the ideal numberdtipper/2011/slides3.pdf · as a threshold it establishes an equilibrium where...

The Ideal Number

Prpepared by Audits & Investigations 1

Benchmarking Financial Performance in Benchmarking Financial Performance in Network Services & InfrastructureNetwork Services & Infrastructure

The Ideal NumberThe Ideal Number

audits and investigations

technology made simplertechnology made simpler

A&IA&I

Today’s presentation is about a process where both technical and financial titles can define and measure value in IT – specifically with regards to network services.

Current models deal more with operational than financial performance. As value becomes a critical measure for IT professionals, there needs to be a common language and methodology between tech and business functions so that financial concerns are addressed more effectively. This is especially key as financial conditions in the marketplace will place additional pressures on budgets. IT professionals – including technical titles, need to be able to effectively communicate plans and strategies in order to support funding and staffing needs.

The Ideal Number is a new methodology that not only shows the full potential for savings, but enables IT professionals to predict outcomes for budget considerations.

The premise is simple and straightforward; a continuum with three points – the current position (in terms of cost), the theoretical optimum and the point where the pursuit of efficiency is negated by the cost of the effort.

Decision processDecision process

ConceptsConcepts

MechanicsMechanics

Case Case SummariesSummaries

DiscussionDiscussion



A&IA&I

You will see the following areas explored in this presentation:The decision hierarchy and processConcepts around The Ideal NumberThe mechanics of The Ideal NumberCase summaries where it was usedAnd then we will have a Q&A session

The Ideal Number


Technology Decision HierarchyTechnology Decision Hierarchy



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Who makes technology decisions?Everyone – it’s just a matter of what type of decision is required.

There are four levels in most enterprises:Technical – including engineers and specialists, IT Management – like Telecom Managers or IT Directors, IT Leadership – CIOs and VPs of Infrastructure or IT Administration, Executive Leadership Team which includes representatives of all stakeholders.

ELT and It Leadership have a Strategic outlook and are responsible for where the company is going and the brand/imageIT Management and Technical titles are concerned with Tactical issues such as how strategic objectives are actually accomplished.

In terms of how their performance is measured, the two groups are either primarily financial or technical.

It is important to understand this as decisions are based on these forces within the enterprise.

The Ideal Number


The Ideal Number


Performance: Operational Performance: Operational vsvs FinancialFinancial

Metrics Metrics Decision ToolsDecision ToolsStandardsStandards



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What goes into a decision?

The guy in the picture represents non-technical titles that often have a great influence on what gets approved and why. Therefore it is critical to understand their concerns and needs.

Metrics – numerical measurements of key events and conditions are a strong tool used in communicating how a company is progressing or achieving its goals.

In IT, there are 3 key metrics; User Satisfaction, Uptime and Data Delivery

Decisions must be supported and most of the Decision Tools available have been borrowed from other industries:

ROI – Return On Investment was taken from investors on Wall Street. The idea is a ratio between money paid out to money gained back.CBA – Cost Benefit Analysis is classic Risk Management and is used when determining how much of a risk is a decision against what is promised in benefit.

Bottom Line GainsBottom Line GainsBottom Line GainsBottom Line Gains

Bottom Line GainsBottom Line Gains

Top Line Big Top Line Big MovesMoves

Top Line Big Top Line Big MovesMoves

New LevelsNew Levels

Maturity Level 0Maturity Level 0--11 Maturity Level 2Maturity Level 2--33 Maturity Level 4Maturity Level 4--55

•• Cost cutting initiativesCost cutting initiatives•• Getting organizedGetting organized•• Ad Hoc system developmentAd Hoc system development

•• New contract, vendorNew contract, vendor•• New technologyNew technology•• Strategic initiativeStrategic initiative

•• Adaptable processesAdaptable processes•• Decision toolsDecision tools•• Linked to businessLinked to business

Quality Management PrinciplesQuality Management Principles



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Applying Quality Management principles will greatly increase the potential for good results.

On the left is conventional efforts that involve cutting cost as a standalone initiative as a result of a new manager, budget demand or home grown effort. The grayed area represents the portion often left out because of ineffective processes.

The center is either the same company in a later phase or a different one where a new contract creates the need to enhance performance. The ‘Big Move’ captures attention at a higher level and is driven by broader goals. Results are stronger, yet still lack real effectiveness as repeatability and standardized processes are not fully employed.

The third instance is with QM principles fully engaged where processes are in place for cost controls, intelligence is collected and analyzed and stakeholders have a role in the process. Contracts are negotiated with targeted outcomes, cost savings are managed on an ongoing basis and IT is able to offer solutions proactively and intelligently.

The Ideal Number


Target Current

Ideal

Target = point of diminishing returns

Threshold = point where changing trends shift between favorable / unfavorable

Threshold

The Ideal Number as target or thresholdThe Ideal Number as target or threshold



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Cost Management vs Cost Avoidance are separate issues.

Cost Management is making the most of what you have; Cost Avoidance is choosing an alternative that is better.

The Ideal Number can play a role in both scenarios. As a Target it establishes point to pursue for cost efficiency between current and perfection.

As a Threshold it establishes an equilibrium where conditions change from unfavorable to favorable.

The Ideal Number


Granular Consumption – Finding nGranular Consumption Granular Consumption –– Finding Finding nn

Accounting for the whole by counting Accounting for the whole by counting everything that is consumed.everything that is consumed.

•• Reduced to measurable unitsReduced to measurable units

•• Can occupy Can occupy ‘‘spacespace’’ within cost within cost element or represents element or represents consumption of a set capacityconsumption of a set capacity

•• Classified as either Multipliers or Classified as either Multipliers or AcceleratorsAccelerators



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In today’s IT world we think in terms of Capacities & Capabilities – how fast, how much etc. We need to think more in terms of Adoption & Absorption to understand how technology is actually consumed.Granular Consumption means accounting for the whole by counting everything that is consumed as a part. We call this finding ‘n’; the number of the cost element needed to be known in order to start understanding consumption.

Reduced to units such as lines, users, circuits, minutes of use etc.‘Space’ represents what is bought in bulk; T1s that come with a set of minutes included in the cost – it also represents simultaneous calls in something like SIP trunking.Finally, every unit is categorized as either a fixed cost (multiplier) or variable (accelerator). These terms help explain how they impact overall performance.

The Ideal Number


The Ideal Number


Multipliers & AcceleratorsMultipliers & Accelerators

Fixed Costs = Multipliers n*12, n*24, n*36,Fixed Costs = Multipliers n*12, n*24, n*36,……

Constant, even if not usedConstant, even if not usedGrow in numbers more easily than shrinkGrow in numbers more easily than shrink

Driven by time, continue until stoppedDriven by time, continue until stopped

Variable Costs = Accelerators nVariable Costs = Accelerators nu1u1, n, nu2u2, n, nu3u3, n, nu4u4……

Increase with each userIncrease with each user

Units difficult to reduce in volume Units difficult to reduce in volume

Driven by events, behaviors & job titlesDriven by events, behaviors & job titles

Multipliers + AcceleratorsMultipliers + Accelerators

May or may not be under contractMay or may not be under contractCan differ dramatically in cost by serviceCan differ dramatically in cost by service



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Multipliers - units that occur across all locations and are multiplied each month until cancelled.

Effect: 500 units over a 3 year contract life become 18,000. At $50 each, that’s almost $1 million in total.

Characteristics of Multipliers:

- Remain constant even if not used- Grow in number more easily than shrink- Bill until they are acted upon

Takeaway - Changing technologies, moving or closing offices will create additional cost until the units are terminated both on the network and on the bill.

Accelerators: - Increase exponentially, both in count and cost.

Ch i i f A l

The Ideal Number


Elements of The Ideal NumberElements of The Ideal Number

•• Applied only to the Applied only to the ‘‘Significant FewSignificant Few’’

•• All TCO factors includedAll TCO factors included

•• Stripped of all extraneous elementsStripped of all extraneous elements

•• Matched user needMatched user need

•• Tied to unit impact (Tied to unit impact (nn))

•• Theoretical optimumTheoretical optimum

The reference point used to calculate the most favorable balance of efficiency as measured against effort

The reference point used to The reference point used to calculate the most favorable calculate the most favorable balance of efficiency as balance of efficiency as measured against effortmeasured against effort



A&IA&I

The Ideal Number is actually a reference point rather than the end result. Without it, you cannot calculate the Target (T) where efficiency is measured against cost of effort.

The Ideal Number (Ni) also calculates the Benefit (B) as measured against current cost (Costc) where B= Costc – Ni

Some characteristics of ‘The Ideal Number’:

- Applied only to ‘Significant Few’ (top cost elements)- TCO factors are included- All extraneous elements are taken out- Matched to user(s) need- Tied to impact of n - It is assumed to be a perfect number – the laws of diminishing returns make it rarely achieved,

but used as not realistically achievable, but within reach

The Ideal Number


Number of UsersNumber of Users

Access LinesAccess Lines

ServicesServices

Usage Usage -- AllAll

LocationsLocationsTaxes & FeesTaxes & Fees

The Ideal Number: The Breakdown ProcessThe Ideal Number: The Breakdown Process

nn

Network Service CostsNetwork Service CostsIdeal Number = Ideal Number = a + b +ca + b +c

c c

a a

b b

a



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ClassificationClassificationSortingSortingDeselectionDeselectionDiscoveryDiscoveryRevisionRevisionQuantificationQuantification

So how is ‘The Ideal Number’ established?

Example - Calculating impact of access lines and associated costs.

A six step process:

•Classification – Creating categories for each element•Sorting – Grouping items by class•Deselection – Removing what does not belong•Discovery – Learning what happens as process is broken down•Revision – Adjusting to discovery•Quantification – Reducing cost elements to equation

Discovery has revealed a necessary adjustment based on a change in users. Revision creates na (fewer access lines). Lines, services and taxes and fees become the TCO elements. Adjusted ‘n’ now reflects new net cost.

The Ideal Number


Case SummariesCase Summaries

Government Government –– Cost Management + Contract NegotiationsCost Management + Contract Negotiations

Target Target --



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The Ideal Number can be employed in various scenarios.

Cost Management & Contract Negotiations:

Allegheny County had about 8,500 Centrex lines and 6,300 employees. Obviously there was a considerable savings potential; but how much and where do you start cutting lines?

Difference of Used vs Available(Below 90% Occupancy & More Than 20 Lines Per Account)

0

200

400

600

800

1,000

1,200

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41

# of Accounts

# of

Lin

es

Used Lines Difference



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The County is organized into departments across many locations; each with their own account.

It was determined a Cost Per extension would be a usable model to include line charges, features and usage to match the number of users. We developed a strategy we called Occupancy Rate and wanted to establish how many users were in each location compared to the line counts. Using the 911 surcharge and lines that appear on bills when there is any usage, we graphed them by accounts with 20+ lines.

The green represents the waste.

The Ideal Number


The Ideal Number


Range of Cost Per Extension

$0

$10

$20

$30

$40

$50

$60

$70

$80

$90

Entit

y A

Entit

y B

Entit

y C

Entit

y D

Entit

y E

Entit

y F

Entit

y G

Entit

y H

Entit

y I

Entit

y J

Entit

y K

Entit

y L

Aver

ages

Current Cost Per Extension Current Cost Per Extension -- $41.11$41.11Ideal Cost Per Extension Ideal Cost Per Extension -- $27.65$27.65



A&IA&I

Once we adjusted for unused lines, we then engaged in discovery to identify necessary cost elements such as features and taxes and fees.

We revised the costs and then adjusted line counts by location and account. Here you see the high mark (current cost), The Ideal Number (low point) and the Target (mid-point) based on averages.

Across the board, the starting average was $41, we then established $27 as the Target.

As it turned out, we proceeded to contract negotiations and used the learned information to drive the most significant cost elements below the previous Target and ended up about $23 after the contract was signed.



Savings: $4.5M over 3 yearsSavings: $4.5M over 3 years

Target Target --

Banking Banking –– Forecasting Budget + Cost Management Forecasting Budget + Cost Management



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County resources then proceeded on cutting lines and the combined benefit was about $4.5 million (also including the City of Pittsburgh who shared the contract).

Another scenario involved Ni as a forecasting, as well as a cost management tool.

WesBanco had made a considerable investment an IP Telephony solution for the entire 80 branch bank enterprise. What was left were analog lines needed for alarms, faxes, ISDN BRIs and other purposes.

The Ideal Number


The Ideal Number


Base Cost Per Line by Provider (Average)

$0

$20

$40

$60

$80

$100

$120

$140

$160

$180

0 10 20 30 40 50 60 70 80

Accounts

Net C

ost p

er L

ine

CBTSBCVerizon

Current Cost Per Line Current Cost Per Line -- $53.26$53.26Ideal Cost Per Line Ideal Cost Per Line -- $36.16$36.16



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A standardized configuration was established and line costs were normalized based on geography and vendor. This isolated where line costs were in variance which became both current and target. Ni was calculated at about $33 and $36 was decided as the Target.




Target Target --


Savings Potential: $332,000 over 3 yearsSavings Potential: $332,000 over 3 years

Threshold Threshold --

Healthcare Healthcare –– Decision Tool Decision Tool –– Technology Options Technology Options



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Taking out the excess cost resulted in a forecasted savings of $332,000 over the next 3 years. At this point, we are still working through the records and hundreds of accounts to normalize the cost to Target. We are about at the mid-point today and expect have the fully realized by end of year.

Finally, there is a scenario that is still under development as conditions have shifted. The decision is to substantially alter the routing patterns to drive costs from favorable interstate rates from intrastate and intralatarates.

The Ideal Number


$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

$9,000

$10,000

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LATA Intra Inter

Voice Rate Differential: in-State vs Interstate(Based on 100K minutes per month)

Voice Rate Differential: in-State vs Interstate(Based on 100K minutes per month)



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The red line here represents the substantial difference between the various jurisdictions (Inter, intra and LATA) for both outbound and inbound calls.

By employing routing that sends all calls across state lines and backhauls them over an existing VOIP network, costs will become normalized at a flat rate.

The Ideal Number


EVR Business CaseEVR Business CaseEVR Business Case

Multiple Multiple JurisdictionsJurisdictions

Unified JurisdictionUnified Jurisdiction(Interstate only)(Interstate only)

TCO FactorsTCO Factors•• > Bandwidth> Bandwidth•• > Resources> Resources•• EquipmentEquipment•• MonitoringMonitoring

Rate Factor Rate Factor -- 0 0 -- >1.5 x>1.5 x Rate Factor Rate Factor -- <1.5x <1.5x -- 00• Interstate (0%)Interstate (0%)•• Intrastate (0+)Intrastate (0+)•• IntraLATAIntraLATA (0+)(0+)

Current Cost Per Minute Current Cost Per Minute -- .0322.0322Ideal Cost Per Minute Ideal Cost Per Minute -- .0197.0197



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EVR stands for Enhanced VOIP Routing and trades lower usage costs for additional resources and infrastructure in form of bandwidth, equipment, maintenance costs and personnel.

The client has a mix of call volume which is 55% interstate and 45% intra & LATA in sufficient volumes to justify such a move. As this document is being written a new contract with the vendor has moved all the numbers down changing the cost impact. Depending on call volume growth and business continuity decisions, this will still be a strong option to consider.

Again, Ni plays a role in watching for conditions to shift in order to make a decision. Continued growth in non-interstate traffic will support such an investment.

Based on existing contract and volumes, the difference is about 30% .0322 ACPM vs .0197 ACPM – fully loaded (all TCO factors).

The Ideal Number





Target Target --



Threshold Threshold --

Healthcare Healthcare –– Decision Tool Decision Tool –– Technology Options Technology Options




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In all of these cases, Ni plays a significant role eliminating estimates, providing greater insight into the decision process and being used as a means to forecast IT budgets.

The Ideal Number




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NNii RequirementsRequirements

Commitment to processCommitment to process

Complete data sets Complete data sets

Unbiased analysis Unbiased analysis

Contextual understandingContextual understanding

Ni works more effectively if the following conditions are present:

There must be a commitment to the process.

The data used for analysis and reporting needs to be complete (everything involved is fully accounted for)

The viewpoint of analysis must not favor any predetermined outcome and follow the information as it presents itself

There much be an appreciation for the context – knowing how these decisions will impact the user community and the potential for the business changing its needs in the foreseeable future.

The Ideal Number


the ideal numberdtipper/2011/slides3.pdf · as a threshold it establishes an equilibrium where...

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