Financial Analyses - Approximations, Telephone Sets

Financial Analyses
Any financial comparison between IP-Centrex services and in-house (customer-owned) solutions must use input data that are specific to the organization under review. An exhaustive financial analysis is difficult to achieve without a considerable amount of data and effort. Even so, variables such as interest rates and market dynamics can render an exceptionally detailed financial analysis as an approximation.

An increasingly important factor is the growing popularity of IP telephony systems (usually IP-PBXs). While legacy Centrex services would normally be compared to circuit-switched digital PBXs or KTSs, it is more realistic to build comparisons between IP-Centrex and IP-PBX systems. We fully expect that digital PBXs will wane in popularity as IP telephony takes hold in more enterprises over the next few years. The financial dynamics of IP-PBXs also upset the traditional comparison, because factors such as inside wiring, system management, and application integration have changed considerably with this new technology. For these reasons our financial analyses focus on comparing IP-Centrex service to IP-PBX systems only.

Approximations
Because no large-scale IP-Centrex offerings were available at the time of this writing, we have used available information and reasonable judgment to provide estimated costs for future IP-Centrex services. Our analyses have also assumed that IP-Centrex rental costs hold steady over a multiyear provider contract, and we have brought these future rental expenditures to an approximate present value by assuming an annual discount rate of 5%.

We have assumed that the premium on IP-PBX costs, as compared with TDM PBXs, will have disappeared by 2004.

While not included in these comparisons, time versus money factors should be considered, to more accurately calculate an organization's return on investment (ROI) of a private IP-PBX option. Standard and well-known financial modeling tools such as net present value (NPV) or internal rate of return (IRR) would most likely be used, along with the weighted average cost of capital (WACC), or interest rate, depreciation, and marginal tax rate.

Investment Period
The installation of a new PBX solution ("greenfield" or major replacement) is normally treated as a 5- to 10-year investment. Even with the introduction of IP-PBXs, a comparative analysis should cover a similar range of time. Government organizations may tend to the high side (10 years) of this period, while a more dynamic company would be on the low side (5 years). We expect that new software releases for IP-PBX systems will occur more frequently over the next few years than has been the custom with legacy PBXs, due to the emerging nature of this technology.

Inside Wiring
Because the inside wiring component is now equalized when IP telephony or IP-Centrex is considered, it is not included in these calculations. You should, however, know that a small number of additional LAN cabling outlets and associated Ethernet switch interfaces may be required in various building locations in which only a phone might be required (such as lobbies).

Telephone Sets
It is reasonable to assume that IP telephones will be available both as rented units from the IP-Centrex provider or as an outright purchase by the customer organization. Per-unit costs are normally driven by the features available on the set itself (e.g., number of lines or Web browsing capability). We categorize these IP phones in the same manner as traditional phone sets: single-line (basic) phones, feature phones, executive phones, and contact-center set (softphone). In the case of purchase, the customer organization should factor in maintenance costs for the sets (which a service provider would include as a component of the rental charges).

For estimation purposes we have assumed that the cost of IP phones will drop 50% in the first 3 years that IP-Centrex is on the market, because several manufacturers should be producing them in large quantities by the year 2005.