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Capital Budgeting: Rational Outsourcing Decision in VoIP Projects

  • July 19, 2006
  • By Marcia Gulesian
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Voice over IP (VoIP)

The feature of Voice over IP (VOIP) that has attracted the most attention is its cost-saving potential. By moving away from the public switched telephone networks (PSTN), long distance phone calls become very inexpensive. Instead of being processed across conventional commercial telecommunications line configurations, voice traffic travels on the Internet or over private data network lines. PSTN is the international telephone system based on copper wires carrying analog voice data.

Furthermore, VoIP, being digital, offers features and applications not possible with its analog predecessor.

Most legacy telephony devices are dumb endpoints with no memory or processors built into them; all of the intelligence was located within the proprietary PBX processor software. In contrast, with VoIP PBX solutions, all endpoints have processors and memory, thus creating superior intelligence out at the network edge.

And, many VoIP installations use SIP, a signaling protocol for the establishment of communication sessions between these smart endpoints. It is commonly used to initiate voice, video, and IM sessions and also can be used to convey presence, location, and other information. SIP has emerged as a key protocol with strong industry support for the deployment of IP-based telephony. In addition to the rich media session and information that it can convey, SIP offers other additional benefits.

For example, SIP provides a user with a logical identity regardless of the device type he or she is currently using or the device's physical location. This allows road warriors to roam and to switch between devices (such as from a handheld to a computer SIP phone), while remaining reachable through a single address: callers do not need to try multiple phone numbers.

VOIP also is cost effective because all of an organization's electronic traffic (phone and data) can be migrated onto one physical network, bypassing the need for separate private branch exchange (PBX) tie lines. Although there is a significant initial startup cost to such an enterprise, significant net savings can result from managing only one network and not needing to sustain a legacy telephony system in an increasingly digital/data-centered world. Also, the network administrator's burden may be lessened because they can now focus on a single network. There is no longer a need for several teams to manage a data network and another to mange a voice network. The simplicity of VOIP systems is attractive, one organization/one network.

But, the whole world hasn't migrated to VoIP telephony yet. Therefore, your VoIP networks need a portal to the rest of the world (that is, PSTN). So, initially, you will typically employ VoIP gateways to interface between a VoIP network and a private branch exchange (PBX) or the PSTN.

Figure 3. Basic hybrid VoIP/PSTN network.

The transition from a traditional PBX-based telephony system to a Voice over IP (VoIP) system usually is not an overnight process. Instead, you typically take "baby steps." A first step might be to replace the trunk line that interconnects PBXs at remote sites with an IP wide area network (WAN) connection. A next step could be to connect existing analog phones, fax machines, and speaker phones to voice-enabled routers (in other words, a gateway). The end result of these steps is a telephony network, without a PBX, where voice traffic is transmitted over an IP network. There are, of course, many other migration scenarios, some of which will be mentioned later.


It should come as no surprise that there are any number of costs that may be difficult to estimate à priori; that is, during the budgeting process. But, these costs can be crucial to the outcome of the project, so you (or the contractor you hire) can't gloss over them when planning for the introduction of a new VoIP system.

The simplified decision tree shown in Figure 4 (to be discussed below) consists of two branches: one—to create a VoIP system with in-house staff (in other words, make)—and another—to outsource (buy). The buy branch may sometimes contain little more than the net of the purchase price of your contract with an outsourcing firm and the discounted future cash flow savings resulting from the use of the resulting VoIP system. In either case, you should know as much as possible about the process of migrating a traditional telephone system to one that is either all VoIP or a hybrid consisting of both traditional and VoIP services. One possible hybrid is shown in Figure 3.

As already stated, VoIP can result in cost savings, especially where users have existing under-utilized network capacity they can use for VoIP at no additional cost. However, extra voice over IP traffic may cause a need for increased bandwidth. The cost for this extra capacity will have to be subtracted from the savings achieved from reduced traditional telephone usage. Nonetheless, the cost justifications for a VoIP integrated network are usually large enough to warrant an upgrade in equipment costs if needed.

Consider interoffice calls. Nowadays, large corporations typically find themselves with offices or supply chains spread out over many geographical locations, in countries all over the world. What is the cost of telephone communications with these offices and suppliers? Depending on the configuration of your network and the locations of the calls you need to make, your long-distance tolls could plummet after implementing VoIP. After all, there is no distinction to be made on a data network between an international link and a regional link.

Bypassing the PSTN and making telephone calls on an IP network is referred to as toll bypass. Toll bypass occurs when a PBX or an IP PBX is connected to a VoIP gateway, which is then connected to an IP network. The call traffic goes from the PBX to the VoIP gateway instead of from the PBX to a PSTN switch, thus avoiding the toll, or cost of using the PSTN. As a result of the PSTN toll rate structure, companies with a large number of international sites are likely to see more cost savings from toll bypass than companies that make most of their calls within the United States.

Savings may not be immediate or automatic, however. Many organizations should not convert to VoIP completely, or all at once. The PSTN lines may still be needed for some time during the migration phase, and some companies may want to keep the PSTN as a fallback network. But, in most cases, the long-distance costs associated with PSTN usage should decrease after a VoIP implementation.

Calculations of parameters such as peak bandwidth are hard to estimate at the outset and midcourse and/or post-launch corrections are more the rule than the exception. This reality holds true whether you decide to rollout a VoIP system with in-house staff or outsource the job.

The perception of many in business today is that VoIP isn't reliable enough to support the telecommunication demands of a corporate environment. After all, corporate PBX systems are considered highly reliable, but how many times in a month do you hear users say, "My email isn't working," "The Internet is down," or "I can't print to the network printer." Because of such past frustrations with data network applications, this perception of unreliability has unfortunately carried forward to any new application running on the data network, such as VoIP.

VoIP networks can be designed to be more available. One approach is to have fault tolerance built into the network components. By so doing, you actually can design VoIP networks that are just as reliable as legacy PBX systems. But, there's a cost to doing so and this is another cost that needs to be included in your capital budget, if it's to be realistic.

Managing unbudgeted downside risk

Tools such as Palisades Precision Tree (shown in Figure 4) can "automate" the buy or make decision process.

Click here for a larger image.

Figure 4. A commercial decision tree tool (Palisade Precision Tree).

The objective is to arrive at the decision node (indicated by a green square) with quantitative values for make and buy so that the project manager can pick the alternative that promises to have the better outcome for the project. Precision Tree takes care of this step for you by labeling with "TRUE" the path that yields the optimum choice. The details of how to use this tool in decision tree analysis—there are many ways—are beyond the scope of this article. But, countless references are available.

Inputs to the decision-making process are both quantitative and qualitative or judgmental. You estimate costs and cash benefits for both the make and buy choices. You make judgments about the performance expectations of your in-house technical staff and about the performance of an alternative vendor. Sometimes, there is a project history you can access of former similar-to projects that provide the data for the judgments.

As illustrated in Figures 1 and 4, the budget for expected value is based on probabilities for both favorable and unfavorable outcomes. But, you should never rule out the worst-case scenario. That is, you should replace—if only for a moment—the comforting presumption that disaster could happen (with a given probability) with the harsh reality that it will happen (for certain). The two equations below calculate the worst case scenarios by yielding the cost of the two alternatives when the probability of an x-day delay is 100%.

Downside risk (buy) ≤ $(budget for expected value) .
   $(acquisition + cost of x-day delay)

Downside risk (make) ≤ $(budget for expected value) .
   $(acquisition + cost of x-day delay)

You, or your project sponsor, must also decide whether this unbudgeted risk is affordable if all risk mitigation fails and the x-day delay does, in fact, occur.

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