Supply Chain

The Ultimate Calling Plan

As phone service moves to the Internet, CFOs face a tricky cost/benefit calculation.
Russ BanhamApril 27, 2005

While SBC’s $16 billion acquisition of AT&T guarantees that 2005 will be a landmark year in telecom history, the more momentous development may prove to be the broad acceptance of Internet-based phone service. M&A activity has reached the point where no deal is truly shocking, even one that reunites entities that had been forcibly split apart by judicial fiat only a decade ago. While the news of AT&T’s demise carried plenty of symbolic weight, it won’t change life as we know it. But VoIP just might.

The idea of having voice traffic move across the Internet is almost as old as the Internet itself, but VoIP (pronounced “voyp,” for voice over Internet Protocol) has progressed slowly, beset by technical problems that hamper audio quality and, more important, economic issues that favor current telecom infrastructure. (While some make the distinction between VoIP, which, strictly speaking, pertains only to voice traffic, and “Internet telephony,” which refers to any and all combinations of voice and data traffic that move over the Internet, VoIP is often used interchangeably with Internet telephony. That is how we use it here.)

But while AT&T stumbled and sputtered and then was suddenly gone, VoIP has stumbled and sputtered and now seems to be everywhere, eagerly discussed from the halls of Washington to the snack rooms of Silicon Valley. Technical kinks have been worked out, vendor competition is fierce, and the promise of sexy new applications that boost productivity by combining voice and data functions in novel ways is suddenly very real.

And then there’s the simple fact that telecom gear wears out. At Prudential Northwest Properties, a Portland, Oregon-based real estate brokerage with 800 employees in 16 locations, the company’s PBX (private branch exchange, or switchboard) and supporting equipment began to show the effects of aging in 2000. Meanwhile, the cost and maintenance of its outsourced voice-mail service were also getting unwieldy. Something needed to be done, but the question was whether to upgrade using traditional technology or take a step into the future with VoIP.

Maybe it was millennium madness, but the company decided to be bold. Working with telecom provider Verizon Communications and systems architect 3Com, it built a VoIP network that, according to finance and operations vice president Jon Spencer, “replaced several aging telephone systems in various offices and eliminated an expensive outsourced companywide voice-mail system.” Spencer says the company’s telecommunications costs declined significantly almost at once.

Stories of hard-dollar savings, combined with softer benefits such as the ability to listen to E-mail and read voice mail, form a potent marketing message. But don’t expect the phone companies to shut down the public switched telephone network (PSTN). Few technology devices are as dependable as landline phones for quality, reliability, and security. There’s nothing like having 130 years to get the bugs out.

But that reliability comes at a price, and if you’re calling from a hotel room, that price may equal a year of your child’s college tuition. The fundamental appeal of VoIP—that a phone call is priced the same as an E-mail (that is, virtually free, except for the fixed cost of the Internet service)—is so alluring that the problems often associated with VoIP don’t seem particularly daunting. Voice quality, an overreliance on the Internet as an all-purpose network, the initial investment in new equipment, security concerns, and worries that the federal government will regulate (and tax) VoIP in unforeseen ways have not dissuaded vendors or customers from moving forward.

The quality, reliability, and security problems that daunted past deployments have been largely solved by telecommunications providers such as SBC, Verizon, Sype, and Vonage, and IT vendors such as Cisco, 3Com, and Avaya. But that doesn’t mean that companies are now happy to pony up for a telecom paradigm shift. Put simply, “the CFO remains the hardest sell,” says Peter Brockmann, vice president of enterprise voice solutions marketing at Marlborough, Massachusetts-based 3Com. “It’s tough to argue the benefits of moving forward when they have perfectly good hardware in place. The savings on a hard-dollar basis don’t look great, and the soft-dollar savings from productivity enhancements don’t get much attention, because they don’t flow onto the income statement and balance sheet.”

If that’s what the marketing guy is saying publicly, imagine what the sales force is dealing with. And Brockmann is not alone. “CFOs are understandably skeptical,” acknowledges Cathy Martine, senior vice president for Internet telephony at AT&T. “VoIP has been given a bad rap. CFOs want to know if VoIP’s quality, reliability, and security equal what they’ve come to expect from the PSTN world.”

Bottom-lining It

But what they want to know even more is whether VoIP saves money. By next year, more than two-thirds of 131 large companies surveyed by Deloitte & Touche will be rolling out VoIP to employees, usually on a phased-in basis. The primary driver for 84 percent of those rollouts is cost reductions. “If you’re a company with many branch offices, you can negotiate a great deal with your telecom provider,” says Will Stofega, a senior analyst of VoIP services at research firm IDC. “But it can’t compare to what you get with VoIP—free long distance for what we call “on-Net” calls. Interoffice calls now travel on your network, and you don’t have to pay a dime for them.” IDC gauges average enterprise savings at 30 percent.

As telecom consultants frequently point out, most companies don’t have a solid grasp on telecom expenses to begin with, which can make assessing the savings of VoIP tricky. Even at an accounting firm the numbers proved surprising. When Chicago-based Grant Thornton LLP, a global accounting, tax, and business advisory firm with 49 offices in the United States, began a VoIP deployment several years ago, it expected to save about 25 percent on its interoffice long-distance calls. But Kevin Lopez, national manager of telecommunications at the firm, concedes, “We really had no way of tracking this cost, so we were really guesstimating at the beginning of the project. But once we were up and running in all offices and tracking the bills carefully, we were surprised how much we were saving.” Long-distance expenses were cut by 65 percent, while the tab for local calls dropped 20 percent.

While phone charges offer the best chance for an apples-to-apples comparison of VoIP and traditional phone service, proponents of the newer technology tout other kinds of savings. The provisioning of employees—getting them set up in a new office—can be an ordeal that demands staff resources and may leave the employee unproductive for a time. “In the old days, when an employee moved from one desk to the next or a new employee was added to the roster, it took time and labor to get them set up with a new phone,” says Dave Hattey, vice president and general manager of enterprise voice solutions at 3Com, which has converted its own network to VoIP. “Today, when an employee moves down the hall, he or she unplugs their Internet phone and plugs it into the network jack at the new location. The cost is zero.”

Savings also accrue from shared infrastructure costs: companies pay to monitor, maintain, and service one network rather than two, with all voice and data traffic moving over that one network. “We were able to consolidate our IT staff to four hub locations,” says David Holyoak, CIO and partner at Grant Thornton. “While we still have people at each office whose job it is to ensure laptops and desktops are operating, their number is way down. At the same time, we’ve increased salaries for the network administrators because they do more than just fix things that break.”

If all this sounds too good to be true, it is. “The notion that voice rides for free over the Internet is not entirely true,” says Bryan Van Dussen, director of telecommunications research at The Yankee Group, a Boston-based research firm. “For one thing, the Internet is not free—you still have to pay an Internet service provider for your Internet access. Secondly, concerns over voice quality often prompt companies to buy additional bandwidth. VoIP may also require the purchase of new handsets, additional cabling and routing equipment, and software. Then there is the potential cost of a network outage. “VoIP presents a single point of failure,” Van Dussen explains. “If the data circuit goes down, and you have removed the public telephone connection you previously had, you face a significant business-continuity issue.”

Step by Step

Little wonder then that most companies approach VoIP in phases. Fortunately, unlike some other large-scale IT projects like ERP implementations, VoIP lends itself to such an approach. “Our surveys and conversations with suppliers bear out that the majority of companies are disinclined to do a full cutover to an entirely new architecture,” says Van Dussen. “Most do VoIP on a transitional basis, starting out regionally before becoming national. A traditional approach is to install it at headquarters in a small department that doesn’t touch the customer, and then broaden it out once you’re comfortable with quality, reliability, and security.”

Analysts and vendors agree that the litmus test for VoIP will be its acceptance in global organizations, because their move to a new communications infrastructure is complex, expensive, and time-consuming. But it is happening. At Boeing, Vaho Rebasso, chief architect for computing and network operations, says, “We’d been monitoring VoIP for a while and felt that the maturity had reached a point where we would deploy it in a pilot program.” The business case for a large-scale deployment was wanting, because the older systems were chugging along just fine, he says. “But we knew that VoIP presented large productivity gains down the line and significant cost savings.”

By the end of this year, Rebasso anticipates that 20,000 stations or desktops will be VoIP-enabled, out of a network of about 150,000. “We are starting with newly built locations and facilities at which legacy phone equipment needed upgrading,” he says, noting that it will take 5 to 10 years to completely migrate to VoIP.

Ford Motor Co. recently announced that it will implement the technology at 70,000 stations in southeast Michigan, “after several years of kicking the tires,” says George Surdu, director of global IT infrastructure. “We deployed VoIP to run voice and data over the same line between our headquarters and our Asia/Pacific outlets several years ago, primarily as a way to save money on telecom costs. It was purely a financial call then, and still is, although we are intrigued by the ability to use the phone as an intelligent, multifunctional device” (see “The Softer Side of VoIP” at the end of this article).

Consultants and vendors advise IT departments to assess network traffic, quality of service, potential problem spots, and bandwidth needs before implementation, and to continue testing and monitoring the network afterward. Typical quality concerns include echoes and jitter due to network congestion, packets lost during transmission due to network errors and router changes, and delays in packet transmission, all of which affect the quality of two-way conversation. “A network assessment will show you how the network assets are configured and where the choke points are located,” says IDC’s Stofega.

Some companies give the IP addresses that carry voice traffic priority over those that carry data. Multiprotocol Label Switching, or MPLS, offers another way to favor voice, by routing it at different times—for example, voice immediately, data later—giving network operators a great deal of flexibility to route traffic around link failures, congestion, and bottlenecks. “It’s like having a passenger train and a freight train use the same track,” says Stofega. “The passenger train—voice—needs to arrive on time, but it’s OK if the freight train—data—arrives a bit later.”

Software companies like Global IP and Telchemy make applications that help prevent bottlenecks and improve call quality. “All the voice-quality issues have been practically overcome. The bugs can be ironed out—with money,” says Stofega.

As for system reliability, Grant Thornton’s Lopez says that remains a concern. “The fact is that network shutdowns occur more often than traditional wireline shutdowns, which is why we believe some sort of hybrid system offering both traditional and IP traffic makes sense for the next five years.” On the flip side, McRae from Prudential Northwest Properties points out that when a severe ice storm took the traditional phone system down for a period last winter, “the unified messaging capabilities of our VoIP system enabled people to conduct business even though they were stuck at home.”

Security remains something of an unknown. With voice traffic moving over the same Internet that has provided a conduit for any number of hacker attacks, VoIP systems in theory are at risk, although there have been no reported security breaches so far. And companies are working hard to secure VoIP systems. In fact, just last month a group of hardware and software companies, research centers, and consultancies formed the VoIP Security Alliance—probably not a moment too soon.

Russ Banham is the author of The Ford Century and is at work on a book about the Airstream travel trailer.

The Softer Side of VoIP

While the primary appeal of VoIP lies in dramatically reduced phone bills, productivity gains deserve attention as well. “The business case for many CFOs can’t stand on the cost savings alone,” says Bryan Van Dussen, director of telecommunications research at The Yankee Group, “so soft-dollar benefits from productivity gains have become a compelling argument.”

Accounting firm Grant Thornton touts the phonetic operator application within its VoIP network that allows anyone calling from within the United States to contact an employee. “The caller speaks the employee’s name and that information is then routed over the network to find the employee,” explains Kevin Lopez, national manager of telecommunications at the firm. “If the person doesn’t pick up, an E-mail and voice mail alerts them about the call.” An application called modular messaging allows a voice mail to be sent as an E-mail and vice versa, so that E-mails can be read to a recipient over the phone and voice mails can be played by Windows Media Player and heard either with a headset or speakers.

“There are some real killer apps here,” says Lisa Pierce, vice president in the U.S. telecom services unit of Forrester Group. “There’s an application that allows VoIP users to plug their phones into an IP network no matter where they are and do immediate conferencing. You simply hit ‘talk’ and everyone is talking together.” Such services exist without VoIP, of course, but they usually come at a hefty price.

VoIP provider Vonage in Edison, N.J., which recently unveiled a VoIP solution for small businesses, believes the productivity enhancements are the key to VoIP’s success in the enterprise marketplace. “We can give a small business any area code they want,” says John Rego, CFO at Vonage. “If you’re a furniture maker in North Carolina, you can advertise in California using a local area code from that state, instead of the typical 800 number. Suddenly you look like a local company. If you have a ‘soft’ VoIP phone, you can plug it into a hotel’s Internet access and make unlimited long-distance calls free.”

Dave Hattey, vice president and general manager of enterprise voice solutions at VoIP provider 3Com, takes his VoIP phone and office applications with him wherever he travels. “I estimate that I’ve spent more than 11,000 minutes listening to voice mail during my career,” he says. “You know what it’s like: you sit there listening to five unimportant messages waiting for the one really important message. With VoIP, you can see your voice mails as E-mails and then rank order them.”

3Com offers a VoIP application called “find me, follow me.” As Hattey explains, “When you call me and I’m not at my desk, the application puts you on hold and then finds me to tell me you’re on the line. I can then either take the call or have the system ask you to leave a message.”

At Prudential Northwest Properties, the company’s unified voice mail/E-mail system enables its sales staff to respond to customer requests to view properties instantly, which is particularly handy when an out-of-town customer has limited availability. Their requests can be routed to an available agent, with E-mails translatable into voice mail and vice versa, allowing the message to get through via whichever means is most handy at the moment.

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