The big picture on convergence for Telecommunications

We all know that telecommunications is an area which sees one technology advance after another, in quick fire succession.

What, at times, is not so apparent are the implications of these technology advances, particularly when it comes to telecommunications costs.

Just now, there is a virtual revolution taking place in telecommunications, all summed up in one term – convergence.

Convergence is a term we read a lot about, but just what does it mean?

Probably the best way of understanding convergence is to take an example we are all familiar with.  We have all lived at some time or another in homes which rely on either gas or electricity for heating and cooking.  We know that you can’t take a gas oven and plug it into an electrical power point and expect it to work.  And vice versa.

However, in the world of telecommunications, thanks to the magic of convergence, you can do the equivalent.  If you use your mobile phone to download images from the internet, this is convergence.  Using your landline simultaneously to make a voice phone call and download from the internet is another example of convergence.  And so it goes on.

Up until quite recently, organisations used the three networks (mobile network, the PSTN [public switched telephone network] and the data network) independently of each other.  The view was taken that each had its own job to do.  So no-one worried about the cost of maintaining three different networks.  This was taken as an inevitable part of business.

The result was that when managers in organisations wanted to review their telecommunications costs, they tended to concentrate only on call charges – the rates they had to pay carriers to make fixed line and mobile calls.

Reviewing call charges is still a valid and necessary exercise, but as a result of convergence, there are many other aspects to consider when reviewing telecommunications costs.

Convergence has resulted in choices which in turn mean that decisions have to be made.

Going back to our original example, if you have an oven which can function by being plugged into either your gas lines or your electrical circuits, you can now choose whether you want just gas lines or electrical circuits or both.  If both offer the same utility in terms of getting your oven to work, it becomes a matter of cost.  Why pay for both gas lines and electrical circuits if just one will do the job?  And if say, gas lines are much cheaper than electrical circuits, why pay the extra for electricity?

Relating this back to the three types of telecommunications networks, we have now reached the stage where each of the networks can support other network functions.  Some people go so far as to say that within the next twenty years, the three networks as we currently know them, will vanish, to be replaced by a single network capable of supporting voice, mobile and data telephony.

While we may not quite have reached that stage, we have certainly reached the stage where voice telephony is capable of being carried on a data network – commonly referred to as IP telephony.  We can also say that in theory, voice over data networks could offer a potential 90 percent reduction in phone costs.

The catch is that things are not quite that straightforward.  Businesses may have to spend money on infrastructure and the like to achieve IP telephony and the issue then becomes whether this form of telephony is cost-effective.

So we come right back to the assessment of costs as a key determinant in assessing the usefulness of technology advances in telecommunications.

So what sorts of factors should businesses take into account in assessing the implementation of new technology?

It is a given that the technology should help the bottom line in some measurable way.  So we need ways to examine and evaluate new technologies to see whether they add value.

There are really only six factors which need to be taken into account.

1. Cost reduction
2. Increased revenue
3. Increased efficiency
4. Customer satisfaction improvement
5. Access to new markets
6. The provision of a new service.

Let’s look briefly at each of these factors.

First, cost reduction.  The technology may enable the cost of making phone calls to be reduced.  In simple terms, IP telephony makes use of an organisation’s own data network to carry calls.  Consequently, the organisation does not have to pay to use a carrier’s network leading to the possibility of savings of up to 90 percent.

However, as against this, we have to offset a number of other factors.  It may for example be necessary to upgrade the data network which will involve additional cost.  Moving the voice telephony to a data network can involve management issues.  Extra IT staff capacity may be needed to cope with this.  There may be training and related issues.

Second, an assessment needs to be made whether the new technology may result in additional revenue for the business.  For example, a Web-based company may see the opportunity to sell more products.  However, this may mean incurring more costs in other areas.

Third, a new technology may enable new levels of efficiency to be achieved.  These efficiencies will need to be carefully assessed to determine whether they add real value.

Fourth, the adoption of a new technology may lead to increased customer satisfaction.  The issue here will be whether this can be translated into revenue equivalent.

Fifth and sixth, a new technology may enable access to new markets or the provision by the business of a new service, leading to improvements to the bottom line.

By now it should be apparent that new technologies can have both positive and negative impacts on the bottom line of a business.  However, no business can afford to ignore new technologies for that reason.  In order to be able to maintain a competitive edge, businesses need the ability to swiftly and efficiently develop a business case analysis of likely technologies as they emerge, so that the appropriate decisions can be made.  If businesses are not able to do this, they may find themselves at a disadvantage as their competitors take up the benefits which new technologies can offer.

In looking at the six factors above, it can be seen that the first factor is crucial.  Businesses should at all times have up-to-date information on the costs of their current networks.  Although calculating this may be seen as a complex process, there are really only four main factors to be taken into account.

1. The network cost.  This is the recurring costs billed monthly by a carrier made up essentially of call charges and the costs of renting various types of lines and services.
2. Equipment costs.  These are generally one-time costs related to the acquisition of equipment such as PABXs and routers.
3. Operational costs.  These are the costs involved in supporting on-going adds, moves and changes and will generally consist of support staff costs.
4. Administrative costs.  There are costs involved in the monthly processing of invoices and the ongoing monitoring of network performance.  This may involve the same staff as in point 3 above or different staff.

Associated with all of the above will be a range of other factors including training and technical support and the purchase of software upgrades.

This all becomes the total cost of ownership of telecommunications which is the basic building block for development of a business case analysis for new technologies as they emerge.  This is the “big picture" for telecommunications and clearly, call charges are only a small part of the big picture.

Sound business decisions are based on careful evaluation in the light of available information.  If you know the total cost of ownership of your current telecommunications set up, you will be in the best possible position to make the appropriate decisions on the adoption of new technology.

For further information on this subject review a recent article by Graeme in Australia's Keeping Good Companies magazine which is published by the Australian Chartered Secretaries.

Prepared by Graeme K Cox, Telecommunications cost management consultant for Expense Reduction Analysts