Sunday, June 06, 2004

Voice over IP (VoIP) and Outsourcing

In April 2004, I attended dinner organized by Canadian Information Processing Society (CIPS) Toronto Chapter. I had an interesting discussion with a senior IT executive responsible for Canadian operations of a retail franchise. As a background to the company, they have about 150 corporate stores and about 300 franchise stores in Canada and managed by North American operations based in USA. Note: All numbers are informally quoted as discussion happened over dinner casually.

Implementing VoIP without reason

The executive was discussing how his CIO based in USA forced him to go to an expensive VoIP (Voice-over-IP) phone solution that he really didn'tÂ’t believe he needed neither it was a cost effective alternative to traditional phone system he was using for about 450 voice mailboxes.

The only tangible benefits, he could identify going to VoIP system were:
  • Saving on average 4.5 cents per minute on long-distance charges between US and Canada. The call volume is not high.
  • Elimination of nominal payment they were making to a third party service provider for managing the changes with voice mailboxes. Such changes in voice mailboxes are infrequent.
The VoIP system cost billed to Canadian operations was over $300,000 with $30,000+ in annual maintenance fees.

Does this seem like a reasonable switchover from traditional phone system to VoIP?

Was there more than just cost-benefit analysis for making the decision?

Hidden Costs of Outsourcing

It appears the relationship between vendor, outsourcer and senior management of North American operations of retail franchise may have also played a part in this decision.

For example, the outsourcer in the name of standardization forced the Canadian operation to take a very expensive high-end hardware component whose functions could have easily be delivered using a reasonably priced model from the same VoIP vendor even after projecting reasonable growth for the Canadian operations.

Obviously, the outsourcer has vested interest in keeping the same hardware component everywhere, which reduces the support cost for outsourcer and maintains its profit margins.

What about the cost of acquiring and maintaining unnecessarily a high-end hardware component for the retail franchise?

Whose bottom line does this higher cost of components show up?

Do customers include such additional expense in cost-benefit analysis of retaining an outsourcer?

Is this trend of focusing on core operations and outsourcing the rest delivering the promised benefits?

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