FINANCIAL METRICS

There are numerous metrics that can be used to measure the financial viability of deploying any kind of technology. One of the most useful metrics is the payback period, which is the amount of time before the resultant savings equals or exceeds the cost of deploying a new technology or service. To demonstrate payback period, assume that a company invests $1,000,000 in new equipment to upgrade its WAN and further assume that the upgraded WAN saves the company $100,000 a month. In that case, the payback period is ten months.

Another useful financial metric is the internal rate of return (IRR). The IRR is the annualized effective compounded return rate that can be earned on the invested capital. One way to look at the IRR metric is to consider an IT organization that invested $100,000 in new technology and after three years the use of that new technology produced a hard savings of $200,000. The IRR metric is the answer to the question “If the company had invested that $100,000 in the bank, what annual rate of return would the bank had to have given them for the three years, in order for their $100,000 investment to grow to $200,000”. In this particular case, the answer to that question is 26%.

TIME FRAME FOR THE ANALYSIS

The explanation of IRR used a three year time frame to determine the IRR. When establishing a time frame for doing a financial analysis of a project that involves acquiring new equipment, most of the companies that I work with use the length of time over which they depreciate that equipment.

HARD VS. SOFT SAVINGS

The explanation of IRR also mentioned hard savings. Hard savings refers to a verifiable reduction in spending, such as the reduction that results from either canceling an MPLS circuit or cancelling an MPLS service and replacing it with a less expensive Internet circuit. This is in contrast to the soft savings that may be associated with a WAN upgrade. Soft savings, while important, are both harder to measure and more difficult to use as justification for spending money to upgrade the WAN.

There are many types of soft savings associated with a WAN upgrade including:

• Improving the quality of VoIP
• Protecting the company’s revenue stream by increasing availability of key applications
• Improving employee productivity
• Responding to compliance requirements
• Enabling one or more of the company’s key business initiatives such as pursuing mergers and acquisitions
• Improving the performance of one or more applications
• Supporting mobile workers
• Enabling one or more of the IT organizations key initiatives such as implementing virtual desktops or making additional use of public cloud services

Depending on your company, cost avoidance may be considered a hard saving or it may be considered a soft savings. As mentioned, one example of cost reduction is the savings that results from decommissioning an MPLS circuit. An example of cost avoidance is the savings that occurs from not having to increase the capacity, and hence the cost, of an MPLS circuit.

Financial metrics, a time frame and a range of hard and soft savings are all part of a framework for justifying upgrading a WAN. Perhaps the biggest element of that framework is trust. Does the person or people who have to approve the WAN upgrade trust that the promised benefits will occur? Building that trust takes going back to the approving person or group after each project and either showing that most, if not all, of the promised benefits were achieved or else explaining why those benefits weren’t achieved.