1 Copyright W. Scott Gerstenberger, This work is the intellectual property of the author. Permission is granted for this material to be shared for non-commercial, educational purposes, provided that this copyright statement appears on the reproduced materials and notice is given that the copying is by permission of the author. To disseminate otherwise or to republish requires written permission from the author. Better Business Practices for State Education Networks EDUCAUSE/COSN State Networks

2 W. Scott Gerstenberger Merit Network Better Business Practices for State Education Networks

3 Michigan Educational Environment Very decentralized –public universities, all independent of each other –K-12 and community colleges also decentralized No state-provided network for education No state-imposed networking requirements for K-12 or higher education No state funding for networking

4 Merit Overview Private, not-for-profit, 501(c)(3), Michigan membership corporation founded in 1966 by University of Michigan, Michigan State University, and Wayne State University No formal relationship with state government Merit’s Members (owners) now composed of all the public universities –Board of Directors has an Advisory Committee to get input from other customer groups (K-12s, community colleges, libraries, private colleges, governmental units, health care, some for-profits)

5 Merit Activities $25M annual budget, 80 FTEs Program and network initiatives –MichNet network »Fee-for-service dedicated and dial-in services –Grant and corporate-funded R&D activities »Routing database development »Internet performance measurement »North American Network Operators Group (NANOG) –Grant-funded K12 educational outreach activities »Concentrated on resources for using technology in K-12 teaching »Activities open to all K-12s, not just MichNet customers

6 MichNet Overview $21M annual budget –Entirely fee-for-service –All customers voluntary –45 FTEs MichNet Services –Dedicated Internet connections »Commodity »Internet2 (for eligible organizations) –Comprehensive dial-in »For organizations (not end users) using distributed authentication and authorization »For PC vendors (for state’s teacher laptop program)

7 MichNet Technology State backbone network –Michigan GigaPOP –25 POPs in Michigan and Chicago –Mix of OC-48, OC-12, OC-3, DS-3 backbone circuits –Two connections to Abilene –Commodity from Qwest and C&W at multiple points –Non-transit peering in Michigan and Chicago Statewide ubiquitous dial-in service –14,000 lines in Michigan, NYC, DC, and Ontario –Distributed authentication and authorization

8 MichNet Dedicated Connections For 13 Merit member universities –Connection speeds range from 100m to 1,000m bps For 275 customers (400 individual connections) –Most private 4-year higher education schools –75% of the state’s K-12 districts –Most of the state’s public libraries –Most of the state’s community colleges –Various governmental, health-care, and non-profits –Some commercial organizations and small ISPs –Connection speeds range from 56k to 155m bps

9 MichNet Funding Model for Dedicated Connections The 13 members each pay an annual membership fee based on: –Merit aggregate cost of providing service to them –Financial size of each university (US DOE) –Peak bandwidth requested for fiscal year –Previous year actual measured traffic volume Others pay for services based on bandwidth, location, and organization type

10 Setting Rates for Customers Assumption: rates will be based on: –Recovering the costs for providing service –Connection speed (“contracted bandwidth”), i.e. total peak for customer’s physical connection(s) –Customer type (MiCTA vs. non-MiCTA) –Number of physical connections –Consortium vs. individual customer Inputs to rate setting process –Annual expense budget for providing service –Current customer inventory –Projected future customer gains, losses, upgrades

11 Annual Expense Budget Last rate analysis done in Oct 2001 using $5M customer budget and inventory Identify all line item expenses: –Salaries (admin, admin support, operations, customer support) –Share of MichNet backbone (equipment, circuits, commodity service, Internet2) –Customer circuits (pass through) and customer- site routing equipment –Other (NOC, travel, systems administration, rent, hosting charges, professional development, etc.)

12 Expense Allocation to Rate Categories Assign each expense item to a category: –New customer one-time install charges –Existing customer one-time upgrade charges –Passthrough recurring charges (telco circuits) –Recurring charges sub-categories: »General (management, miscellaneous) »Operations (relevant salaries and equipment) »Customer support (relevant salaries) »Bandwidth (some salaries, circuits, NOC, commodity) Some items are split across multiple categories

13 Customer Inventory Current customers –By contracted bandwidth (speed) –By type (single or multiple connections) Expected customer upgrades –By contracted bandwidth (speed, before and after) –By type (single or multiple connections) Expected new customers –By contracted bandwidth (speed) –By type (single or multiple connections)

14 Compute One-time Install Rates for New and Upgrading Customers Sum all the budget line items that are allocated to the new customer install charge category and divide by the expected number of new customers. Sum all the budget line items that are allocated to the upgrading customer install charge category and divide by the expected number of upgrading customers.

15 Compute Recurring Rate Components - 1 General –Sum all the budget line items that are allocated to the general recurring charge category divided by the current number of customers. Operations –Sum all the budget line items that are allocated to the operations recurring charge category divided by the current number of attachments. –Rate is unrelated to the speed of attachments, but is related to number of attachments.

16 Compute Recurring Rate Components - 2 Customer Support –For single-connection customers, decided that support effort increases when customer has more than 3 mbps of contracted bandwidth. –For multiple-connection customers, decided that support effort increases by same amount for each additional attachment beyond the first, independent of contracted bandwidth. –For a consortium customer that wants its members to each be able to receive direct customer support, there is an additional charge per member.

17 Compute Recurring Rate Components - 3 –Rates for customer support use an estimate of the number of support hours per year for each type of customer times the average hourly salary rate for customer support staff. Bandwidth –The rate per megabit of bandwidth is computed as the sum all the budget line items that are allocated to the bandwidth recurring charge category divided by the sum of the contracted bandwidth for all current customers. –This is linear with bandwidth. A better model would give a discount for higher bandwidths.

18 Charge Rate Table A charge table can be built as follows: –Single-connection customers »Rate for each contracted bandwidth –Two-connection customers or consortia »Rate for each contracted bandwidth »Fixed charge for each additional connection (beyond two), independent of contracted bandwidth »Fixed charge for each consortium member for which full customer support is needed, independent of contracted bandwidth

19 Refine, Fudge, Repeat Common sense and competitor pricing may show that some resulting rates are unreasonable –Our customer support staff helped a lot with this If some rates are then fudged, the lost (or gained) revenue will need to be moved into another charge category Most importantly, a proof check must be done –Apply your new rates to your customer inventory and see you fully recover your costs

20 Summary Methodology is fairly objective. Could easily be reused periodically to verify validity of rates or need to adjust. Depends on having a realistic budget with carefully controlled expenses Depends on accurate customer data and realistic estimates of new customers, lost customers, and upgrades Has worked so far, but we are only in the middle of the first full fiscal year

21 Contact information W. Scott Gerstenberger Merit Network 4251 Plymouth Rd., Bldg 1, Suite 2000 Ann Arbor, MI USA