model was fairly basic. A typical analysis included product hardware costs, maintenance plans and spare parts, and a consistent product lifespan (typically five years). The main objective of the model was to compare the total project costs for PBXs between the different vendors. An analysis could also be used by a customer to compare the capital expenditure (CAPEX) of a PBX purchase to a voice circuit lease plan, such as CENTREX, from a local telephone line provider.

The new TCO model includes all of the components of the old model (although several of the component values have changed) as well as new components such as applications. Applications deliver hard and soft ROI that cut costs by exploiting convergence and/or generate revenue for the business owner. Older models were fairly stagnant on cost cutting techniques as it primarily centered on hardware costs and system maintenance costs. With IP telephony systems, the features and applications discussed in the ROI section earlier come into play and change this portion of the equation dramatically. However, companies adopting IP telephony must change their business models to actually use the new applications and capabilities that IP telephony can deliver if they want to realize the financial benefits of IP telephony.

The following chart (Figure 1) shows a comparison of components in the old model and the new model.

Figure 1: Old and New TCO Model Comparison

The following diagram (Figure 2) shows a pictorial overview of TCO components in a generic IP telephony model. The value of a purchase depends upon the revenue potential and costs associated with the purchase.

Figure 1: General Product TCO Model for IP Telephony

An interesting change for telephony equipment is that the product lifecycles have typically decreased from five or more years to about three years. This is essentially due to the fact that telephony equipment has become a computer server running on standard computer operating systems such as Microsoft Windows. One side note is that NEC lifecycles for IP telephony servers are still typically around five years or more.

The physical infrastructure has also changed with convergence. Voice and data communications are now run on one set of wiring, which is typically CAT5/6 cabling. In addition, voice and data circuits can be combined and the quantity of circuits typically reduced if there is excess bandwidth. Voice codecs with compression can further reduce bandwidth requirements, and therefore costs.

Outsourcing of IT services for remote locations can also provide cost reductions. Companies with centralized IT staff can spend a significant amount of money traveling to remote sites and on equipment shipping costs, whereas it would be more cost effective to outsource the service to a local company for $200 per hour instead.

New product training and additional IT infrastructure (Layer 2 switches, routers, hubs, etc.) will add to a customer’s cost to deploy IP telephony. More advanced capabilities also tend to require a higher-cost skill set on the part of the customer.

On the other hand, horizontal and vertical solution sets can add significant value to the customer. For instance, a horizontal solution such as User (IP) mobility can dramatically improve productivity for employees, as discussed in the whitepaper from NEC titled “IP Telephony Drivers for the Enterprise Market.” This solution set allows employees to generate more revenue for the company.

Telecommuting/hoteling has several important benefits as well. Telecommuting can directly impact office costs by letting employees share the same office on different days of the week or also by simply having the employee work out of a home office. This reduces office rent, insurance, and other costs. Telecommuting can also improve worker productivity. Employees can work from home during inclement weather (snow, ice, etc.), as well as work from home at night or on the weekend (versus having to physically drive into the office and spend additional time and gas on the commute) to catch up on some extra work.

Unified communications is another horizontal solution that allows seamless integration of multiple communications devices into one device. This provides many benefits including speedier decision making, reduced travel costs, and cost-effective video conferencing.

Some items don’t show up in this diagram because it depends on the customer’s decision as to how they contribute to the TCO. For instance, financing increases the costs of the solution, but on the other hand it lowers the initial investment for the customer. Another item is the vendor selection. The right vendor can decrease the solution costs while the wrong vendor will actually add to it. Other vendors result in a net neutral situation.

For instance, NEC will help decrease costs for its customers and brings many benefits to a customer including the following:

• Solution expertise and company stability (Fortune 150)
• Understanding of customer business issues
• Customer focus, especially with product migrations
• Vendor consolidation (for products, applications, and services)
• Extended warranties (5 yr plus)
• Demonstrated product quality (products in service for 15 to 20 years)
• Relationship development with customers, not just a quick sale
• Strong product feature sets and standards compliance

As the model in Figure 1 shows, there are both cost increases and cost savings due to IP telephony. Figure 3 lists the common items.

Figure 3: Cost Increases and Decreases Summary for the IP Telephony TCO Model

As can be seen in Figure 3, the cost savings of IP telephony will partially, or completely, off-set the cost increases. Applications will typically off-set the remaining costs and lower the TCO.

In summation, it’s not just that IP telephony results in more sources of ROI, but the whole TCO model itself has changed with the development of IP telephony systems. The new model has the advantage of more ways for customer to cut costs and/or generate revenue from their communications platform. However, the level of ROI that can be achieved from an IP telephony system depends upon the customer changing their business model to take advantage of the ROI components.

Additional information is available in the full version of this article in the NEC Technologies & Trends Information Series under the title “The Changing TCO Model for IP Telephony.”

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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