In telecommunications it pays to see the big picture

Published In: Keeping Good Companies
Date Published: 1st March 2004
Author: Graeme Cox

by Graeme Cox, telecommuniations specialist, Expense Reduction Analysts

- What are the implications of convergence for telecommunications?

- How does convergence result in choices concerning costs?

- How do you assess the costs of implementing new technology?

We all know that telecommunications is an area that 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?

Overview of convergence

Probably the best way of understanding convergence is to take an example with which we are all familiar. We have all lived at some time or another in homes that 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 to make a voice phone call and download from the Internet simultaneously is nother example of convergence. The list goes on.

Mobile phones and landlines are examples of two different networks, the mobile network and the public switched telephone network (PSTN).

Then there is a third kind of network, usually referred to as a data network. This is the sort of network that allows an organisation to send data between its various branches. Data can be any sort of digitised material, such as the output from a financial accounting system. The PSTN network has been around for a very long time now and data networks have also existed in commercial organisations for quite some time. The mobile network is relatively more recent.

Until quite recently, organisations used the three networks 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 means 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 or 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 per cent 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.

Assessing the costs of implementation of new technology

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. 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 per cent.

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 product. 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 ongoing 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 operational costs 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.