Positive ROI is What Made WAN Transformation Possible
More Bandwidth is Great, but the Financing has to Work
By michaeljmorris on Sun, 09/26/10 - 8:01pm.Previous blogs on WAN Transformation:
Our WAN Transformation project aims to bring many new technologies and enhanced capabilities to users. But, before any of this could be done, the finances had to work out.
As I mentioned in last week's blog about Cisco's new dividend, every company has a financial rate of return every project must exceed to be approved. In the blog I used the example of 15%; we'll use that again today for this blog.
(I'm changing the actual numbers for confidentiality. It's the principle here, not the actual numbers.)
In this case, our WAN Transformation project needed to show a 15% ROI over a 3 year time frame to even be considered. This meant, despite adding gobs of bandwidth and WAN acceleration, the overall project needed to cut costs by 15% over the next three years. Plus, as any good finance guy will explain to you if you're interested, that 15% savings needs to be in today's dollars, not a 15% cut in the last year. Interesting thing about money - it's worth less tomorrow than it is today. This is called time value of money. When doing a proper ROI, you need to consider the fact that saving some money in year 3 isn't the same as saving money today. Some simple finance calculations in Excel can figure all this out for you.
The first step in developing the ROI was to develop the new pricing model with our carrier. The idea working with them was we would give them more of our business in exchange for much better bandwidth rates. So we agreed to do SIP Trunking, conference calling, WAN acceleration management, and long distance with this carrier is exchange for very high discounts on WAN bandwidth. This allows us to pump up the bandwidth to high levels for not much extra cost. Further savings are created with better rates on conference calling, long distance, and SIP Trunking to offset the extra cost for more bandwidth. Overall, this reduces our total telecom spending and gives us all these new services.
This cost reduction with the carrier is important because there is upfront investment (costs) to build this new WAN. For example, new routers will be needed. Then there's the WAN acceleration hardware to buy for each site. There's also project management costs, site installation costs, travel, training, and other items. All this adds up and must be spent initially to even have a shot at the telecom cost savings (and the extra bandwidth and WAN acceleration) in the coming three years. Thus, it's not just 15% in cost savings; you also have to recoup the initial investment. And this investment is in today's dollars. The savings is in future dollars meaning it will take more savings than the initial investment to make the ROI positive.
It works out something like this:
What this says is if you spend $130.00 today to do WAN Transformation, your telecom costs will go down over the next 3 years by $100.00, $170.00 and $230.00. This total cost reduction of $500.00, even at a 15% discount, saves $205.85 over 3 years in today's dollars. This is a positive, hard dollar ROI.
Despite different numbers, this is the financial basis for WAN Transformation. Even with all the extra bandwidth and new technologies, it still saves money. Executives love a hard dollar ROI - much more than they love extra bandwidth.
More >From the Field blog entries:
Cisco's Dividend Announcement and a Little Corporate Finance Shows How Cisco is Changing
WAN Transformation is a Huge Project
Cisco Unified Computing System is 75% Networking - Who Knew?
Congress Needs to Step In for Net Neutrality...Really? Seriously?
It's Time to Start Loving Tunnels
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- About From the Field
Michael Morris is a communications engineering manager at a $3-billion high-tech company. His background is in enterprise WANs working with telcos and developing large-scale routing designs. He has worked on networks at government and corporate organizations, including networks at two Fortune 10 companies. In his current role, he leads a team of 10 engineers responsible for large-scale IT networking projects and architectural standards for data networks, storage area networks, IP telephony, contact centers, and security. Michael is CCIE #11733 and recently became one of the first three Cisco Certified Design Experts (CCDE) ever (#20080002). He has 11 years experience in networking and communications, including four years as a paratrooper in the U.S. Army. He has a bachelor's degree in MIS from the University at Buffalo and is working on his MBA from NC State University. In 2008, he was awarded the Network Professional Association (NPA) Professional Excellence and Innovation Award for his work on network architecture, templates and enterprise MPLS design.
Michael Morris's From the Field blog is also featured on the Cisco Learning Network. See it there, along with the blogs of other Cisco Experts.
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