tei of avaya ip branch-final draft -...

Prepared for Avaya March 31, 2007

The Total Economic Impact™ Of Avaya IP Telephony Solutions Within A Branch Environment Multicompany Analysis

Project Director: Jon Erickson

The Total Economic Impact™ Of Avaya IP Branch Telephony Solutions Within A Branch Environment

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TABLE OF CONTENTS Executive Summary ...............................................................................................................................4

Purpose ..............................................................................................................................................4

Methodology.......................................................................................................................................4

Approach............................................................................................................................................5

Key Findings ......................................................................................................................................5

Disclosures.........................................................................................................................................6

Avaya IP Telephony Within a Branch Environment: Overview.............................................................7

Analysis...................................................................................................................................................7

Interview Highlights............................................................................................................................8

TEI Framework ..................................................................................................................................9

Costs ................................................................................................................................................11

Benefits ............................................................................................................................................15

Risk...................................................................................................................................................21

Flexibility...........................................................................................................................................23

TEI Framework: Summary...............................................................................................................23

Study Conclusions................................................................................................................................25

Appendix A: Composite Organization Description ..............................................................................26

Appendix B: Total Economic Impact Overview ...................................................................................27

Benefits ............................................................................................................................................27

Costs ................................................................................................................................................27

Risk...................................................................................................................................................27

Flexibility...........................................................................................................................................27

Appendix C: Glossary...........................................................................................................................28


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Appendix D: Adjusting For Investment Risk (Example) ......................................................................29

© 2007, Forrester Research, Inc. All rights reserved. Forrester, Forrester Wave, Forrester's Ultimate Consumer Panel, WholeView 2, Technographics, and Total Economic Impact are trademarks of Forrester Research, Inc. All other trademarks are the property of their respective companies. Forrester clients may make one attributed copy or slide of each figure contained herein. Additional reproduction is strictly prohibited. For additional reproduction rights and usage information, go to www.forrester.com. Information is based on best available resources. Opinions reflect judgment at the time and are subject to change.


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Executive Summary In January 2007, Avaya commissioned Forrester Consulting to examine the total economic impact and potential return on investment (ROI) enterprises may realize by deploying IP solutions to individual branch locations. Avaya’s IP branch solutions allow organizations to deploy effective IP Telephony solutions to individual branches coupled with creating a similar user experience throughout the organization. This study illustrates the financial impact of moving towards IP Telephony within a branch environment.

In conducting in-depth interviews with four existing global customers, Forrester found common cases of reduced telephony costs, improved administration, and operational efficiencies, as well as enhanced business process efficiencies of mobile and desk-bound employees within the branch location.

Purpose The purpose of this study is to provide readers with a framework to evaluate the potential financial impact of Avaya IP Telephony solutions specifically for the branch environment within their organizations. Forrester’s aim is to clearly show all calculations and assumptions used in the analysis. Readers should use this study to better understand and communicate a business case for investing in Avaya IP Telephony within a branch environment.

Methodology Avaya selected Forrester for this project because of its industry expertise in IP Telephony and Forrester’s Total Economic Impact™ (TEI) methodology. TEI not only measures costs and cost reduction (areas that are typically accounted for within IT) but also weighs the enabling value of a technology in increasing the effectiveness of overall business processes.

For this study, Forrester employed four fundamental elements of TEI in modeling Avaya IP Telephony within a branch environment:

1. Costs and cost reduction

2. Benefits to the entire organization

3. Flexibility

4. Risk

Given the increasing sophistication that enterprises have regarding cost analyses related to IT investments, Forrester’s TEI methodology serves an extremely useful purpose by providing a complete picture of the total economic impact of purchase decisions. Please see Appendix B for additional information on the TEI methodology.


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Approach Forrester used a five-step approach for this study.

1. Forrester gathered data from existing Forrester research relative to the Avaya IP Telephony within a branch environment and the IP Telephony market, in general.

2. Forrester interviewed Avaya branch marketing and sales personnel to fully understand the potential (or intended) value proposition of Avaya IP Telephony solutions.

3. Forrester conducted a series of in-depth interviews with four global organizations currently using Avaya IP Telephony within a branch environment.

4. Forrester constructed a financial model representative of the interviews. This model can be found in the TEI Framework section below.

5. Forrester created a composite organization based on the interviews and populated the framework using data from the interviews as applied to the composite organization.

Key Findings Forrester’s study yielded three key findings based on the modeling of the costs and benefits of a services organization with 40 branch locations and 1,550 branch employees moving away from legacy key based telephony systems to IP Telephony:

• ROI: Based on the interviews and data with the four existing customers, Forrester constructed a TEI framework for a composite organization (see Appendix A) and the associated ROI analysis illustrating the financial impact areas. As seen in Table 1, the risk-adjusted ROI for our composite company is 60% with a breakeven point (payback period) of 2.2 years after deployment.

• Benefits: Common quantified benefits identified by the interviewed organizations included reduced telephony costs, improved capital efficiency, higher administration and operational efficiency, and improved desktop and mobile productivity. In addition to these common quantified benefits, individual organizations saw cases of closer technology integration between branch locations and other customer facing contact/call centers, integration of contact center functionality within the individual branch locations, improved scalability to ramp up and ramp down specific branch locations in the event of natural or man made disasters, ability to deploy specific customer facing applications that can potentially lead to decrease in customer churn and increase in incremental revenue per customer.

• Costs: Costs to implement Avaya IP Telephony within a branch environment included the cost of hardware and software, maintenance, implementation and planning, as well as ongoing administration and training.

Table 1 illustrates the risk-adjusted five year cash flow for the composite organization, based on data and characteristics obtained during the interview process. Forrester risk-adjusts these values to take into account the potential uncertainty that exists in estimating the costs and benefits of a technology investment. The risk-adjusted value is meant to provide a conservative estimation, incorporating any potential risk factors that may later impact the original cost and benefit estimates. For a more in-depth explanation of risk and risk adjustments used in this study, please see the Risk section.


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Table 1: Summary Financial Metrics, Composite Organization – Five Year Analysis

Summary financial results Original estimate Risk-adjusted

ROI 76% 60%

Payback period (years) 2.0 2.2

Total costs (present value) ($2,055,093) ($2,103,921)

Total benefits (PV) $3,610,980 $3,357,302

Total (net present value) $1,555,887 $1,253,381

Internal rate of return (IRR) 45% 39%

Source: Forrester Research, Inc.

Forrester found higher ROIs were associated with organizations with higher telephony usage between individual branches and a central headquarters location, the ability to centralize much of their telephony administration within a central location, as well as the ability to drive adoption by branch end users of specific features and applications.

In addition, with the increase in the number of branches, the ability of the benefits per branch to scale allows the organization to further drove higher ROI based in part on the original upfront investment in Avaya.

Disclosures The reader should be aware of the following:

• The study was commissioned by Avaya and delivered by the Forrester Consulting group.

• Avaya reviewed and provided feedback to Forrester, but Forrester maintained editorial control over the study and its findings and did not accept changes to the study that contradicted Forrester’s findings or obscured the meaning of the study.

• The customer names for the interviews were provided by Avaya.

• Forrester makes no assumptions as to the potential return on investment that other organizations will receive. Forrester strongly advises that readers should use their own estimates within the framework provided in the report to determine the appropriateness of an investment in Avaya IP Telephony within a branch environment.

• This study is not meant to be used as a competitive product analysis.


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Avaya IP Telephony Within a Branch Environment: Overview According to Avaya, its IP Telephony Solution for branch offices consists of a range of solutions which provide firms with a choice of platforms designed to lower total cost of operation (TCO) while improving the efficiency and effectiveness of branch employees. The solution installed at each of the interviewed companies and evaluated for purposes of this paper is based on Avaya Communication Manager software, which provides over 700 features designed to improve the way businesses handle internal and external calls. For branch offices, Avaya Communication Manager can be deployed in a central location (HQ, Data Center or Contact Center) and endpoints in the branch can have features and applications provided via an enterprise Wide Area Network (WAN). Local media gateways (e.g. G350, G700) provide access to PSTN facilities as well as media handling resources designed to conserve bandwidth. These gateways can be configured with local survivability so that 100% feature availability is maintained for the end-users and customers calling in to the branches, even in the case of an interruption in WAN connectivity.

The characteristics of a branch network based on Avaya Communication Manager are:

• Easy administration of multiple branch locations as a single system, reducing the need for local administrators or service visits for moves, adds and changes (MAC’s).

• Access to productivity-enhancing applications for all branch users including unified messaging, unified communication through various desktop interfaces, contact center, mobility, call recording and more.

• Advanced call routing and handling designed to provide callers to branches with a consistent, branded experience regardless of where they call while providing enterprises with actionable business intelligence.

Avaya’s branch IP Telephony solutions are supported by Avaya Global Services, which provides a range of offerings from planning and consulting through implementation to on-going management and support. These services are designed to ensure successful implementation, on-time and on-budget so that enterprises can realize the benefits of IP Telephony in a timely manner.

More than simple VoIP, Avaya sees its IP Telephony Solution as a catalyst for creating a new paradigm of Intelligent Communications that makes employees more efficient, processes more effective and customers more satisfied.

Analysis As stated in the Executive Summary, Forrester took a multistep approach to evaluate the impact that implementing Avaya IP Telephony within a branch environment can have on an organization:

• Interviews with Avaya marketing and sales personnel.

• In-depth interviews of four organizations currently using Avaya IP Telephony within a branch environment.

• Construction of a common financial framework for the implementation of Avaya IP Telephony within a branch environment.


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• Construction of a composite organization based on characteristics of the interviewed organizations.

Interview Highlights A total of four interviews were conducted for this study, involving representatives from the following companies (Avaya IP Telephony within-a-branch-environment customers based in each global region):

1. A global technology services provider based in India, with a significant global presence in Europe and North America that has roughly 55 locations and an estimated 5,000 employees using IP Telephony solutions.

2. A European-based services organization, which is part of a much larger global organization, that rolled out IP Telephony to its headquarter location and completed the migration of three of the 14 branch locations and expected all branch locations totaling 3,300 endpoints to be completed by 2008.

3. A South American manufacturing organization that has regional and international branch offices which deployed IP Telephony to roughly 1,000 employees in 14 branch locations with additional growth of locations focused on the North American market.

4. A US-based financial services organization located in the Southeastern US that employs roughly 1,000 employees with roughly 24 regional branch banking locations.

The four in-depth interviews uncovered common cases where the interviewed organizations were able to reduce telephony costs, improve administration and operational efficiencies, as well as enhance business process efficiencies of mobile and desk-bound employees within the branch location. In particular, the organizations interviewed shared a set of common challenges that drove the calculations of benefits for the composite organization:

• Need to control telephony costs. All organizations noted reduced telephony costs as a factor in the movement of IP Telephony for the individual branches. It reduced overall costs of calls between the branch and other branches as well as to a central headquarters location.

• Need to maximize administration and operational efficiency. A compelling factor for several of the organizations interviewed was the efficiency created by centralizing the branch and HQ locations on a converged IP Telephony solution. In particular, several organizations noted improved efficiency of existing staff and not having to hire additional distributed staff with the growth in branches as a result of centralized management.

• Need to provide the same user experience to branch employees. Another common theme among the interviewed organizations was the need for branch office employees to have the same functionality as their colleagues at the central locations with IP Telephony. Having a similar user experience improves the connectivity between the branch and central location while at the same time reducing training costs and easing mobility across locations.

• Need to deliver communications applications to the branches. While providing a similar end-user experience was important for the interviewed organizations, several mentioned that another factor that drove them toward the use of IP Telephony was the ability to provide features and applications targeted toward direct customer-facing


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employees. As a result, several organizations noted the ability of these applications to further drive business process efficiency for both their desk-bound and mobile employees.

• Need to maintain high levels of reliability and QoS. Several organizations noted with the movement to IP Telephony, there was a significant amount of effort to ensure a high level of Quality of Service (QoS) and reliability to the branch locations. The use of external professional services, both from Avaya as well as third party providers, was a way for organizations to reduce some of the implementation risk associated with the movement to IP Telephony within the branch.

The composite organization created from the results of the customer interviews represents a regional services organization of roughly 3,550 employees with roughly 2,000 employees located at the headquarters location and 1,550 within the branch locations. The organization currently has a total of 40 branch locations, which are classified in size as either small or large. The small-sized locations have an average 25 employees per location while the typical large sized locations have on average 80 employees per location. We also assume the organization is adding one large and four small branch locations per year on average.

The organization decided to move IP Telephony within the branch environment as a way to control costs and provide enhanced services to individual branch locations. Prior to IP Telephony, the organization was using existing key-based PBX solutions at its branch locations while migrating to IP Telephony at the central location two years before examining the financial impact of IP Telephony on the branch locations. The composite organization also had already performed a network upgrade to the branches prior to the investment in IP Telephony.

TEI Framework

Introduction From the information provided in the in-depth interviews, Forrester has constructed a TEI framework for organizations considering implementation of Avaya IP Telephony within a branch office environment. The objective of the framework is to identify the cost, benefit, flexibility, and risk factors that impact the investment decision.

Composite Organization Based on the interviews with the four existing customers provided by Avaya, Forrester constructed a TEI framework, a composite company, and an associated ROI analysis that illustrates the areas affected financially. The composite organization that Forrester synthesized from these results represents a regional services organization of roughly 3,550 employees with roughly 2,000 employees located at the headquarters location and 1,550 within the branch locations. See Appendix A for more details on the composite organization.

Framework Assumptions Table 2 lists the discount rate used in the present value (PV) and net present value (NPV) calculations and the time horizon used for the financial modeling.


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Table 2: General Assumptions

Ref. General assumptions Value

Discount rate 10%

Length of analysis Five years


Organizations typically use discount rates between 8% and 16% based on their current environment. Readers are urged to consult with their finance departments to determine the most appropriate discount rate to use within their own organizations.

In addition to the financial assumptions used to construct the cash-flow analysis, Table 3 provides salary assumptions used within this analysis.

Table 3: Salary Assumptions

Ref. Metric Calculation Value

A1 Hours per week per average employee 40

A2 Working weeks per year 50

A3 Working hours per year (M-F, 9-5) 2,000

A4 System hours per year (24x7) 8,736

A5 Salary -Network administrator $90,000

A6 Hourly salary – Network administrator (A5/A3) $45



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Costs Costs for Avaya IP Telephony within branch locations include cost of hardware, software, maintenance, implementation, ongoing administration and training. The actual cost of the solution will vary depending on the number of branch offices, the level of experience of existing staff around IP Telephony, and the number of additional telephony applications rolled out to the branches. Forrester also assumes the composite organization had previously upgraded its network infrastructure as part of an ongoing refresh of network hardware. Since the investment in network refresh was made separately from the investment in IP Telephony, we chose not to include the costs as part of the overall investment to the branch.

Branch IP Telephony Hardware Cost Moving Avaya IP Telephony to individual branch locations requires an investment in IP hardware at the central and remote locations. Forrester assumes that the organization previously had legacy key-based systems that needed to be replaced with an IP-based infrastructure at each branch location. As part of the investment, we assume the composite organization will purchase either the Avaya G350 or G700 Media Gateway depending on the size of the branch location. Offices that have between eight and 72 extensions will receive the G350, and larger locations will receive the G700. While the actual configuration of these devices may vary by location, Forrester assumes a typical net price (list price minus any applicable discounts). In addition, Forrester assumes the organization will purchase the Avaya 4600 Series IP Telephone for each of its branch end users. Table 4 illustrates the breakdown of the number of units purchased and the total cost of the hardware.

Table 4: Branch IP Telephony Hardware Cost

Ref. Metric Units purchased

Net total

A1 Avaya G350 Media-Gateway 30 $157,151

A2 Avaya G700 Media Gateway 10 $95,934

A3 Avaya 4600 Series IP Telephone 1,550 $397,963

At Total hardware cost A1+A2+A3 $651,048


Table 5 illustrates the deployment breakdown of the IP hardware to the branch locations. We assume the composite organization will purchase the hardware initially and deploy it over a 12 month time period.


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Table 5: Branch IP Telephony Hardware Cost - Deployment

Ref. Metric Total value Initial Cost

A1 Avaya G350 Media-Gateway $157,151

$157,151

B1 % deployed 100%

A2 Avaya G700 Media Gateway $95,934

$95,934

B2 % deployed 100%

A3 Avaya 4600 Series IP Telephone

$397,963

$397,963

B3 % deployed 100%

Bt Hardware cost breakdown A1+A2+A3 651,048


IP Telephony Software Fees In addition to the cost of hardware, we assume the composite organization will have to purchase Avaya Communication Manager software licenses for each of the end users. Communication Manager is an integrated suite of products that includes integrated voicemail and mobility solutions. For the purpose of this analysis, we assume the organization purchases licenses at typical net price (list price minus any applicable discounts). In addition, we assume the composite organization will purchase 300 licenses of the Avaya one-X Mobile Edition Telephone software for its mobile users. Table 6 illustrates the calculation used.

Table 6: IP Telephony Software Fees

Ref. Metric Number of Units Net cost

C1 License fees – Avaya Communication Manager

1,550 $287,138

C2 Avaya Modular Messaging 1,550 $75,563

C3 Extension to cellular licenses – one-X™ Mobile Edition 300 $12,870

Ct Software license fees C1+C2+C3 $375,571



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Software and Hardware Maintenance The cost of software and hardware maintenance represents an additional cost associated with the Avaya platform. Maintenance is typically priced out monthly on a per-user basis, and we assume the cost of initial maintenance is included in the first year warranty. Table 7 illustrates the calculation used.

Table 7: Annual Maintenance

Ref. Metric Calculation Year 1 Year 2

D1 ACM software and hardware $4,805

D2 Avaya Modular Messaging $2,093

D3 Number of months 12

A4 Cost of annual maintenance (D1+D2)*D3 $82,776


Implementation Cost The interviewed organizations indicated that the implementation of the Avaya IP Telephony at branch locations was also a component of the overall investment cost. Most of the interviewed organizations indicated that they relied on a combination of their own internal staff as well as external professional services. Several organizations saw the use of third party services including Avaya professional services as a way of controlling implementation risk and ensuring smooth migration to IP Telephony for the branch locations. Implementation costs include the cost of planning and rollout, the cost to remove the existing PBX system, the cost of additional ancillary network hardware, such as additional cabling associated with implementation, as well as the cost to pilot and ramp up to the full production environment. For the purpose of this analysis, we assume the average installation cost per branch equates to $10,000 per branch location with an additional $100,000 cost at the central location to build out connectivity to the branches. Table 8 illustrates the calculation used.

Table 8: Implementation Cost


E1 Average implementation cost per branch

$10,000

E2 Total branches deployed 40

E3 Implementation cost – HQ $100,000

Et Implementation cost (E1*E2)+E3 $500,000



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Administrative And Support Costs In addition to initial implementation costs, Forrester assumes that the shift to centralized IP management will require hiring additional staff specifically trained in IP Telephony. Ongoing maintenance costs include the labor necessary to support and manage the IP Telephony environment specifically for branch locations and to add or move different IP applications for end users. This cost is offset by overall cost savings as support staff is consolidated at a centralized location. For the purpose of this analysis, the composite organization will allocate an additional Full Time Equivalent (FTE) at the central location to support and manage the branch IP environment. Assuming a fully-burdened cost of $90,000, we can calculate the total incremental cost of administration and support equates to $90,000. Table 9 illustrates the equation used.

Table 9: Administration And Support Costs


F1 Additional FTEs at HQ location

1

F2 Cost per FTE $90,000

Ft Incremental support F1*F2 $90,000


Training Costs Several customers noted that they required additional training costs above and beyond the cost of professional services. Training costs reflect the cost of additional training specifically for existing personnel as well as the additional cost to new IT employees on the Avaya platform. This cost is in addition to the professional services cost cited above and reflects the specialized training for the IT staff around migration of its existing systems to IP Telephony solution. For the purpose of this analysis, we assume the cost of additional training represents a small part of the overall implementation cost. Table 10 illustrates the calculation used.

Table 10: Training Costs

Ref. Metric Calculation Initial cost

G1 Number of people 1550

G2 Cost per person $20

Gt Training fees G2*G1 $31,000



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Total Costs The total cost for the composite organization for IP Telephony for the branch environment is illustrated in Table 11.

Table 11: Total Costs – Non-Risk-Adjusted

Cash Flow Analysis (Original Estimates)

Costs Initial Year 1 Year 2 Year 3 Year 4 Year 5 Total Present value

Hardware cost breakdown (651,048) (651,048) (651,048)

Software license fees (375,571) (375,571) (375,571)

Annual maintenance (82,776) (82,776) (82,776) (82,776) (331,104) (238,534)

Administration and support (45,000) (67,500) (90,000) (90,000) (90,000) (382,500) (281,667)

Implementation cost (250,000) (250,000) (500,000) (477,273)

Training Fees (31,000) (31,000) (31,000)

Total ($1,307,619) ($295,000) ($150,276) ($172,776) ($172,776) ($172,776) ($2,271,223) ($2,055,093)


Benefits The second component of this analysis looks at the potential benefits associated with an organization investing in Avaya IP Telephony within the branch environment. Among the Avaya customers interviewed, common quantified benefits included:

• Reduced telephony management and administration

• Telephony cost savings

• Reduced software maintenance expense

• Improved branch end user impact

In addition to the common quantified benefits cited by the interviewed organizations, there were several cases of individual organizations citing actual benefits resulting from the introduction of Avaya IP Telephony within the branch environment. These included:

• Closer technology integration between branch locations and other customer facing contact/call centers.

• Integration of contact center functionality within the individual branch locations.


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• Improved scalability to ramp up and ramp down specific branch locations in the event of natural or man made disasters.

• Ability to deploy specific customer facing applications that can potentially lead to decrease in customer churn and increase in incremental revenue per customer.

While not quantified as part of the common benefits cited in this study, readers should evaluate the additional impact of these benefits in their existing environment and the longer term impact of IP Telephony. Avaya’s scalability and depth of IP applications was a factor in achieving these benefits for the individual customers.

Reduced Telephony Management And Administration A common theme among the interviewed organizations was whether the movement to IP Telephony within the branch was able to provide them with the ability to manage the growing telephony environment at the branch with fewer staff in a centralized environment. Ongoing tasks such as adding or changing users, having to make physical changes at each of the branch locations, making updates to telephony applications, as well as improving the integration between the headquarters location (which was already IP Telephony enabled) and the branch locations all drove efficiency within the administration and operations staff. As a result, even with taking on additional staff in the centralized environment, the net impact was a positive gain in overall administration cost savings.

Interviewed organizations that had experienced an increase in administration efficiency indicated that the impact of improved administration efficiency was seen through either a transfer of existing staff away from distributed administration at the branch level or an anticipated reduction in the growth of administration staff with the anticipated growth of branches. Based upon the findings of the interviewed organizations, the composite organization had a staff of seven FTEs at a fully-burdened salary of $90,000. By moving away from the previous key-based environment to IP Telephony, the organization was able to centralize its telephony administration, reducing the level of staff resources to roughly four FTEs. Table 12 illustrates the calculation used.

Table 12: Reduced Branch Telephony Management And Administration

Ref. Metric Calculation Per period

A1 Total number of administrators 7

A2 Annual salary $90,000

A3 Estimated savings in administrators 40%

At Administration cost savings A1*A2*A3 $252,000


Telephony Cost Savings A second common benefit mentioned by the interviewed organizations was the reduction in telephony costs to the branches as a result of moving to IP Telephony. Several of the organizations indicated that the cost differential between traditional PBX local and long distance and IP Telephony calling rates and reduction of trunk access charges was a key component in their decision to move


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away from the PBX environment. For the branch offices in particular, organizations saw the potential for reducing outbound call costs between the individual branches, the branch and the headquarters location, and outbound calls to individual customers. In addition, costs savings around reduced trunk access charges contributed to the overall cost savings around IP Telephony.

To calculate reduced telephony costs, we first need to make assumptions around the number of local and long distance calls placed by a branch within the organization. Table 13 illustrates the call volume assumptions across the individual branches.

Table 13: Call Volume Assumptions

Metric Value

Outbound calls per day per branch 450

% calls – company - local 40%

% calls – company - long distance 60%

Total length of call (minutes) 5


Table 14 illustrates the projected cost of traditional PBX calls for local and long distance and the estimated reduction in cost as a result of moving to IP Telephony within the branch. For the purpose of this analysis, Forrester assumes the cost of a traditional PBX local call is .03 per minute while the cost for long distance is .06 per minute Assuming the average length of a call is 5 minutes, we can calculate the cost per call (.15 cents for local calls and .30 cents for long distance calls.) Assuming on average 450 outbound calls per day per branch, we can calculate the yearly telephony cost across branches for the PBX solution. Forrester assumes for the composite organization a 35% yearly reduction in the cost of telephony across the individual branch locations as a result of using IP Telephony.

Table 14: Calculated Savings – Reduced Telephony Cost

Per min

Per call

Per day

Per week

Per year

Total across branches

Estimated savings

Total savings

Cost per minute-local $0.03 $0.15 $27.00 $135.00 $6,750 $270,000 35% $94,500

Cost per minute-LD $0.06 $0.30 $81.00 $405.00 $20,250 $810,000 35% $283,500

Total $108.00 $540.00 $27,000 $1,080,000 $378,000


Reduced Software Maintenance Expense If the organization consolidates its branch environment to IP Telephony within the branches and at the central headquarters location, the organization can reduce spend on existing PBX equipment within the branches. While the cost of those licenses cannot be recovered, we can assume that the organization will no longer have to pay annual maintenance on those licenses. For the purpose of this analysis, we assume that the organization can reduce its annual maintenance fees by $60,000


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per year, which represents 20% of the total license spend of the legacy solution. This benefit, however, will be offset by the potential increase in maintenance fees assuming that additional licenses of the standardized platform will be purchased. Table 15 illustrates the calculation used.

Table 15: Reduced Software Maintenance Spend


C1 Legacy system license cost $300,000

C2 Percent maintenance 20%

Ct Reduced software maintenance spend C1*C2 $60,000


End-User Impact of Branch IP Telephony Another key benefit mentioned by end users as a driver for adopting IP Telephony in the branch was the ability to provide end users with the tools to maximize their productivity around business processes. This is manifested in two separate areas. The first one was being able to provide branch end users with a similar telephony experience at the branch locations, which enables the organization as a whole to effectively rollout specific applications to both desk-bound and mobile workers. Secondly, IP Telephony enables the organization to tailor specific applications for the branches that are typically the front line of customer interactions.

The financial impact of increasing end-user experience can be seen through increases in productivity of both desktop and mobile branch office employees. In the case of desktop employees, features such as integrated voicemail and advanced call routing can reduce the time to complete a business process. One organization mentioned a 20% improvement in business process time for their desk-bound workers by being able to quickly connect to other team employees between the branch office, remote workers, and the headquarters location quickly.

For the purpose of this analysis, we assume the organization has a combination of deskbound and mobile employees within the branch locations. In addition, roughly 10% of employees will not be affected by the movement to IP telephony. To calculate the impact on desk-bound end users within the branch, we assume that roughly 60% of the 1,550 branch office workers are non-mobile but collaborate in teams both across the branch offices and with employees at the headquarters location. Prior to the movement to IP Telephony, we assume that the average user spends roughly 30 minutes per week connecting to other team members, responding to missed voicemails, and identifying and locating other employees. Having applications that specifically improve the connectivity between groups enables enhanced productivity of an estimated 30%. In addition, we assume that of the 40% time regained, only 30% of the time actually translated into bottom line value. Table 16 illustrates the calculation used.


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Table 16: Productivity Savings – Desk-Bound


D1 Total users 1550

D2 % of user impacted 60%

D3 Hours per week 0.5

D4 Est. productivity imp. 40%

D5 Fully-burdened salary –hourly

60

D6 % productive time 30%

Dt End-user impact – desk-bound D1*D2*D3*D4*D5*D6*50 167,400


In addition to desk-bound productivity savings, one additional area of business impact savings is on mobile users. Several of the organizations interviewed indicated that the services industry requires a large percent of their employees to be mobile between branch locations as well as between the central headquarters office and the branch locations. Many of the mobile workers do not have a specific office location but require a single contact number enabling improved access. Having a unified telephony between the branches and central location can enable mobile workers to be connected at different locations thus improving overall business process.

To calculate the impact on mobile end users, we assume that roughly 30% of the 1,550 branch office workers are mobile throughout the branch office and headquarters location. Prior to the movement to IP Telephony, we assume that the average user spends roughly one hour per week responding to missed calls, locating other mobile employees, and checking multiple voicemail accounts. We assume having applications that specifically improve the connectivity between groups enables enhanced productivity of an estimated 30%. In addition, we assume that of the 40% time regained, only 30% of the time actually translated into bottom line value. Table 17 illustrates the calculation used.


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Table 17: Productivity Savings — Mobile


E1 Total users 1550

E2 % of user impacted 30%

E3 Hours per week 1

E4 Est. productivity imp. 40%

E5 Fully-burdened salary 60

E6 % productive time 30%

Et End-user impact – mobile E1*E2*E3*E4*E5*E6*50 167,400


Total Benefits Table 18 illustrates the total benefits over a five-year period. Benefits are reduced by 25% in Year 1 to take into account the time to ramp up the branch locations onto IP telephony. Reduced software maintenance spend does not begin until Year 2 due to the time it takes to suspend the existing legacy maintenance contract.

Table 18: Total Benefits — Non-Risk-Adjusted

Benefits Year 1 Year 2 Year 3 Year 4 Year 5 Total Present Value

Administration cost savings 189,000 252,000 252,000 252,000 252,000 1,197,000 898,006

Reduced telephony cost 283,500 378,000 378,000 378,000 378,000 1,795,500 1,347,008

Reduced software maintenance spend 60,000 60,000 60,000 60,000 240,000 172,902

End-user impact – desk-bound 125,550 167,400 167,400 167,400 167,400 795,150 596,532

End-user impact – mobile 125,550 167,400 167,400 167,400 167,400 795,150 596,532

Total $723,600 $1,024,800 $1,024,800 $1,024,800 $1,024,800 $4,822,800 $3,610,980



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Risk Forrester defines two types of investment risk associated with this analysis: implementation and impact risk. Implementation risk is the risk that a proposed technology investment may deviate from original resource requirements needed to implement and integrate the investment resulting in higher costs than anticipated. Impact risk refers to the risk that the business or technology needs of the organization may not be met by the technology investment resulting in lower overall total benefits. The greater the uncertainty, the wider the potential range of outcomes for cost and benefit estimates. More meaningful and accurate estimates and a more accurate projection of the return on an investment will result by directly adjusting the investment for risk.

The following implementation risks are identified as part of this analysis:

• Installation and testing could demand more time for moving to an IP Telephony environment and could take longer than originally anticipated.

• Acquisition costs could be higher than originally anticipated for IP Telephony hardware and software.

• The administrative cost to support the IP Telephony environment could be higher than originally anticipated.

The following impact risks are identified as part of the analysis:

• The level of adoption of IP Telephony within the branch offices could be lower than originally anticipated.

• Movement of administration staff could take longer than originally anticipated leading to reduced administration cost savings.

• The amount of existing maintenance spend could be lower than originally anticipated leading to reduced cost savings.

• The level of business process impact could be lower than originally anticipated.

Steps For Measuring Investment Risk In order to calculate the final risk adjusted estimates, Forrester applies a multistep process examining the impact of bias and variance on cost and benefit estimates.

• Step 1: Calculate original cost and benefit estimates. This is the initial calculation of the cost and benefit estimates without accounting for the impact of investment risk.

• Step 2: Calculate the impact of bias for cost and benefit estimates. To account for the impact of bias (most organizations overestimate benefits and underestimate cost estimates), this step recalculates the original cost and benefit estimates by using the average of the original estimate (calculated in Step 1) and a low and a high estimate.

• Step 3: Calculate variance for cost and benefit estimates. This step measures the impact of variance on cost and benefit estimates. Variance is a measure of the possible range of outcomes for cost and benefit estimates. Higher variance implies a wider range of possible outcomes, increasing the uncertainty in cost and benefit estimates.


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The three steps are used to identify and incorporate the full impact of risk as part of a technology decision. The tables below illustrate the impact of implementation and impact risk on cost and benefit estimates. For more information on the application of risk, please see Appendix D.

Table 19: Risk Adjustment — Cost

Step 1 Step 2 Step 3

Costs Original estimate High Low Bias adjustment Risk-adjusted

% Value % Value

Hardware cost breakdown (651,048) (651,048) (651,048) 100% ($651,048) 100% (651,048)

Software license fees (375,571) (375,571) (375,571) 100% ($375,571) 100% (375,571)

Annual maintenance (331,104) (331,104) (331,104) 100% ($331,104) 100% (331,104)

Incremental support (382,500) (478,125) (382,500) 108% ($414,375) 102% (422,663)

Implementation cost (500,000) (580,000) (420,000) 100% ($500,000) 103% (515,000)

Training fees (31,000) (46,500) (23,250) 108% ($33,583) 107% (35,934)


Table 20: Risk Adjustment — Benefit


Benefit Original estimate High Low Bias adjustment Risk-adjusted

% Value % Value

Administration cost savings 1,197,000 1,346,625 1,047,375 100% 1,197,000 97% 1,161,090

Reduced telephony cost 1,795,500 1,795,500 1,282,500 90% 1,624,500 97% 1,575,765

Reduced software maintenance spend 240,000 240,000 240,000 100% 240,000 100% 240,000

End-user impact - desk-bound 795,150 795,150 735,514 98% 775,271 99% 767,519

End-user impact - mobile 795,150 795,150 675,878 95% 755,393 98% 740,285



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Flexibility Flexibility, as defined by Forrester’s TEI methodology, represents an investment in additional capacity or agility today that can be turned into future business benefits at some additional cost. Flexibility benefits typically increase with the scalability of the technology investment. This provides an organization with the “right” or the ability to engage in future initiatives but not the obligation to do so. In the case of this investment, there are multiple scenarios in which a customer might choose to purchase IP Telephony for the branch locations with the intention of future scalability within its branch environment. These may include closer technology integration between branch locations and other customer facing contact/call centers, integration of contact center functionality within the individual branch locations, improved scalability to ramp up and ramp down specific branch locations in the event of natural or man made disasters, ability to deploy specific customer facing applications that can potentially lead to decrease in customer churn and increase in incremental revenue per customer.

While Forrester believes organizations that their use of IP Telephony can take advantage of these flexibility options, quantification (using the financial industry standard Black-Scholes or the binomial option pricing models) of the additional value associated with these options for this customer would require scenario development and forward-looking analysis that is not available at this time.

The value of flexibility is unique to each organization, and the willingness to measure its value varies from company to company (see Appendix B for additional information regarding the flexibility calculation).

TEI Framework: Summary Considering the financial framework constructed above, the results of the costs, benefits, risk, and flexibility sections using the representative numbers can be used to determine a return on investment, net present value, and payback period. Table 21 shows the consolidation of the numbers for the composite organization.

Table 21: Cash Flow Summary

Summary financial results Original estimate Risk-adjusted

ROI 76% 60%

Payback period (years) 2.0 2.2

Total costs (PV) ($2,055,093) ($2,103,921)

Total benefits (PV) $3,610,980 $3,357,302

Total (NPV) $1,555,887 $1,253,381

Internal rate of return (IRR) 45% 39%


It is important to note that values used throughout the TEI Framework are based on in-depth interviews with four organizations and the resulting composite organization built by Forrester. Forrester makes no assumptions as to the potential return that other organizations will receive within their own environment. Forrester strongly advises that readers use their own estimates within


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the framework provided in this study to determine the expected financial impact of migrating to IP Telephony for branch locations.


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Study Conclusions Forrester’s in-depth interviews with Avaya customers yielded several important observations:

• Based on information collected in interviews with current Avaya IP Telephony customers, Forrester found that organizations can realize benefits in the form of reduced telephony costs, improved capital efficiency, higher administration and operational efficiency, and improved desktop and mobile productivity.

• In addition to common quantified benefits, individual organizations also indicated the impact of benefits specific to their organizations. These included the ability to provide stronger links between the branch locations and other customer-facing channels such as call/contact centers, the ability to ramp up or ramp down different branch locations in less time than traditional PBX systems, and the need to deploy specific applications that tie directly to uplifts in incremental revenue.

• Of the customers interviewed, several factors contributed to the difference in ROIs. Forrester found higher ROIs were associated with organizations with higher telephony usage between individual branches and a central headquarters location, the ability to centralize much of their telephony administration within a central location, as well as the ability to drive adoption by branch end users of specific features and applications.

The financial analysis provided in this study illustrates the potential way an organization can evaluate the value proposition of IP Telephony for branch locations. Based on information collected in four in-depth customer interviews, Forrester calculated a five-year risk-adjusted ROI of 60% for the composite organization with a payback period of 2.2 years. All final estimates are risk-adjusted to incorporate potential uncertainty in the calculation of costs and benefits.

Based on these findings, companies looking to implement Avaya IP Telephony solutions can see quantitative benefits within their environment. Using the TEI framework, many companies may find the potential for a compelling business case to make such an investment.


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Appendix A: Composite Organization Description The composite organization created from the results of the customer interviews represents a regional services organization of roughly 3,550 employees with roughly 2,000 employees located at the headquarters location and 1,550 within the branch locations. The organization currently has a total of 40 branch locations, classified in size as either small or large. The small-sized locations have an average of 25 employees per location while the typical large-sized locations have an average of 80 employees per location. We also assume the organization is adding one large and four small branch locations per year on average.

The four in-depth interviews uncovered cases where the interviewed organizations were able to reduce telephony costs, improve administration and operational efficiencies, and enhance business process efficiencies of mobile and desk-bound employees within the branch location. In particular, the organizations interviewed shared a set of common challenges that drove the calculations of benefits for the composite organization:

• Need to control telephony costs. All organizations noted reduced telephony costs as a factor in the movement of IP Telephony for the individual branches. Several of the organizations that had branches internally noted that this was a key factor in moving to IP Telephony. It reduced costs of calls between the branch and other branches as well as to a central headquarters location.

• Need to maximize administration and operational efficiency. A compelling factor for several of the organizations interviewed was the efficiency created by centralizing the branch and HQ locations on a converged IP Telephony solution. In particular, several organizations noted improved efficiency of existing staff and not having to hire additional distributed staff with the growth in branches as a result of centralized telephony control.

• Need to provide the same user experience to branch employees. Another common theme among the interviewed organizations was the need for branch office employees to have the same functionality as their colleagues at the central locations with IP Telephony. Having a similar user experience improves the connectivity between the branch and central location while at the same time reducing training costs and easing mobility across locations.

• Need to deliver communications applications to the branches. While providing a similar end-user experience was important for the interviewed organizations, several mentioned that another factor that drove them toward the use of IP Telephony was the ability to provide features and applications targeted toward direct customer-facing employees. As a result, several organizations noted the ability of these applications to further drive business process efficiency for both their desk-bound and mobile employees.

• Need to maintain high levels of availability and QoS. Several organizations noted with the movement to IP Telephony, there was a significant amount of effort to ensure a high level of Quality of Service (QoS) and availability to the branch locations. The use of external professional services, both from Avaya as well as third party providers, was a way for organizations to reduce some of the implementation risk associated with the movement to IP Telephony within the branch.


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Appendix B: Total Economic Impact Overview Total Economic Impact is a methodology developed by Forrester Research, Inc. that enhances a company’s technology decision-making processes and assists vendors in communicating the value proposition of their products and services to clients. The TEI methodology helps companies demonstrate, justify, and realize the tangible value of IT initiatives to both senior management and other key business stakeholders.

The TEI methodology consists of four components to evaluate investment value: 1) benefits; 2) costs; 3) risks; and 4) flexibility. For the purpose of this analysis, the impact of flexibility was not quantified.

Benefits Benefits represent the value delivered to the user organization — IT and/or business units — by the proposed product or project. Often product or project justification exercises focus just on IT cost and cost reduction, leaving little room to analyze the effect of the technology on the entire organization. The TEI methodology and the resulting financial model place equal weight on the measure of benefits and the measure of costs, allowing for a full examination of the effect of the technology on the entire organization. Calculation of benefit estimates involves a clear dialogue with the user organization to understand the specific value that is created. In addition, Forrester also requires that there be a clear line of accountability established between the measurement and justification of benefit estimates after the project has been completed. This ensures that benefit estimates tie back directly to the bottom line.

Costs Costs represent the investment necessary to capture the value, or benefits, of the proposed project. IT or the business units may incur costs in the forms of fully-burdened labor, subcontractors, or materials. Costs consider all the investments and expenses necessary to deliver the proposed value. In addition, the cost category within TEI captures any incremental costs over the existing environment for ongoing costs associated with the solution. All costs must be tied to the benefits that are created.

Risk Risk measures the uncertainty of benefit and cost estimates contained within the investment. Uncertainty is measured in two ways: 1) the likelihood that the cost and benefit estimates will meet the original projections, and 2) the likelihood that the estimates will be measured and tracked over time. TEI applies a probability density function known as “triangular distribution” to the values entered. At a minimum, three values are calculated to estimate the underlying range around each cost and benefit.

Flexibility Within the TEI methodology, direct benefits represent one part of the investment value. While direct benefits can typically be the primary way to justify a project, Forrester believes that organizations should be able to measure the strategic value of an investment. Flexibility represents the value that can be obtained for some future additional investment building on top of the initial investment already made. For instance, an investment in an enterprise-wide upgrade of an office productivity suite can potentially increase standardization (to increase efficiency) and reduce licensing costs. However, an embedded collaboration feature may translate to greater worker productivity if activated. The collaboration can only be used with additional investment in training at some future point in time. However, having the ability to capture that benefit has a present value that can be estimated. The flexibility component of TEI captures that value.


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Appendix C: Glossary Discount rate: The interest rate used in cash-flow analysis to take into account the time value of money. Although the Federal Reserve Bank sets a discount rate, companies often set a discount rate based on their business and investment environment. Forrester assumes a yearly discount rate of 10% for this analysis. Organizations typically use discount rates between 8% and 16% based on their current environment. Readers are urged to consult their organizations to determine the most appropriate discount rate to use in their own environment.

Internal Rate of Return (IRR): A measure of return similar to ROI. IRR is the discount rate that makes the net present value from all cash flows equal to zero. Generally the higher the IRR, the greater the return the project will provide to the organization.

Net present value (NPV): The present or current value of (discounted) future net cash flows given an interest rate (the discount rate). A positive project NPV normally indicates that the investment should be made, unless other projects have higher NPVs.

Present value (PV): The present or current value of (discounted) cost and benefit estimates given at an interest rate (the discount rate). The PV of costs and benefits feed into the total net present value of cash flows.

Payback period: The breakeven point for an investment. The point in time at which net benefits (benefits minus costs) equal initial investment or cost.

Return on investment (ROI): A measure of a project expected return in percentage terms. ROI is calculated by dividing net present value benefits (benefits minus costs) by present value costs over a five-year period.

A Note On Cash-Flow Tables The following is a note on the cash-flow tables used in this study (see the Example Table below). The initial investment column contains costs incurred at “time 0” or at the beginning of Year 1. Those costs are not discounted. All other cash flows in Year 1 through Year 3 are discounted using the discount rate shown in Table 2 at the end of the year. Present value (PV) calculations are calculated for each total cost and benefit estimate. Net present value (NPV) calculations are not calculated until the summary tables and are the sum of the initial investment and the discounted cash flows in each year.

Example Table

Ref. Category Calculation Initial cost Year 1 Year 2 Year 3 Total



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Appendix D: Adjusting For Investment Risk (Example) This example provides a high-level illustration of the measurement of investment risk to a single benefit estimate. The table below provides a high-level overview of the following steps.


Benefit Original estimate High Low Bias adjustment Risk-adjusted

% Value % Value Benefit 1 $2,000 $2,400 $400 80% $1600 87% $1395

Step 1: Calculate Original Cost And Benefit Estimates

Suppose that an organization is trying to estimate the different types of benefits that might arise from a given technology investment. One potential expected benefit is savings per employee from the use of the technology. A sample benefit calculation is as follows:

Ref. Metric Calculation Estimate

A1 Number of employees 200

A2 Savings per employee $10

At Total yearly estimated savings A1*A2 $2,000

The $2,000 represents the organization’s original estimate of the yearly impact of the technology investment.

Step 2: Calculate The Impact Of Bias For Cost And Benefit Estimates

In Step 2, we account for the impact of bias in our original cost and benefit estimates. To measure the impact of bias, we need to calculate the range of possible outcomes of our original estimate by estimating possible high/low variables around our original estimates.

Ref. Metric Calculation Estimate Low High

A1 Number of employees per year

200

A2 Savings per employee $10

A3 Total yearly estimated savings A1*A2 $2,000 $400 $2,400

B1 Bias-adjusted estimate ($2,000+$400+$2,400)/3 $1,600


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In the case of our example, we have calculated our original estimate ($2,000), our low estimate ($400), and our high estimate ($2,400). The unbiased estimate is calculated as the mean of the high and low estimates: [($2,000 + $1,200 + $2,400)/3 = $1,600]. The revised estimate is now $1,600. Reference A4 in the above table presents the revised estimate.

Step 3: Calculate The Impact Of Variance On Cost And Benefit Estimates

Once we have determined the impact of bias in our original estimates, the next step is to calculate the impact of variance. Variance measures the possible spread within our estimates. In the case of our example, the variance is based upon the low estimate ($400), the high estimate ($2,400), and the revised estimate ($1,600). A wider spread would create higher uncertainty, and as a result, greater risk.

To calculate the impact of variance, we need to use the following calculations:

( ) ( ) ( )[ ] ( ) ( ) ( ) ( ) ( ) ( ) ( ) )2(18

2222 222

xVarHxxxHxLxxLxHxxLx=

∗∗−∗−∗−++

Where

Lx Low estimate $400

X2 Revised (bias-adjusted) estimate $1,600

Hx High estimate $2,400

( ) ( ) ( )[ ] ( ) ( ) ( ) ( ) ( ) ( ) 16888918

240016002400400160040024001600400 222

=∗−∗−∗−++

The standard deviation represents the square root of the variance:

( ) ( )22 xVarx =∂

( ) 4111688892 ==∂ x

The final calculation in our analysis is to create a measure for the impact of risk on the cost or benefit estimate. To do this, we use the following equation:

Risk impact: [(standard deviation of estimate)/ (unbiased estimate)] * ½

Risk impact = ( )[ ]

21

221 ∗⎥⎦

⎤⎢⎣⎡ ∂−

xx


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Risk impact = %2.87%8.12121

16004111 =−=∗⎥⎦

⎤⎢⎣⎡−

The logic behind the equation for risk impact is as follows:

• We first divide the standard deviation into the unbiased estimate to get an estimate of the magnitude of the mean of the distribution to the possible spread of the distribution. This ratio allows us to compare the impact of risk multiple cost and benefit estimates by reducing them to a percentage.

• We next multiply the original ratio by ½ to measure only the likelihood of the potential downside of the estimate. Multiplying by ½ allows us to look at the part of the distribution where the likelihood that the costs will be higher than estimated (the right side of the distribution) or where benefits will be lower than originally estimated (the left side of a normal distribution).

The table below illustrates the progression of the original benefit estimate to the risk-adjusted benefit estimate, accounting for the impact of variance.

Impact of bias and risk

Original estimate $2,000

Revised estimate $1,600

Risk-adjusted estimate $1,395

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