Thursday, October 25, 2007

Getting $ from the CFO, Simple Math, Value > Cost

In my 28 years in the technology industry there has always been a struggle between IT who want more goods and services and the CFO who wants to cut spending. If you want to get your projects funded, it is important to understand the economic equation as you present your solution to the CFO, CIO or other financial driven decision makers. At the end of the day, the solution you seek to obtain funding for must provide greater value than cost.

When you present your solution to financial managers, you must understand that you are “selling” your solution to the CFO as though he is your customer – for him to buy, he must understand the value in economic terms. If your solution is presented in economic (ROI, TCO, EBITDA, etc) vernacular, your chances of success are much higher than if presented in technical vernacular (speeds, feeds, TCP/IP, etc).

While cost is generally easy to obtain, make sure that you understand all costs! Leaving costs out will create doubt that the solution should be funded. A general overview of cost includes the following:

1. Capital Expenditure = hardware + software price (often expressed as depreciation over the life of the investment on an income statement)

2. Operational expenditure = installation, training, maintenance for the life of the investment

3. Financing cost = cost of money

The total price should be factored into a useful life over the term of the investment and then divided by the number of months and divided once again by the number of users to obtain a cost per month per user. When comparing cost models, make sure you communicate the life of an investment, emphasizing that newer technology has a longer life span than legacy technology. For example, if an investment costs $100,000 but has a five year useful life it has a cost per year of $20,000 which is less money than a $70,000 investment with a three year life, equating to $23,333 per year.

The second and more difficult part of the equation is the value side. You must understand how the investment will allow the company you work for to save money or make money. For example, if you were purchasing a new communications system, the ability to automatically route calls to available agents would increase efficiency and allow you to have fewer call center reps to handle more calls. If you were deploying a network for a new facility that can handle multiple facility applications such as voice, video surveillance, video conferencing, digital signage and building controls, etc., the savings on cabling and operational expense for moves/adds/changes (MACs) is significant allowing more technology to be deployed and managed with lower headcount and therefore lower operational expense.

Consider the following hypothetical example to justify the purchase of a 100 user IP communications system for a call center with 10 users spread among two branches that has the expectation that call volume will double over the next 12 months:

Cost side:

1. Capital Expenditure : Phone system hardware and capital cost is $100,000

2. Operational Expenditure: Maintenance = $50,000 for five year s, installation = $20,000, training = $10,000.

3. Financing cost: 0% interest over 36 months = $0

The total cost in this case would be $190,000 / 60 months/100 users = $31.67 per user per month

Value side:

1. Call center users = $30,000 per year x 10 users currently. As volume doubles with the current system, users must double. With the new system, users only have to increase to 16 due to efficiencies within IP telephony such as integration into software to support screen pops, predictive dialing and 4 digit branch to branch communication. Therefore, the value obtained in this scenario is $30,000 x 4 people x 5 years = $600,000 in savings.

2. Telephone charge savings = by using IP, PSTN costs drop as WAN’s can be leveraged for inter-branch calling. In addition, conference call costs and travel costs can decrease due to the integration of new technologies like telepresence and meeting bridges. For this example, we will assume $500 per month savings or $18,000 over 60 months.

3. Cabling leverage = By installing the new system in a secondary branch, only one cabling infrastructure needs to be installed, saving about $10,000 for cable runs to support 20 new users.

The total value in this case would be ($600,000 + $18,000 + $10,000) / 60 months/100 users = $104.67 per user per month

As such, the value of $104.67 represents a better than 3:1 return on investment (ROI) versus the $31.67 per month cost.

Another example is the cost savings by implementing server and storage virtualization resulting in additional capital expenditure offset by lower maintenance, staffing and energy costs.

If you think about the value that each solution provides your company before you ask for money, your chance for funding this expense will increase!

Please let us know how we can help you justify your strategic technology decisions!

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