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The Migration to VoIP

The proliferation of low-cost, broadband data services and favorable regulation encouraging competition in the Local Loop has spurred many ISPs and competitive carriers to seriously consider the case for selling VoIP services to business and residential customers. Indeed, industry analysts are expecting revenue from VoIP services to the business sector to grow exponentially over the next five years, reaching into the tens of billions of dollars globally. But before service providers rush to cash in on this lucrative new revenue stream created by the release of the VoIP genie, they must consider the “total cost of ownership” factor that will serve as the basis for a quick return on investment. Many service providers overestimate the contribution equipment costs make to ROI when taking the VoIP plunge. Equipment costs are actually only a relatively small fraction of the total cost of enabling the service.

Service providers tend to overlook or underestimate the hidden operational costs involved in running and maintaining the system. To ensure that a VoIP service pays for itself quickly and is a moneymaker over time, it is therefore necessary to choose a system with a low total cost of ownership (TCO).

Operating Costs: The Hidden Expense

Only an estimated 35 percent of a service provider’s Opex and Capex are spent on equipment in the business cycle of a VoIP rollout. The remaining 65 percent of expenditures are the “hidden costs” of operating the system. Unlike startup equipment costs, operating costs are not fixed and can balloon, resulting in a total cost of ownership that can jeopardize the viability of a VoIP business model. Therefore, any calculation of ROI must factor in much more than vendor equipment prices.

A rough breakdown of VoIP service Opex and Capex shows that in addition to equipment costs, owners of a VoIP system should figure in installation costs (10%), broadband connection upgrades (5%), maintenance and service (20%), customer support (20%), software upgrades (5%), and network scalability (5%).

This simple breakdown explains why the VoIP service provider has to add up the impact of hidden costs when calculating vendor equipment prices and base the price comparison on the total cost of ownership rather than the cost of individual devices. This is because product functionality, as examined below, directly affects Opex.

Steps for Cutting VoIP Opex


Let’s first look at ways to cut installation costs at both the provider and customer premises.

A VoIP system that is optimized for the needs of service providers has fully integrated equipment that is controlled by a central management system. An inclusive end-to-end VoIP system solution, moreover, greatly expedites time-to-market.

When it comes to installation, time is money. Gluing together a solution comprised of products from different manufacturers can take anywhere from 10 weeks to a year before it can become fully operative, while an all-inclusive system can be up and running in less than seven days.

No VoIP system comes with a 100 percent guarantee that service teams won’t ever have to visit a customer on site. However, a VoIP solution that includes a comprehensive provisioning and management system enables providers to exercise extensive control over end units remotely, resulting in quicker installation with fewer installation teams. Comprehensive central management also enables providers to offer models designed for self-installation.

The central management tool enables configuration work to be handled from the central office, saving on expensive on-site manpower and reducing integration and initial start-up costs.

Common management also significantly reduces the installment time for each customer, so that it can be measured in mere minutes rather than hours. This increases the number of installations that can be scheduled per day, which, in turn, attracts more customers.

This ease of rapid installation frees up enough time for service providers to contract with resellers, who can then manage their own customers while the service provider does what it does best, which is service provisioning. This is no trivial matter. It facilitates a much more rapid deployment and customer sign-up pace than anything that can reasonably be expected by relying on solutions from multiple manufacturers.


Service and Maintenance Savings

Industry professionals estimate that maintenance and service along with customer support are responsible for approximately 40 percent of the cost of operating a VoIP service.

Maintenance and service are defined as system monitoring, fault analysis and real-time response to service alerts. If the VoIP service solution does not have a central management system with remote system monitoring, analysis and alert detection, the only way to respond to a service issue of any type is to dispatch a technician for an onsite visit. Considering that VoIP is designed to be a low-cost service, repeat truck rolls can eat away at profitability very quickly.

For service providers, therefore, the challenge is to provide five-nines reliability (99.999%) to curb the churn factor endemic in the VoIP market. The higher the churn rate and the additional resources expended on servicing the system to solve problems, the higher the total cost of ownership and the longer it will take to reach ROI.

Since voice quality is a make-or-break factor in customer churn, the success of a VoIP service depends on its reliability. Service providers with better end-to-end control and trouble-shooting capabilities will therefore have an advantage over other providers, and keep quality control costs to a minimum.

To ensure the success of a VoIP service, the service provider will want to use a sophisticated central management system that monitors and analyzes performance at the customer end. The ideal system has the capability to collect real-time data, such as lost packets, jitter and delay, from the customer-premises devices (CPEs) and generate statistics and reports on call quality. This information enables providers to diagnose and repair quality problems even before they interfere with the VoIP service. Equally important, the system should have full, on-line monitoring of all system layers, with the capability to issue alerts, for example, when the quality of the DSL line drops.

Network Upgrades

Sometimes forgotten when assessing TCO is the impact that network upgrades have on operating expenses.

A VoIP system that requires manual firmware transfer to each end unit requires hours, if not days, of expensive technician time for on-site upgrading. A comprehensive central office management system that controls both the softswitch and thousands of end units allows massive software upgrades to be made with a single click.

A fully integrated system also enables the simultaneous upgrading of both the central softswitch and the end-user CPEs. The service provider can thereby dramatically cut down on the costs of upgrades and rolling out new services to customers.

Customer Support

Customer support is labor intensive and frequently prone to employee turnover, which generates additional costs. Solving problems by using a sophisticated Web-based central analysis system will naturally increase customer satisfaction. Support issues can be pinpointed early, thereby reducing technician visits. Customers will waste no time dealing with service technicians, who should be dispatched only as a last resort.

On the other hand, a VoIP system with limited monitoring capabilities naturally requires a relatively large support team. Moreover, any substantial increase in subscribers will, out of necessity, incur a concomitant growth in the cost of customer support. Finding a larger number of qualified individuals has its own pitfalls and can easily eat into bottom-line results or adversely affect customer satisfaction and exacerbate churn.

A single Web-based interface controlling the entire system requires fewer central office VoIP technicians, even for a large network. Since no special expertise is needed to operate this kind of a system, Web-based management significantly cuts training expenses and reduces manpower, thereby reducing the total cost of ownership.

Scalability: Reduces Capital Investment, Expansion Costs

Start small, pay as you grow. This is the best business strategy for entry into the VoIP market, which is typically characterized by gradual market penetration. Benefiting from this low-risk approach, however, requires an integrated system with a scalable architecture that enables the launch of service with a low initial capital investment and an option for easy expansion.

A VoIP system with a pricing architecture that is designed for capital investment with the addition of subscribers can make a VoIP service profitable in less than one year, or upon signing up only several hundred customers. Multi-vendor solutions, in contrast, require tens of thousands of customers before turning a profit.

An inclusive end-to-end VoIP system with central management is also easily expandable and thereby a money-saver. Rolling out service to new customers and new service areas does not require the contracting of expensive and time-consuming project management teams to patch together the new parts.

Choosing a highly scalable system is therefore a smart long-term investment that saves on capital expenditures.

Value for Money

Commoditization of VoIP equipment can easily lead to the misperception that a VoIP service provider can achieve faster ROI by cobbling together a VoIP service platform from disparate low-cost parts. This bias ignores the true weight of VoIP operating expenses, which can exceed initial equipment purchase costs by a factor of three or four.

Therefore, when evaluating VoIP equipment vendors, the savvy service provider would be advised to establish TCO benchmarks that take into account other cost factors such as installation, maintenance and service, customer support, upgrades, and scalability, as well as minimum initial investment outlays. 

By fully understanding the role that VoIP equipment plays in determining TCO benchmarks, the service provider will be better able to answer the questions: Can I make money from selling VoIP services? And if so, how soon?

The Churn Factor

The Quality of Service of phone calls is the No. 1 reason VoIP subscribers switch or cancel VoIP service. According to research conducted by Telephia Total Communications, more than 27 percent of subscribers who canceled service cited poor network quality as the reason for switching providers. Dissatisfaction with call quality was more than twice as likely to drive customers away compared with complaints about customer service, a reason cited by some 14 percent.

Total Cost of Ownership

The Total Cost of Ownership (TCO) is the accumulation of costs in an investment. In IT, TCO is calculated by taking the initial startup costs of acquiring equipment and then adding recurring costs over the rollout lifecycle. TCO is used to make a financial analysis among the products of different vendors.


Source: RAD Data Communications -
About the Author : Oded Tubias has more than 15 years of experience in product definition, design and management. He previously served as the Product Marketing Manager at LEA*D Corporation, whose VoIP platform was acquired by RAD Data Communications in 2007. Tubias holds an engineering degree from the Technion, Israel Institute of Technology, and a Bachelors of Business Administration from the University of Derby. Mr. Tubias can be contacted at




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