I recently caught up with Dan Lipson, Global Converged Solutions Manager for Sprint, based in Chicago, about the ROI of SIP trunking. Dan mentioned how common it is for companies to forgo the long-term savings of SIP trunking because they did not have the capital allocated in the short term to fund a project. I have seen this many times over the years. To take advantage of operational savings, you have to go through the capital budgeting process often a year in advance, which can be a confusing maze for IT professionals.
In a speech I gave at Cisco Live not too long ago, I asked the audience how many people felt comfortable "selling" a project internally that had a payback of six months. As you can imagine, almost all the hands went up. A six-month payback project is an easy sale because it can typically be done without expending any capital (perhaps by leasing capital gear) and it usually pays for itself by the end of the fiscal year – when one would otherwise have to explain being over budget.
In fact, a number of IT professionals tell me their company only invests in IT projects with paybacks of six months or less. This tells me a lot about the challenges an IT professional might face in trying to sell a project with a longer payback. Telling IT people that no projects with paybacks over six months will be funded helps ensure that cash flows are so near-term and so likely to occur as a result of the investment that the investment can be made with far less scrutiny and financial rigor.
But all a "six-month payback rule" really means is that any project with a longer payback merely needs to go through the more complex company-wide capital budgeting process. And this is indeed a process that can be quite intimidating without a finance degree. Once you start investing money (capital funds) in one fiscal year that is expected to pay itself back with reduced costs (operating funds) in future fiscal years, you enter the realm of needing to ignore "payback" and focusing on discounted cash flows.
Payback is the simplest of ROI calculations. You simply identify the up-front cost to take an action (renting or buying a piece of hardware, for example) divided by the monthly savings that result. For example, a $250 purchase that saves you $50 a month has a payback of five months. The math is very simple. However, when you get into capital budgeting, things can more complicated, often requiring calculations such as "net present value" or NPV.
NPV is a more complicated ROI calculation, because one has to recognize that because of inflation (aka the "time value of money") the value of a dollar today is worth more than a dollar will be next year or significantly more than a dollar will be 10 years from now. If you need to calculate an NPV, the up-front cost to buying a $5,000 piece of hardware costs you 100 percent of that $5,000 in "today's dollars." However, when it comes to calculating the benefits of that investment, those might get paid back over 10 years. So depending on inflation rates, the $1,000 annual savings realized at the end of year one might only be worth 90 percent (or $900) in "today's dollars" and the $1,000 realized in year 10 might be worth only 38 percent (or $380) in "today's dollars."
Beyond the more complex math, the business cases behind these kinds of longer-term investments are even more intimidating because the further out into the future you go, the less accurate your predictions would be about the status quo had you not made the investment. These might be predictions about the future of your company, the economy, or even the various assumptions about the future prices of the current technology. At its most extreme, this can often require estimating the probability distribution of the possible range of a number of expected future values.
Fortunately, when we come back around to most technology investments, it rarely has to be this difficult.
In one of Dan’s examples, he had a potential customer in the Chicago area with 25 sites that could easily save 50 percent off the monthly cost of their old-school PSTN voice trunks by moving to SIP trunking. But the customer had not planned ahead for the capital investment in new PBX and telephony gear, so they could not move ahead with the project regardless of the savings. This shows the importance of planning now for next year's (or the year after's) capital budget allocations, to secure the capital for new equipment and take advantage of the savings currently being missed out on because of the failure to invest in SIP trunking technology.
No one expects IT (or anyone else without a finance degree) to build an entire business case on their own. To help the finance folks help you build your case, create a year-by-year table showing the initial capital outlay as a negative number in "Year 0" at 100 percent of its "today's dollar" value. Then simply show the savings in "Year 1" as a positive number at 90 percent of its "today's dollar" value, "Year 2" at 80 percent, and so on. If your payback is five years or less, this gives you a pretty good approximation of the discounted cash flows or NPV of the project. If the finance guys ask what "discount rate" you used for the "cost of capital" in your calculations, tell them it's about 10 percent; but then ask them for their help to further flesh out the business case in line with how your company does capital budgeting requests.
Any strategic investment in technology is going to require capital, and the earlier you get your project into the capital budgeting process of your company, the more likely you are to secure the funds for the needed investment six to 18 months down the road. It might seem intimidating because you have to compete against other capital projects, but the great thing about IT investments is that they touch every aspect of your business. If you can also articulate the soft benefits of your project to all the other groups that want money, you might actually get them to start supporting your project as well.
Read Christopher's blog on the ROI of SIP trunking
