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Outsourcing IP VPNs: How to measure ROI

This column covers selecting outsourced service providers, specific IP VPN and related services to outsource, and accurately gauging the ROI for outsourcing VPNs.

Vab Goel

What is driving the trend towards outsourced virtual private networks (VPNs)? The answer can be summed up easily: more, more, more. Networks are growing more complex, and enterprises need more of them, particularly as they are driven to expand globally more than ever before to meet revenue expectations. At the same time, they are being forced to do it all with less -- less money, less staff and less time.

Enter outsourcing. It's an option that's increasingly inevitable for companies to keep up and gain a competitive edge in today's market climate. Cost savings are a key driver, enabling enterprises access to valuable network support resources that are too costly or impractical to build in-house, such as a 24x7 global help desk. The question is how to best go about selecting outsourced service providers, specific IP VPN and related services to outsource, and accurately gauging their return on investment (ROI).

All or nothing? Just say no
Typically, the menu of carrier-managed VPN services is less than appealing, given their fixed set of services using a fixed set of providers. Forward-thinking service providers are answering the enterprise dilemma with a la carte options that solve particular pain points, rather than requiring wholesale outsourcing. Need to outsource just the monitoring of your existing VPN? Just the provisioning, installation and operation of your Asia-Pac VPN? Just the management of myriad access providers around the world? No problem. Specialized VPN service providers are flexible, customizing either piecemeal or full-scale managed solutions using a blend of technologies and providers with a true agnostic approach.

Unlike Frame Relay, which requires physically connecting all locations together via one network, VPNs enable enterprises to exploit multiple global IP networks to achieve built-in redundancy, optimal performance, and the opportunity to select different service providers to manage the network.

Not sure where to start? Selective services such as cost and performance benchmarking analyses are also available, enabling enterprises to leverage expertise to assess the current state of their networks and, for example, whether they are paying too much or are in line with the most aggressive market rates. These providers can renegotiate rates, as well as handle tasks such as RFP management. The list of out-tasked to fully outsourced services is growing exponentially, allowing enterprises to customize their outsourcing to better focus on revenue-generating business while improving network availability, quality of service and security through stringent service guarantees and highly skilled 24x7 resources.

Once the case is made to move forward in any direction, enterprises should demand a business case -- with ROI -- be part of the initial network assessment. This should include a number of baseline considerations, such as current network infrastructure, critical network application drivers, network security, IT staff and capabilities, and current network, training and maintenance costs to make the most valid comparison.

Beyond the ABCs of ROI
There are a number of concrete considerations in evaluating the ROI of any outsourced VPN, whether against a legacy environment or a do-it-yourself scenario. These include key one-time costs, such as equipment, installation, access, service activation and migration. You'll also need to add key recurring costs, including: CPE management, access, managed ports, remote access user connections and solution redundancy. Naturally, there are associated internal costs as well as fees paid to the service provider. Keep in mind that in assessing the value of new functionality -- such as disaster recovery or support for overlay voice and video -- the end result may not be a true apples-to-apples comparison.

The analysis should include monthly, 3-year and 5-year timelines, including one-time charges, months to payback, percentage savings and dollar savings -- both monthly and annually.

Beyond hard costs, enterprises must evaluate the more qualitative and strategic benefits. While it is sometimes difficult to assign hard costs in this area, even conservative assumptions will help reflect actual return. These include increases in IT staff and company employee efficiency, productivity and morale; decreases in network downtime (and revenue lost to downtime); direct Internet access resources per site; performance and bandwidth increases; enablement of new applications; and speed and ease of adding or deleting users, locations, and partners to the network.

An area sometimes overlooked in calculating soft costs includes time expended by IT staff to develop and price support services for internal employees. If buying services from multiple carriers (which is advisable to mitigate risk), consider the time cost involved in contract negotiation, billing consolidation and other aspects of multi-carrier management. For an international network, selecting a provider that offers a single point of contact and a single bill for multiple services across multiple countries can result in major dividends.

There are other helpful rules of thumb based on generally accepted assumptions, such as the following put forth by industry research firm IDC. These include:

  • Burdened salary (salary + 50% for benefits and overhead) to qualify efficiency and productivity savings
  • Downtime = number of hours multiplied by number of users affected
  • Impact of unplanned downtime = impaired end user productivity and lost revenue
  • Lost productivity = downtime multiplied by burdened salary
  • Lost revenue = downtime multiplied by average revenues generated per hour (IDC attributes 30% of lost productivity and 42% of lost revenue to savings.)

Further, to arrive at total ROI, enterprises can use the Net Present Value (NPV) tool. NPV calculates the value in current dollars for a multi-year ROI, including annual average cost reductions, cost savings in IT, staff and user efficiency and productivity, and additional revenue generated. ROI is the net return on investment, or NPV divided by investment.

In additional to these pieces of the puzzle, keep in mind that there are always intangible benefits that should be noted alongside any formal ROI evaluation, such as making recurring costs more predictable by moving to a fixed-cost model, and the ability to pay as you grow versus overspending on capital expenditures today in hopes of accommodating future needs.

About the author:
Vab Goel is chairman of Virtela Communications, a global network solutions company based in Denver, Colo., and a partner at Norwest Venture Partners in Palo Alto, Calif.

This was last published in May 2004

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