The ROI of VoIP

A step-by-step guide to determining the true cost and benefits of VoIP.

When it comes to VoIP, most network managers are satisfied that the technology works. The challenge is developing cost analyses: What will the new technology cost to roll out and support, and what benefits can companies expect to reap?

There's no single shrink-wrapped answer. But Nemertes Research interviewed 65 IT executives at leading-edge companies across a range of industries and developed real-world guidelines for analyzing the costs and savings that can result from VoIP projects.

Step 1. Preplanning is key

In most projects, the first stage is preplanning in which companies assess the network, including present and future applications requirements and future business plans, such as new moves, company growth, and merger and acquisition possibilities.

It's at this stage that companies answer the fundamental question: Is it worth moving to a converged infrastructure, and if so, at what pace?

Once companies decide the technology is worth further exploration, they enter the official "planning" stage, during which they should perform several tasks, including assigning a project leader, evaluating management and security options, and working to raise end-user excitement in the project.

Most importantly, they're developing a detailed ROI to validate the project financially.

Step 2. Determine start-up costs

Start-up costs fall into two general categories: operational and capital. In both cases, the figures in this report represent actual costs that companies participating in the research study incurred, starting with the planning stages and ending once the initial troubleshooting was finished.

For operational costs, companies provided the staff hours or actual dollars devoted to the baseline network assessment, project planning, installation of the IP PBX(s) and accompanying handsets, and troubleshooting. Companies that installed a unified messaging system or audio/video bridge with their initial implementation also included the time it took to handle those tasks.

Capital costs are defined as the IP PBX, phones and network equipment explicitly installed for the initial VoIP rollout.

Part of the planning phase includes a baseline-network assessment, or a network readiness study. Companies typically budget about $20,000 for the assessment, though larger companies spend $50,000 or more. Typically, a vendor, systems integrator, value-added reseller, carrier or internal IT staff evaluates the organization's network, running simulated voice traffic over it to determine what upgrades are necessary.

The baseline network assessment has become a crucial part of any VoIP implementation. Although some companies abide by the finger-to-the-wind test, a growing number of IT executives strongly suggest conducting such an assessment, despite the cost. "VoIP is so new to us. We'd be concerned with what it does to our data traffic. We can't take it casually," says Irving Tyler, CIO of Quaker Chemical Company in Conshohocken, Pa.

Operational start-up costs vary considerably based on the company size and state of deployment. For example, companies with 100 to 499 users spend the most per user, and costs drop as the number of users on the VoIP system increases. This is primarily because companies are able to leverage the costs involved with planning, installation and troubleshooting among a greater number of end users.

Organizations with fewer than 100 users spend less than those with 100 to 499 users. Often, companies with fewer than 100 users are running small trials and haven't invested in a baseline network assessment yet, so their cost per user appears lower.

Also, organizations with small rollouts usually keep their implementations straightforward, eliminating some of the time-consuming complexities of larger rollouts, such as integrating the gear into current TDM PBXs or voice mail systems. This keeps the fewer-than-100-user rollouts lower than the next level up.

The trends were similar with capital costs. The highest cost per unit is among companies with 100 to 499 users, at $771. The lowest cost per unit is among companies with more than 1,000 units, at $448.

In cases where the average phone cost is high, it's usually organizations that have added audio or video equipment to their hardware costs, or those that have invested heavily in equipment and still are running trials so they don't have as many phones in use as the equipment supports.

For example, one large global manufacturer has spent $2 million on equipment, housed in five U.S. and two European locations. But it only has 350 users on the system now, as it runs trials and starts a slow rollout. Once fully deployed, the switches will support thousands of users, lowering the cost per unit, even though the company will buy more handsets.

Step 3. Don't forget the cost of management tools and training

Aside from the initial capital equipment and operational costs, many companies overlook a few other key cost considerations: management tools and training.

Only about 25% of companies budget upfront for specialized management and security tools. Many network managers say current management tools will do the trick, and (if they acknowledge that voice traffic must be secured) standard security practices already in place will take care of the security issues.

But this isn't the end of the story. Most companies that didn't budget for management and security end up wishing they had. Sometime within 12 months after installation, companies recognize they need VoIP-specific management tools, and they start shopping. The budget for management tools should be set at about $50,000, and companies should budget a minimum of $100,000 (this could go significantly higher, depending on the size of the company and the extent of the rollout).

Training is another area that companies often fail to budget for, or underestimate. The average amount survey participants spent on training was $16,438. Vendors and training organizations typically charge between $1,700 and $2,500 per IT staff member, though some IT executives say they have been able to negotiate two-for-one training deals.

Step 4. Calculate savings from long-distance and local loop

When VoIP first came onto the scene, networking staffs eyed per-minute, long-distance rates as the big benefactor of the technology. That's not the case anymore. On average, companies are spending between 2 cents and 4 cents per minute on their long-distance calls. VoIP isn't going to reduce those rates much further. Internationally, though, companies are saving between 20% and 40% on their per-minute rates, depending on the country.

According to the study, companies decreased their telecom costs by 25% to 60% when they converged their networks. This takes into account per-minute long-distance, local loops, plain old telephone service (POTS) lines and audio/video services.

Local loops represent one area in which companies save money. This primarily applies to large businesses that have more than two access lines into a given location. IT executives say they limit their access lines in remote locations to two to four (for redundancy sake), and they reassess how much access bandwidth they need. In doing so, they might increase a 6M bit/sec line to a full T-3 and keep two back-up T-1s, but in the process get rid of 15 T-1 lines for voice traffic and one 6M bit/sec line for data. Another area of savings is POTS or trunk lines. Companies can eliminate 70% to 95% of their POTS lines, at an average cost of about $45 each.

It's important to keep in mind the WAN itself likely will need about 30% more availability to handle the voice traffic. Because most companies keep their average utilization at less than 50%, they usually have enough spare capacity - with the right management tools in place - to add bandwidth only in key locations. The value of convergence is reducing the excess capacity that exists in both the voice and data networks.

Step 5. Don't forget potential audio and videoconferencing savings

Some companies have realized that substantial cost savings exist by shifting audioconferencing and videoconferencing traffic to the IP network. IT staffs often overlook both areas when doing their initial ROI, or consciously place them in the second phase of the rollout.

Typically, a company realizes a four- to 12-month payback when it buys an IP-based video or audio server and run the traffic over its IP network rather than via a circuit-switched service.

In terms of videoconferencing, companies are spending from 25 cents to $1.25 per minute, per participant. It's easy to see how the savings could quickly add up. For example, a manufacturer had been paying Sprint $317,000 per year for service. It then spent about $170,000 on video equipment and ran the traffic over the data network, realizing a five-month payback.

Step 6. Factor in moves, adds and changes

One of the best-known benefits of VoIP is the savings that result from moves, adds and changes. On average, companies spend $105 on moves, adds and changes, but the range is from $60 to $250. Companies save anywhere from 89% to 98% on moves, adds and changes, depending on the company size and number of moves, adds and changes per year.

The savings aren't as great when companies already perform their own moves, adds and changes for PBXs. They're still dropping their overall costs, but the dollar amounts are not as great. Internal moves, adds and changes for TDM PBXs typically take about 45 minutes, while moves, adds and changes for IP PBXs take up to 10 minutes. The average cost for an internal TDM move, add and change is $32.52, and $5 for an IP PBX - for about an 85% cost savings.

Step 7. Personnel savings

Personnel savings are no longer the big draw they were during the boom years. Most organizations have fairly lean IT and network staff to begin with. Where we see most of the value here is in cost avoidance. IT executives say they had planned to hire one or two more people and then did not have to because they were able to cross-train current staff, reduce workload and make do with the status quo.

On average, companies were able to cut $76,839, or an average of 0.74 positions, from the IT budget because of convergence projects. It's not a make-or-break number for a given project, but it certainly adds further justification to the ROI.

In addition to the IT staff, some companies have been able to reduce their receptionist staffs by using the automated attendant features of some of the IP phone systems from companies such as Cisco and ShoreTel. Rather than having 10 receptionists answering phones at 10 locations, companies have reduced the number to five receptionists, each handling two locations (or in some cases, even greater ratios). They can transfer the calls over the IP network so they're not incurring long-distance charges.

The bottom line is costs and savings are multifaceted, and it's imperative for companies to do a detailed assessment that includes all of these components.

Gareiss is executive vice president at Nemertes Research, which specializes in quantifying the business impact of emerging technologies. She can be reached at robin@nemertes.com.