Return On Investment (ROI) for IP Communications

1. Return On Investment (ROI)for IP Communications Mike Kisch CNIC Business Manager Cisco Systems

2. Agenda • General ROI Trends • Changes in the Capital Budgeting Process • Building the Business Case for New Technologies • Feedback from the CIO • 5 Simple Steps to ROI • The ROI for IP Communications • The Benefits of IP Communications • Profile of Customer Engagements • Factors that Drive a Positive/Negative ROI • Overall Findings • Vertical Industry Benchmarks and Case Studies • Interactive Q&A • CIPTUG Attendees ROI

3. General ROI Trends

4. Business Trends Driving the Focus on ROI • Failures of previous IT investments to produce expected returns • Focus on Cost Containment/Reduction • Greater involvement of business managers in technology decisions • IT now accounts for 46% of all capital expenditures • Continued struggles of the global economy keep IT spending tight • Re-introduction of back to basics methodologies for capital investments

5. Importance of ROI • 80% of IT professionals believe that measuring the value of IT investments has increased over the past year!* • 86% of IT professionals believe that measuring the value of IT is important** • Only 30% have a formal ROI methodology/process*** 3% 17% Increased Remained the Same 80% Decreased *Source:Information Week Research **Source: CIO Magazine ***Darwin Magazine

6. The Changing Use of ROI Traditional A structured financial process to “MEASURE” the relevant costs and benefits in an effort to determine the financial impact of an investment Evolving Organizations are beginning to use ROI to compare the relative business contribution of multiple capital investments in an effort to“MAXIMIZE” the value of the complete portfolio

7. Feedback from the CIO • Infrastructure investments need to payback in 18-24 months • Strategic business benefits are still important, but priority is given to projects that reduce costs • If business case is built on soft business benefits, CIO will • heavily discount their impact (50-60%) • Analysis needs to be based upon our internal data, not industry averages or other companies numbers • Keep in mind that I’m competing with other business managers for scarce resources • Need to identify ways to get more from less, by leveraging existing technology investments

8. 5 Simple Steps to an ROI Analysis • Clearly understand the value proposition of the solution and focus on the primary cost/benefit drivers • 2. Validate these benefits through 3rd-party sources and client case studies • Break the analysis into manageable pieces, don’t try to do it all at once (ex. site segmentation) • Use a financial model that properly allocates the costs/benefits over the term of the analysis and applies fundamental financial principles • Run multiple what-if scenarios to determine range of potential outcomes (sensitivity analysis)

9. Obstacles to a Simple and Successful ROI Analysis • Inadequate documentation of costs • Difficulty determining value of tangible/intangible benefits • Failure to set the appropriate scope • Getting buy-in across the organization • Too much reliance on one financial metric (TCO/Payback/NPV) and one potential outcome • Lack of formal ROI process/methodology • Internal politics

10. Cisco’s ROI Methodology

11. Cisco’s ROI Methodology • Secondary Data Sources • Time Motion studies • Industry Averages • Meta/Gartner/Giga Research • Customers • Over 2200 unique analysis • Customizable inputs • ROI snapshots facilitate the data gathering process • Multiple deployment scenarios Converged Network Investment Calculator(CNIC) • Cisco Primary Research • Focus Groups • Customer Surveys • Analyst Input • Demos to major analyst firms to get their buy-in regarding soundness of methodology • Incorporated feedback

12. Cisco’s focus is on quantifying the hard benefits of IP Communications Models have the ability to calculate and discount the value of soft business benefits All Cisco financial models are designed to be customized to a customers specific situation Defaults are used where appropriate, but can be overridden Financial models needs to be boardroom credible Built on a solid financial foundation Conservative assumptions with a transparent methodology Calculating the Hard Benefits Cost/benefit and payback analysis For $$ spent: - Savings realized - Profits generated Building a Credible Financial Model

13. \Cisco Network Investment Calculator (CNIC) • Web-based software application designed to help customers understand the specific financial implications of deploying Cisco solutions • Available to Cisco salespeople and specialized partners • Includes modules for IPT, Unified Messaging, CTI, ICM, ICD, Audio Conferencing, Storage Networking

14. Benefits of IP Communications

15. Hard Cost Savings - Equipment • Reduction in cabling costs for new facilities • Reduction in infrastructure cost at remote sites via centralized call processing • Increased utilization of core networking assets • Reduction in PBX expansion and upgrade costs • Consolidation of message store/back-up systems • Reduction in PBX upgrade/expansion costs

16. Hard Cost Savings - Network Administration • Improved productivity of network support staff • Elimination of certain PBX related tasks • Consolidation of skill sets • Centralized application and network management • Reduction in the costs of Moves, Adds and Changes (MAC’s) • Reduction in remote site management costs • Reduction in ongoing maintenance costs

17. Hard Cost SavingsIntegrated Access/Toll Bypass • Toll-Bypass savings for intra-company traffic • Domestic: Material if call volume is substantial to offset declining toll rates in neighborhood of 2-5 cents or if organization lacks size to negotiate prime rates with carriers • International: Still significant with average toll-rates of 12-15cents • Consolidation of voice and data access • -Reduction in number of dedicated voice lines • -More efficient use of existing bandwidth

18. Examples of Business Benefits • Real Estate Savings • Better utilization of real estate by leveraging extension mobility to increase worker to workspace ratio from 1to1 to X to 1 • Significant savings in high-rent areas like NY, London, etc. • Platform for New Applications • Unified Messaging – Improved productivity per user by 25-40 minutes per day • Audio Conferencing – Ability to offload SP provided minutes (8-12 cents/minute) for smaller conference calls to internal service offering • Ability to standardize infrastructure and extend corporate capabilities to branch offices

19. The ROI for IP Communications

20. Summary of Customer Engagements • 2200+ Customer Analysis to date • Across all major verticals • Financial Services – 228 analysis • Retail – 250 analysis • Education – 110 analysis • Government – 140 analysis • All types of deployment scenarios (greenfield, centrex, centralized call processing, replacement of new/old PBX, lease/buy) • A mix of different technologies (IPT, Contact Center, Unified Messaging, Audio Conferencing, Integrated WAN) • Different size deployments ranging from a 100 phones to 45,000 phones • Flash cuts to 5 year migrations • Global focus including U.S./ Europe/Asia/Latin America

21. Key Drivers of Positive ROI • A compelling event is driving the decision • New facility • End of useful life of PBX/Expiration of lease • Planned upgrade of data infrastructure • Phased approach to deployment starting with the most financially viable sites • Ability to leverage centralized call processing • Deployment has number of remote sites that can leverage CCP • Dynamic organization with substantial employee movement

22. Key Drivers of Negative ROI • In some cases, a significant data network upgrade is necessary to provide the foundation for reliable voice • Difficult to justify on hard cost savings alone the replacement of a relatively new PBX at a single site • Delays in the deployment of the technology delay the realization of benefits • Failure to take advantage of key value producing features of the technology • Aggressive pricing from traditional PBX vendors

23. Summary of ROI Findings • Positive Net Present Value 68% of the time • Average payback of 16-18 months • Average annual savings per user of $334 • Average # of phones in analysis = 600 phones • Average hurdle rate of 10-11% • Primary Areas of Cost Reduction • Network Administration – 48% of savings • Equipment – 28% of savings • Integrated Access/Toll-Bypass – 24% of savings Source: Converged Network Investment Calculator 7/02

24. Summary of ROI Findings - Deployment Scenarios • Paybacks vary based upon deployment scenario, with green fields • producing the most rapid payback (Months) 24 18 14 9 6 0 Green Field Newer PBX Replacement TDM Centrex Replacement Multi-site CCP Older PBX Replacement Source: Converged Network Investment Calculator 7/02

25. ROI Findings for the Financial ServicesVertical

26. ROI Findings – By Vertical Payback in Months (Months) 28 28 18 18 14 13 14 6 6 0 Government Financial Services Retail Education Healthcare Source: Converged Network Investment Calculator 8/02

27. ROI Benchmarks – Financial Services (Avg. 421 phones) Payback/Breakeven Distribution Immediate Year 1 Year 2 Year 3 Year 4 Year 5 (N=15) Net Present Value Distribution $(100K) $0K $5M $2M $500K $1M (N=15) Source: Converged Network Investment Calculator 8/02

28. Financial Services Case Study • Securities firm needed to replace older PBX that was nearing end of useful life • Needed to identify a way to reduce the costs of a constantly moving workforce • Needed to simplify management of the network and improve the productivity of the network support team • Deployed 1500 Cisco IP Phones • Deployed conference connection to offload smaller conference calls • Gave the user the ability to move their phone in an effort to save MAC charges • Leveraged extension mobility to improve utilization of real estate space • Payback of 20 Months • Net Present Value of $1.5M • Achieved an annual savings of $308/per user

29. ROI Findings for the RetailVertical

30. ROI Findings – By Vertical Payback in Months (Months) 28 28 18 18 14 13 14 6 6 0 Government Financial Services Retail Education Healthcare Source: Converged Network Investment Calculator 8/02

31. ROI Benchmarks – Retail (Avg. 1255 phones) Payback/Breakeven Distribution Immediate Year 1 Year 2 Year 3 Year 4 Year 5 (N=10) Net Present Value Distribution $(100K) $0K $5M $2M $500K $1M (N=10) Source: Converged Network Investment Calculator 8/02

32. Retail Case Study • National restaurant chain needed to provide a more cost effective voice service to remote sites • Wanted a standard solution that would lower remote site management costs and provide a consistent level of service • Wanted to greater leverage planned data network upgrade • Solution consists of 2500 Cisco IP Phones leveraging centralized call processing • Updated WAN to facilitate integrated access where available • Able to increase productivity of network support staff via centralizing call processing • Payback of 18 Months • Net Present Value of $2.7M • Achieved an annual savings of $361/per user

33. ROI Findings for the GovernmentVertical

34. ROI Findings – Government Vertical Payback in Months (Months) 28 28 18 18 14 13 14 6 6 0 Government Financial Services Retail Education Healthcare Source: Converged Network Investment Calculator 8/02

35. ROI Benchmarks – Government (Avg. 3000 phones) Payback/Breakeven Distribution Immediate Year 1 Year 2 Year 3 Year 4 Year 5 (N=10) Net Present Value Distribution $(100K) $0K $5M $2M $500K $1M (N=10) Source: Converged Network Investment Calculator 8/02

36. Government Vertical Case Study • Decided to deploy IP Telephony in place of Centrex service to 500 users across several city facilities as first step towards converging their network • Decided to lease instead of purchase new IP Telephony equipment • Annual lease costs for IPT were less then annual Centrex costs • Medium size east coast city was evaluating their future voice strategy • Had a mix of PBX, key systems and Centrex • Centrex contracts were coming due for renewal • Immediate Payback • Net Present Value of $117K • Annual savings per user of $335

37. ROI Findings for the EducationVertical

38. ROI Findings – Education Payback in Months (Months) 28 28 18 18 14 13 14 6 6 0 Government Financial Services Retail Education Healthcare Source: Converged Network Investment Calculator 8/02

39. ROI Benchmarks – Education (Avg. 283 phones) Payback/Breakeven Distribution Immediate Year 1 Year 2 Year 3 Year 4 Year 5 (N=10) Net Present Value Distribution $(100K) $0K $5M $2M $500K $1M (N=10) Source: Converged Network Investment Calculator 8/02

40. Education Vertical Case Study • Extension campus of large state university needed to replace existing end of life PBX • Needed to be able to continue to leverage a percentage of existing handsets • Was faced with an imminent upgrade cost to voicemail system and PBX • Reused 1500 analog phones, while deploying 700 IP phones of various models • Deployed (4) Call Managers and Unity voicemail • Upgraded data infrastructure • Payback of 11 Months • Net Present Value of $253K

41. Final Thoughts • As the technology matures, so does the Business Case for IP Communications • A carefully prepared ROI analysis will assist you in your efforts to internally sell IP Communications • The keys to building the ROI analysis are to understand the primary value propositions of IP Communications and to set an appropriate scope for the analysis • Cisco has a set of tools and best practices that can facilitate the ROI analysis process

42. Backup Slides

43. Cisco’s ROIfor IP Telephony

44. Brussels, Marcel Thiry Brussels, (Antares, Pegasus) * Anchorage, AK Stockley Park * London City Oslo, Göteborg Chicago, IL Helsinki Copenhagen Bloomington, MN Boise, ID Barcelona Amsterdam * Carmel, IN Paris Madrid Berlin, Mannheim, Munich, Stuttgart, Toronto Beijing * Lisbon Istanbul New York, NY Howell, NY Athens Tokyo (*) San Jose, CA Glen Allen, VA Gland Co Springs, CO RTP, NC Luxembourg Jacksonville, FL Akasaka, Fukuoka, Nagoya Tulsa, OK Rogers, OK Montgomery, AL Hong Kong Dallas MetroDallas Sales Riyadh Bangkok New Delhi Metairie, LA Baton Rouge, LA Singapore * Bryanston Auckland Wellington IP Telephony at Cisco IP TelephonyGlobal Deployment Status: 39,120+ IP Phones 153 Sites in Production 27 to go! Brisbane Asia Pac 1,725 IP Phones Americas 6,120 IP Phones Corporate 20,658 IP Phones EMEA 3,047 IP Phones Adelaide Melbourne Perth Tech Trial * Production Sydney (CM 3.0) (North Sydney, Chatswood)

45. ROI = 126% • Payback Month = 10 • NPV (@12 %) = $60 million Actual ROI Results for Cisco EMEA: FY2000 - FY2005 Business Benefit of Cisco IP Telephony (Relative Scale) Deployment of Converged E-Business Applications: IP & Web Foundation Expanded to Include Voice 2001 2000 2003 2002 2004 2005 $12.4m =$1625/emp. $9.4m =$1230/emp. Net Benefit (US$) $33m =$4320/emp. Year $33m =$4320/emp. $2.6 m =$340/emp. 2001 2000 2003 2002 2004 2005

46. Breaking Down the Benefits: Large Office Example • Notes: • Cabling benefit is a one-time benefit and is only generally applicable during the year of a building move (Cisco’s “Large Office” moved in 2001 and thus realised this benefit) • Costs for Moves, Adds and Changes (MAC’s) are based on the average cost of an outsourced PBX MAC, versus that of a Cisco IPT MAC The Single Network $450k Total Recurring $630k $60k Moves, Adds & Changes (MAC’s) (!) Maintenance (!) $120k Staff (!) (!) = Annual Recurring Benefit (+) = One-Time Benefit Total One-Time $500k $500k Cabling (+)

47. Breaking Down the Benefits: Large Office Example • Notes: • The ROI project team made a judgement call that, even though the productivity of Cisco employees is undeniably increased through the use of Cisco’s Unified Messaging (UM) and Personal Assistant (PA) applications, the benefits modelling process would be unacceptably vague because the associated business processes and policies are not yet defined (e.g. incurring a GSM call to have PA speak e-mail over the phone) • This situation will change once the new business processes surrounding UM and PA are defined. • Productivity benefits of CTI applications are substantial because they emulate those of agents at large, CTI-enabled call centres yet can be implemented at a fraction of the cost • Benefits of XML applications are actually small for Cisco because almost all Cisco employees have laptops and ubiquitous access to the Web. Organisations that are not in this same situation will most likely benefit more than Cisco due to not having to provide a PC to all employees Employee Productivity $24k $12k XML TRC Case Application (!) $1k Total Recurring $1.1+ m XML Taxi Services Application (!) $475k XML Facilities Services Application (!) CTI Screen Pop Application(!) $590k (!) = Annual Recurring Benefit (+) = One-Time Benefit CTI Screen Dial Application(!) $???k Unified Messaging & Personal Assistant (!)

48. Breaking Down the Costs: Large Office Example Costs • Notes: • In line with the highly conservative, non-greenfield approach, the ROI analysis assumes that TDM-based infrastructure (PBX, voice mail system, multiplexors, etc.) was already in place, before migration to Cisco IP Telephony • Hence TDM-based infrastructure capex costs are $0 – i.e. all capex costs used in the analysis are representative of Cisco IP Telephony equipment only $20 k Total Opex $320k $300 k IPT Bucket Specific Ongoing Costs (!) IPT Common Ongoing Costs (!) $1.5 m Total Capex $2.6 m IPT Bucket Specific Capex Costs (+) $0 TDM Infrastructure Capex Costs (+) $1.1 m IPT Common Capex Costs (+)

49. Benefit Differences of the Large, Medium, Small Offices • Large Office Results: • Cisco EMEA Headquarters, Bedfont Lakes/London, UK: 1147 Employees • ROI = 130% • Payback Month = 9 • NPV = $12.3 m • Medium Office Results: • Cisco Eschborn/Frankfurt, Germany: 171 Employees • ROI = 120% • Payback Month = 10 • NPV = $1.8 m • Small Office Results: • Cisco Sophia Antipolis, France: 35 Employees • ROI = 111% • Payback Month = 11 • NPV = $330 k

50. To drive cost savings (easier infrastructure mgmt.) To drive revenues To enable additional application capabilities Other Key Customer Drivers for IP Communications Aggregate View on Drivers • Lower Cost of “Network” Ownership • Cost savings are the primary short-term reason to converge voice, data and video onto a single IP network • This reflects the impact of the slowing economy on IT investment • Enhanced Business Communications • Creating new revenue streams and deploying new applications that can increase productivity or enhance customer care are seen as significant, but longer term benefits of convergence 60% 40% 20% 0% 1st — 428 2nd — 397 3rd — 344 Source: The META Group Multi-Client Study 2000/01