The business case for VoIP

Nemertes study shows that as companies broaden their VoIP rollouts, setup costs increase - but so do savings.

When IT executives make the strategic decision to implement VoIP and other converged applications, cost savings is one of the key drivers.

Guide to VoIP logo

But is VoIP really a money saver? Based on a Nemertes Research survey of 90 IT executives, the answer is yes - over time. In other words, steep start-up costs will be offset in the long run by significant savings.

One of the key findings in this year's study is that companies are spending more time and money on planning, installation and troubleshooting, compared with last year.

The reason is that VoIP increasingly is being deployed as part of a strategic, enterprisewide convergence project, rather than as a pilot project or a technology deployed in a limited setting, such as a branch office or contact center.

Another important finding of the study is that VoIP equipment generally costs about the same as TDM gear, with the exception of handsets.

It pays to plan

Since 2004, the amount of time spent planning a VoIP rollout has quadrupled. This is where participants spend most of their overall operational start-up time. They have learned from peers about the nightmares that result from a poorly planned deployment.

Because VoIP is typically part of a larger convergence effort, organizations are spending more time upfront trying to identify steps in the project - and preparing the networks for them. Several early adopter IT executives who participated in the study said if they had spent more time planning, they would have had a smoother rollout and spent less time troubleshooting.

Is your network ready?

As part of planning, IT staffs should perform or hire someone to perform baseline network assessments, also known as network readiness tests. Companies typically spend $3,000 per location for small implementations (usually five or fewer sites) or an average of $63,500 for a comprehensive, multisite evaluation. Comprehensive evaluations range from $12,000 to $150,000.

Management costs

When measuring management cost per user by vendor, Nortel deployments are the most expensive to manage, primarily because many are hybrid, and customers still require staffs to maintain the TDM gear.

Nortel costs $268 per user to operate in smaller rollouts, and $87 in larger rollouts. ShoreTel is the least expensive to operate, at $13 per user for smaller rollouts and $10 per user for larger rollouts.

In reviewing total overall costs for maintaining a VoIP system, however, Cisco, at $256,750 per year, is the most expensive for implementations with more than 1,000 units. and, at $124,266 per year, it's also the most costly for rollouts with fewer than 1,000 units.

Those four vendors garnered enough statistical response to be broken out individually.

As companies install VoIP in more branch offices and give handsets to more users (as opposed to simply IP-enabling a TDM PBX), the amount of time staffs spend installing the gear increases.

Troubleshooting time also is increasing, but not at the same rate as planning and installation. Troubleshooting includes the time spent repairing problems after installation and until the system is considered full-production. Companies with higher-than-normal troubleshooting times typically devoted lower-than-normal time to planning. So it makes sense that as IT staffs spend more time upfront planning the rollout, troubleshooting time should grow more slowly.

Business graphic

There are three primary reasons behind the increases in operational start-up time - and thus, cost. First, organizations are taking their VoIP projects more seriously because they are the first step of an overall convergence effort, and consequently need to devote more people from different disciplines (applications, security, voice, data) to the rollout. In 2004, companies devoted an average of 12 people to convergence projects, compared with 27 people by late 2005.

Second, the salaries of IT staff working on convergence projects have increased. The average salary with benefits was $96,766 in 2004, compared with $98,621 in 2005.

Third, companies are devoting more money to consulting costs related to design and implementation. The median consulting cost is $23,125, but the range is from $500 to $2 million, according to the survey. The goal is to take advantage of the experience of systems integrators and resellers, maintain flexibility with internal staffs, and improve the rate of project success.

Management tools are key

Management tools often are an unplanned expense, but they're key to the success of a VoIP project. Only about 15% of organizations actually budget for such tools upfront, but more than half seek specialty tools within 12 to 18 months of their rollouts.

The amount organizations budgeting for or buying third-party management tools are willing to spend has increased in the past year. This is primarily because they recognize they need solid tools - and a new class of tools - to manage a converged network effectively. Based on that, the recommended management budget has increased slightly this year. (See "Benchmarks for VoIP deployments.")

Training is another often-overlooked area. IT executives cited training as one of their key recommendations to peers based on lessons learned in their own projects. Value-added resellers and vendors often will include training as part of the deal. But several IT executives suggest that vendors invest more in consistent, nationwide training programs - even if they must charge for them.

"Part of the problem is finding training," says the CTO of a healthcare company. "We don't have a $2,000-per-engineer budget, but we do provide training piecemeal."

In fact, the amount organizations are spending on training has decreased since 2004. For example, small companies were spending about $2,500 per person on training in 2004, and they're now spending closer to $2,000.

Nemertes recommends internal IT staffs train users on the new handsets and features whenever possible. The best approach is to schedule 20- to 30-minute sessions with small groups of users and teach them the basics.

Rather than trying to force all users to use all features and applications at the same time, companies that have installed additional features (for example, unified messaging or real-time communications dashboards) should solicit tech-friendly trial users who will build consensus among their peers. Before long, users will be asking for the "cool new feature" that Bob in the next cube has been using.

Cost savings

The specific areas vary in which companies find cost savings, but companies almost always do find some. The most important thing to remember when creating a business-case analysis is that each company's savings depends greatly on architecture, vendor or carrier selection, application rollout plans and staffing levels, among other factors.

Generally, organizations save money (or increase top-line revenue) the most in a few areas: staffing, ongoing management and administration, IP audio- and videoconferencing, telecom circuits, cabling new buildings, and employee productivity.

Staffing:

When they start using VoIP, organizations typically save on their staffing requirements, as well as the money they spend on outsourcers and consultants. However, a small percentage (5%) said they had to increase their staffs because of VoIP. In those cases, they added one to three employees, regardless of overall staff size.

The average personnel savings has increased from 2004, when organizations reassigned or eliminated an average 0.74 positions, at $76,830 per year. This year the figure, when averaged among all organizations, is 0.76 positions, at $81,240 per year.

Benchmarks for VoIP deploymentsThere are four spending benchmarks: start-up costs, capital expenses, training and management.
Median start-up
Fewer than 100 users$143 per user
More than 100 users$53 per user
Average capital expenditures
VoIP implementations, all sizes

IP PBX

$448,221

IP PBX, messaging

included

$562,024

4

IP handsets

$580,799

Network upgrades

$1,398,527

Voice mail/UM

$54,333

Audioconferencing

$182,463

Management

$100,000

Recommended training

Deployment

size

Number of

locations
Users to train

Cost per

user

Very small

5
Fewer than five0 to 1 (0 = outsourced)

$2,000

5
Small6 to 201 to 2$2,000
Midsize21 to 2503 to 5$1,800
Large251 to 1,00010 to 15$1,500
Enterprise1,001 or more15 or more$1,500
Recommended Management budget
Deployment size

Number of

locations

Budget

size

Very small

5
Fewer than five

Freeware, IP PBX tools,

carrier tools
Small6 to 20$25,000 to $50,000
Midsize21 to 250$75,000
Large251 to 1,000$100,000
Enterprise1,001 or more$100,000+ (depends on the configuration; requires consultation)

SOURCE: NEMERTES RESEARCH

Nearly one-third of the participants said they saved on staffing costs. When the numbers were run for only those organizations, the average staff savings jumped to 1.46 employees, or $192,584 in salaries and consulting costs.

Participants said they typically reassign people rather than walk them to the door. In addition, some of the personnel savings comes from cost avoidance.

"If I had to go with TDM, I'd have to hire more people," says the global telecom director of an entertainment company with a growing, 2,500-person VoIP rollout. "I'm working with 20% to 40% less with IP."

Management and administration:

Exactly what are these staff members doing, and how much time are they spending maintaining the voice network? First, they generally don't distinguish between maintenance and troubleshooting. It's all just managing the voice network.

What that includes is making sure IP PBXs, handsets and softphones are up-to-date on the latest revisions; troubleshooting performance problems or outages; moves, adds and changes (MAC); and monitoring overall performance.

Some - typically small and midsize - organizations are starting to outsource the day-to-day management of VoIP systems. "We're considering eliminating a person and outsourcing the actual maintenance of the system," says the IT director of a large law firm. "There's not enough to do to keep someone with those skills on-site."

Savings on MACs are one of the most important ways organizations justify their VoIP rollouts. Overall, participants spend an average of $124 on MACs. This number includes MACs done internally and externally. The cost ranges from $29 to $450: At the low end are internal MACs done by an efficient, experienced and/or low-paid staff. At the high end - generally in large cities - are external MACs.

The number of MACs increases with company size, not surprisingly, and ranges from 197 to 136,020. MAC penetration, however, isn't as dependent on company size (penetration is the percentage of MACs based on the total employee base).

The big shift this year is that on average, organizations make 1.28 MACs for each employee. Realistically, at most organizations employees don't change offices more than once a year. What happens is more like a chain reaction. One person leaves the company, and three to five MACs result - one for the person leaving, one for the person who wants that office, one for the person who wants the next-vacated office, and one for the replacement.

In moving to VoIP, MACs become very simple. The time involved for a TDM MAC is 30 to 90 minutes, but an IP MAC takes 10 minutes or less. The total cost savings, depending on the number of MACs at a given organization, can therefore be significant.

IP conferencing:

Another area of savings is video- and audioconferencing. The payback period is six to 12 months when organizations replace an ISDN-based audio- or videoconferencing system with an IP system. Typically, companies pay $200 to $300 per hour for ISDN-based videoconferencing services (and as much as $2,000 for global calls), and 6 cents to 12 cents per minute for audioconferencing services.

Several organizations say they're using IP video- and audioconferencing for internal communications, which can be 10% to 75% of their audioconferencing calls and 30% to 60% of their videoconferencing calls, depending on the industry. They use service providers for external calls; typically these are ISDN-based services, but they'll use more IP-based services as the carriers migrate to IP.

By shifting from ISDN to IP videoconferencing, organizations can see a payback in 12 to 38 months, based on the averages from the Nemertes study.

Payback periods are even more compelling for audioconferencing: 1.4 to 5 months, based on averages from the study (see "Benchmarking VoIP savings").

Telecom circuits:

By integrating access lines and consolidating unused capacity on WAN links, organizations report they're saving as much as 50% on their network service costs.

Cabling:

For new offices, cabling costs drop by 40% to 50%, because there's no need to run three to four drops per desktop. Instead, companies can run one or two drops per desktop, eliminating the cost of the cable and, more significantly, the labor to do the job.

Employee productivity:

Though difficult to measure, organizations are seeing improved productivity when they roll out VoIP and associated collaborative applications. These savings are mostly anecdotal, however.

For example, hospitals save on nurses' salaries by deploying wireless VoIP phones. They trim 15 to 30 minutes off each eight-hour shift of a nurse, nurse technician or unit clerk in a hospital setting. That translates to 234 to 548 hours per year, per shift, per employee that can be devoted to other tasks. With an average loaded hourly salary of $28, hospitals save $6,552 to $13,104 per nurse, nurse technician or unit clerk per year.

Gareiss is executive vice president and senior founding partner and CFO for Nemertes Research. She can be reached at robin@nemertes.com.

Learn more about this topic

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Survey: VoIP roll out takes more time than expected

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CES - VoIP gear highlighted at CES

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