1 © 2001, Cisco Systems, Inc. All rights reserved. Session Number Presentation_ID CNIC “How To” Training For Cisco Field Sales and Channel Partners David Hume Program Manager Cisco Systems, Inc.

222 Objectives for Today 1.Understand the importance of ROI in today’s selling environment 2.Learn to navigate the calculator and develop an understanding of how to perform an ROI analysis 3.Gain understanding of key ROI concepts and terms 4.Identify most common ROI pitfalls 5.Discuss the Test on the PEC

333 ROI - Definition For a given use of money in an enterprise, the ROI (return on investment) is how much "return," usually profit or cost saving, results. An ROI calculation is sometimes used along with other approaches to develop a business case for a given proposal.enterprise

444 Current IT Investment Climate Two+ years of declining corporate profits and shrinking capital expenditure budgets Focus on back to basics approach to capex, requiring a solid business case before technology purchase is approved Greater involvement from business decision makers who are asking tougher questions Focusing capex on only mission critical projects (“need to have” vs “nice to have”) Less likely to invest in an emerging technology 2000 – 45% of enterprises said they would try an emerging technology 2001 – only 32% said they would try an emerging technology

555 ROI Helps Accelerate the Sales Cycle The ability to help customers determine ROI (55%) is the most often cited means to speed up the adoption of IP Communications What would help speed up the Decision Making Process? Source: Cisco TDM Survey, October 2001

6 © 2001, Cisco Systems, Inc. All rights reserved. Session Number Presentation_ID How Do I Get There?

777 Where Do R O I Start??? Level 1 – ROI White papers Level 2 – ROI Case Studies Level 3 – ROI Snapshots Level 4 – Custom Analysis with CNIC

888 How Do I Know this Works? Equipment & Maintenance Toll-Bypass/Voice/Data Access Network Administration Avg. % Contribution to Cost Savings 44% 34% 22% Source: Converged Network Investment Calculator 2/ Customer Profiles to date Positive ROI 72% of the time Average payback of months

999 What the Analysts Are Saying About CNIC “End-users have told us again and again that identifying the bottom-line benefit when evaluating new technologies is a priority given today’s soft economic climate. Effective ROI tools can serve as a key element to the sales process because the offer the means for customers to measure the actual long-term value of new technologies like IP Communications. Cisco’s Converged Network Investment Calculator (CNIC) is an elegant response that can play a very meaningful role in persuading a customer to invest in a new Cisco technology.” Ken Presti IDC “The most common complaints customers have about ROI calculators are that they are too Optimistic. Cisco Converged Network Investment Calculator (CNIC) addresses the potential for overly Optimistic ROI calculations by letting users enter in their own assumptions –from productivity gains to wiring drop Cost estimates. Building useful ROI tools is difficult. They have to be detailed enough to yield meaningful results that are tailored To each customers unique situation, yet simple enough to make it usable. CNIC is a comprehensive calculator that considers very detailed Aspects of the real-world costs of IP Telephony.” Kathryn Korostoff President Sage Research

10 What Can I Expect the ROI to Be? 44% Green Field TDM Centrex Replacement Multi-site CCP Older PBX Replacement Newer PBX Replacement (Months) Paybacks vary based upon deployment scenario, with green fields producing the most rapid payback

11 Where Can I Expect ROI? 44% Green Field TDM Centrex Replacement Multi-site CCP Older PBX Replacement Newer PBX Replacement Reduced Cabling Costs Reduced Infrastructure Costs Moves, Adds, Changes Toll-Bypass Voice Circuit Consolidation Increased Productivity of Support Staff Reduced Expansion/Upgrade Areas of Return Reduction in Outsourced Costs

12 What about Soft Benefits? Improving End User Productivity Applications like Unified Messaging increase the productivity of the end user. CNIC limits the soft benefits because, while they definitely occur, CFO/CIO’s typically only want to measure quantifiable benefits

13 © 2001, Cisco Systems, Inc. All rights reserved. Session Number Presentation_ID “Enter The Calculator”

14 CNIC Tour Current Solution Modules IP Telephony, Unity Messaging, IP Conference Connection, Contact Center-CTI/ICM/ICD, FC Storage Networking & IP Storage How to navigate through the calculator: File Access Private, Public Online Help Cash Flow Schedule For more information access the CNIC Video Tour

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20 © 2001, Cisco Systems, Inc. All rights reserved. Session Number Presentation_ID Overview of Key Concepts

21 Key Concepts – Costs & Benefits Costs include any expenditure for equipment, services or network management Benefits include cost savings, avoided costs, productivity enhancements, improvements in customer service, enhanced customer morale CNIC attempts to provide a framework to capture all of the relevant costs and benefits that are associated with purchasing a Cisco technology

22 Key Concepts – Hard and Soft Costs Hard costs include areas like equipment, maintenance and administration. They can be easily quantified and there is a little doubt that they are real. Soft costs include areas like productivity and customer service. These are often the greatest drivers IT projects, but are at times fuzzy and difficult to quantify. Customers are often reluctant to include soft costs in an ROI analysis

23 Key Concepts – Length of ROI Analysis The length of time of the ROI analysis. Ranging from 1-5 years. It is recommended that the analysis be a minimum of 3 years long to accurately capture the true financial costs and benefits. The longer the analysis length the more likely that ongoing cost reductions will offset initial technology acquisition costs.

24 Key Concepts - WACC Weighed Average Cost of Capital---The "cost" or "interest" a company pays for its investment funds. Commonly referred to as a "hurdle rate", it also represents the "minimum expected returns" a company demands of its investments (much the same as a bank would demand interest for loaning money to purchase a house). The weighted average cost of capital (WACC) is usually determined by the customer's Finance department. Generally speaking, a higher WACC is indicative of industries or companies which either have many valuable opportunity's competing for investment funds, or higher expectations for benefits derived from making an investment. CNIC uses a default of 10%

25 Key Concepts – Marginal Tax Rate For capital equipment where the useful life is in excess of one- year, firms cannot charge its cost against income for tax purposes. Hence, firms need to depreciate the capital equipment, based on a depreciation schedule. Since depreciation is a non-cash expense, it appears in the income statement and impacts the taxes a firm pays in cash. A marginal corporate tax rate is needed to calculate the income tax liability for the given period. Once the income tax liability is calculated for the given period, it is subtracted from the Cash Flow before taxes to obtain net Cash Flow (after taxes). The tax rate will vary among companies as well as across countries

26 Key Concepts – Depreciation A deduction you are allowed for the wearing away and expensing over time of assets, such as office equipment, vehicles, buildings, and furniture. For assets that have an expected useful life of more than one year, you spread the cost of the asset over its estimated useful life rather than deducting the entire cost in the year you place the asset in service. Traditionally PBX’s are depreciated over 5-7 years

27 Key Concepts – Net Present Value (NPV) Defined as the present value (PV) of the expected future cash flow (CFn) of an investment, discounted at the cost of capital (k), less the cost of the investment. NPV equals the increase in shareholders' wealth. An NPV greater than 0 indicates that the project should be undertaken NPV Example: 3-Year Analysis, WACC (10%), MTR 0% Year 0 Year 1 Year 2 Year 3 Incremental Costs ($100K) Cost Savings $50K $50K $50K Cash Flow($100K) $50K $50K $50K Discounted CF ($100K) $45K $41K $38K NPV = $24K

28 Key Concepts – Internal Rate of Return (IRR) Year 0 Year 1 Year 2 Year 3 Incremental Costs ($100K) Cost Savings $50K $50K $50K Cash Flow ($100K) $50K $50K $50K IRR = 50% Interest rate that equates the Present Value of the expected future cash flow (CFn) to the initial investment outlay, where NPV =0. An IRR value above the cost of capital (k) provides a satisfactory investment, with a proposed project having a greater IRR value being more attractive.

29 Key Concepts – Payback/Breakeven Year 0 Year 1 Year 2 Year 3 Incremental Costs ($100K) Cost Savings $50K $50K $50K Cash Flow($100K) $50K $50K $50K Payback = 2 Years The period required to recover the initial investment of the project. The BE method of evaluating an investment does not consider all cash flows and does not discount the cash flow (CFN). This method may not be appropriate in evaluating an investment over an extended period of time.

30 © 2001, Cisco Systems, Inc. All rights reserved. Session Number Presentation_ID Common ROI Pitfalls

31 Common ROI Pitfalls 1.Burdening the Voice ROI analysis with the complete cost of the data network upgrade 2.Inputting costs for a PBX that has already been purchased and paid for 3.Failing to take into consideration productivity gains 4.Not including all relevant costs and benefits 5.Failure to gather information on how a customer evaluates capital expenditures (WACC, Depreciation schedule, Marginal Tax Rate) 6.Not understanding the principal drivers of an ROI analysis and how they impact the final outcome -Lower Cost of “Network” Ownership -Enhanced Business Communications

32 © 2001, Cisco Systems, Inc. All rights reserved. Session Number Presentation_ID E-Learning Test

33 “Pop Quiz” for the Test Which of the following are reasons why AM’s should be interested in Presenting an ROI analysis for IP Telephony? (choose 3) A.Sales can be completed faster with a proper cost justification B.1/3 of large enterprises require some form of cost justification C.A proper cost justification increases the odds of a successful sale D.Most IT decesions now require some type of financial analysis E.Most IT Mgrs require a discussion of financial benefits

34 Pop Quiz continued Which one of the following IP Telephony deployment scenarios, on average, leads to the quickest return on investment? A. End-of-Life PBX B. Centrex C. Greenfield D. Newer PBX

35 Pop Quiz---Good Luck!!! If a customer has a newer PBX or Key system, the AM will want to emphasize which of the following choices in an ROI Analysis? A.Toll Bypass savings B.Upgrading the data network C.Wiring cost savings D.The strategic value of applications

36 © 2001, Cisco Systems, Inc. All rights reserved. Session Number Presentation_ID Contact Info

37 “It’s On The WEB…” Converged Network Investment Calculator (CNIC) “The ROI Guys” Mike Kisch – Business Manager Phone: David Hume – Program Manager Phone: Cisco Network Investment Calculator Home Page Cisco Network Investment Calculator Training Page

38Convergence_Internal © 2001, Cisco Systems, Inc.

39 © 2001, Cisco Systems, Inc. All rights reserved. Session Number Presentation_ID Hands On Case Studies

40 Case Study - Greenfield Overview: Ajax Inc. is moving into a new facility that will house 500 employees. They need to make a decision regarding their future voice and data network. Ajax is an existing customer of Cisco and receives a 32% discount. They have a WACC of 12% and a marginal tax rate of 35%. They depreciate TDM and IP equipment over 5 years. Customer Data: –Avaya PBX - $600K –Avaya Phones - $250K –PBX Installation/Training - $100K –Annual PBX Maintenance Costs - $150K Cisco IP Telephony Cost Data –4 $19995/per CM –500 phone 250 $ –4 Voice $3995 per –Installation Cost – $75K –Annual Maintenance - $125K –Data Network Upgrade Cost of $45K Network Support Data –6 people currently support separate voice and Data networks –Avg. Salary of $55K –Customer believes that they can increase productivity of support staff by 20% –150 MAC’s per year at a cost of $150/per –Plans to reduce the # of wiring drops by 250 at a cost of $135 per WAN Data –Annual call usage costs of $75K –35% on-net/75% off-net –Annual telco line costs of $100K of which 50% can Be eliminated

41 Case Study - Centrex Overview: Acme Inc. currently is purchasing 250 Centrex lines from Colorado Bell for a regional HQ and is looking at replacing those lines with a Cisco IP Telephony solution. Colorado Bell receives a 32% from Cisco. They have a WACC of 10% and a Marginal Tax Rate of 25%. Customer Data: –Monthly Cost of Each Centrex Line - $35 Cisco IP Telephony Costs –(2) CallManager $19995/per –(250) $545/per –(2) Voice Gateways at $3995/per –Cost of Installation - $35K –Annual Maintenance Cost - $45K –Upgrade to Data Infrastructure of $25K

42 Case Study – Dated PBX Replacement Overview: Epsilon Corp. is a retail brokerage firm that has 100 sites and over 15,000 employees. They are evaluating the purchase of a new voice network to connect a regional HQ with 25 branch offices that has 2500 employees. Epsilon receives a 40% discount from Cisco and has a WACC of 13% and a Marginal Income Tax rate of 31%. They are evaluating Cisco’s IP Telephony and Unity Unified Messaging. Customer Data: –Cost for new PBX and Key Systems - $2.5M –Cost for new phones - $500K –Cost for installation - $250K –Annual Maintenance Costs - $225K Cisco IP Telephony Cost Data: –(8) $15995 per –(500) $645 per –(1500) per –(500) per –SRST costs of $100K –Voice Gateway costs of $100K –Installation - $250K –Annual Maintenance - $215K –Data network upgrade - $1MM Network Support Data –750 Moves per year, 50% Hard/50% Soft –Cost for new phones - $500K –Cost for installation - $250K –Annual Maintenance Costs - $225K Cisco IP Telephony Cost Data: (8) $15995 per (500) $645 per (1500) per (500) per SRST costs of $100K Voice Gateway costs of $100K Installation - $250K Annual Maintenance - $215K

43 Case Study – Dated PBX Replacement Unified Messaging Data: 2000 users Average salary $45K Work 240 days a year, 9 hours per day UM will improve their productivity by 15 minutes/day