Return on Investment (ROI) is one of those phrases that get thrown about frequently, but very few people know what...
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it means and what to do with the calculation. When it comes to calculating ROI for Voice over IP (VoIP) management tools, IT encounters some difficult issues: What should be included? Will the ROI be believable? How should we present an ROI calculation? The management tools have to go beyond fault and failure management for VoIP. The measurement of performance and traffic flow is important because a poor-sounding phone call may be as useless as no phone service.
The definition of ROI from www.investorwords.com is: "A measure of a corporation's profitability, equal to a fiscal year's income divided by common stock and preferred stock equity plus long-term debt. ROI measures how effectively the firm uses its capital to generate profit; the higher the ROI, the better." The first part of this definition is beyond the IT department's responsibility. The second part, maximizing the capital investment, is what the IT ROI should address. An effective ROI calculation will require the IT staff to know more about the operation of the enterprise.
ROI = Perceived Benefits/Value - Anticipated Cost/Investment
In the past, ROI calculations used the reduction of IT staff and associated costs as justification for management tools, according to Richard Whitehead, CTO for Clarus Systems. "The staff reduction justification was successful and easier to prove." However, he says, "IT staffs have been trimmed to the point where this argument does not work as well anymore."
Staff reduction may be one component for the ROI calculation. Many other factors need to be determined. These benefit factors will be divided into hard dollar savings (relatively easy to calculate), soft dollars (more difficult to estimate), and indirect soft values. The softer the component, the harder it is to calculate. The ROI analysis should cover three years of operation. There will be startup costs in the first year that will not occur in the next two years. The startup costs should be pro-rated over the three years. With the rapid changes in technology, it is difficult to look beyond three years.
- There may still be some IT staff reduction. Calculate the salary plus overhead for the staff reduction.
- As enterprises grow, merge and are acquired, there are more resources to manage. Management tools may eliminate the need to hire more staff. Calculate the salary cost plus overhead for the potential hire that can be avoided.
- Loss of access to VoIP will affect all of the enterprise. Survey all the departments and determine what their costs would be if they lost telephone service for one minute, 10 minutes and one hour. The costs may be overtime pay, lost revenue, lost profit and fines.
- Security concerns have risen with VoIP implementations. Management tools can be used to find rogue phones and unusual traffic patterns that may indicate toll fraud. The elimination of these security problems can be estimated and included as a benefit.
- Talk to the legal department to see whether there will be liabilities in the event that 911, E 911 and security phones do not work. The corporate insurance may rise and there may be fines.
- Customer service will be affected with a loss of phone service. Analyze whether customer dissatisfaction could cause a loss of market share (revenue), increased call center costs, increased marketing cost to regain market share, or increased product storage costs because of reduced sales.
- Vendors will charge for service calls whether or not the problem is theirs. Pinpointing the right vendor and describing the correct problem reduces vendor trunk rolls and may reduce your maintenance charges. With the rights tools, you may be able to determine the severity of the problem, and if the severity is low, you can postpone the problem resolution so you do not have to pay premium maintenance charges.
- Limited management tools will force IT staff to work harder and longer and will cause frustration. This can result in staff churn, requiring the IT department to recruit and train new staff. These costs could be avoided.
- In financial institutions, loss of communications can cost several thousand dollars per minute of lost profit on deals that cannot be consummated in time -- for example, brokers and currency traders.
- In manufacturing environments, loss of communications may affect the delivery of components needed to produce the products. What would be the cost in manufacturing of the products if the components did not arrive on time and the assembly process had to be slowed or shut down?
- Determine the costs associated with improperly installed or configured resources that could have been performed better or fixed faster.
- The cost includes the software license fees, operating system and hardware platform. It may be new hardware or an expansion of an existing platform. Documentation may be included in the license or be a separate fee.
- The cost of staff training should include the tuition and fees, staff salary, and overhead and travel expenses. This is for in-class training. There may be some in-class or computer-based training software cost for subsequent training and software upgrades.
- The cost for the software upgrades over the next three years has to be factored into the investment.
- If there is staff turnover, item 2 has to be increased to cover the new staff members.
- There may be a subscription fee and/or ongoing maintenance service cost.
- There may be costs associated with the managed resources, such as software additions and hardware changes necessary for the management tools to operate.
- If other management tools are already in place, there may be additional costs to interoperate with them.
- The number of resources that are managed will influence the final bill. Look at these resources and determine which ones require the least management or have the least impact on the enterprise's operation, and do not factor them into the final cost.
In the final analysis, the more homework you do when calculating the ROI, the more successful you will be when justifying the management tool procurement.
About the author: Gary Audin has more than 40 years of computer, communications and security experience. He has planned, designed, specified, implemented and operated data, LAN and telephone networks. These have included local area, national, and international networks, as well as VoIP and IP convergent networks in the U.S., Canada, Europe, Australia and Asia.