CNIC How To Training For Cisco Field Sales

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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 2

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. 3

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 4

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 5

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 7

How Do I Know this Works? • 2600+ Customer Profiles to date • Positive ROI 72% of the time • Average payback of 16 -18 months Avg. % Contribution to Cost Savings Toll-Bypass/Voice/Data Access 22% 34% Equipment & Maintenance 44% Network Administration Source: Converged Network Investment Calculator 2/02 8

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 9

What Can I Expect the ROI to Be? • Paybacks vary based upon deployment scenario, with green fields producing the most rapid payback 24 18 (Months) 14 9 6 0 Green Field TDM Centrex Replacement Multi-site CCP 44% PBX Older Newer PBX Replacement 10

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

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 12

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: http: //www. cisco. com/partner/cnic/ • File Access Private, Public • Online Help • Cash Flow Schedule • For more information access the CNIC Video Tour 14

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 21

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 22

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. 23

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% 24

Key Concepts – Marginal Tax Rate • For capital equipment where the useful life is in excess of oneyear, 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 25

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 26

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% Incremental Costs Cost Savings Cash Flow Discounted CF NPV = $24 K Year 0 ($100 K) Year 1 Year 2 Year 3 $50 K $45 K $50 K $41 K $50 K $38 K 27

Key Concepts – Internal Rate of Return (IRR) • 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. Incremental Costs Cost Savings Cash Flow IRR = 50% Year 0 ($100 K) Year 1 Year 2 Year 3 $50 K $50 K 28

Key Concepts – Payback/Breakeven • 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. Incremental Costs Cost Savings Cash Flow Payback = 2 Years Year 0 ($100 K) Year 1 Year 2 Year 3 $50 K $50 K 29

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 31

“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 33

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 34

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 35

“It’s On The WEB…” Converged Network Investment Calculator (CNIC) “The ROI Guys” Mike Kisch – Business Manager Phone: 408 -902 -3112 E-mail: mkisch@cisco. com David Hume – Program Manager Phone: 919 -392 -8601 E-mail: dhume@cisco. com Cisco Network Investment Calculator Home Page Cisco Network Investment Calculator Training Page http: //www. cisco. com/partner/cnic/training. shtml 37

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 - $600 K • Network Support Data – 6 people currently support separate voice and –Avaya Phones - $250 K Data networks –PBX Installation/Training - $100 K –Annual PBX Maintenance Costs - $150 K • Cisco IP Telephony Cost Data –Avg. Salary of $55 K –Customer believes that they can increase productivity of support staff by 20% – 4 Call. Manager @ $19995/per CM – 150 MAC’s per year at a cost of $150/per – 500 phone –Plans to reduce the # of wiring drops by 250 at a cost of $135 per • 250 7960 @ $645 • 250 7940 @$545 – 4 Voice Gateways @ $3995 per –Installation Cost – $75 K –Annual Maintenance - $125 K –Data Network Upgrade Cost of $45 K • WAN Data –Annual call usage costs of $75 K – 35% on-net/75% off-net –Annual telco line costs of $100 K of which 50% can Be eliminated 40

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) Call. Manager Servers @ $19995/per –(250) 7940 @ $545/per –(2) Voice Gateways at $3995/per –Cost of Installation - $35 K –Annual Maintenance Cost - $45 K –Upgrade to Data Infrastructure of $25 K 41

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: • – 750 Moves per year, 50% Hard/50% Soft –Cost for new PBX and Key Systems - $2. 5 M –Cost for new phones - $500 K –Cost for installation - $250 K –Annual Maintenance Costs - $225 K • Cisco IP Telephony Cost Data: Network Support Data –Annual Maintenance Costs - $225 K • Cisco IP Telephony Cost Data: –(500) 7960’s @ $645 per • (8) Call. Managers @ $15995 per –(1500) 7940’s @$545 per • (500) 7960’s @ $645 per –(500) 7910’s @$395 per • (1500) 7940’s @$545 per –SRST costs of $100 K • (500) 7910’s @$395 per –Voice Gateway costs of $100 K • SRST costs of $100 K • Voice Gateway costs of $100 K • Installation - $250 K • Annual Maintenance - $215 K –(8) Call. Managers @ $15995 per –Installation - $250 K –Annual Maintenance - $215 K –Data network upgrade - $1 MM 42

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