The Business Case for Network Optimization over Bandwidth Upgrades

ROI and Investment Analysis of Expand Networks network optimization appliances The ACCELERATORs

October 2001

Don Ryan, Vice President Current Analysis

Executive Summary
Current Analysis during the fall of 2001 conducted detailed financial analysis research with Expand Networks customers; documenting the return on investment they are experiencing. The results were startling. All the companies generated annualized after tax rates of return of 40% or more with paybacks in less than one year. Benefits took the form of telecommunications cost savings as well as business productivity enhancements. These returns are above average for IT investments, and all the companies surveyed are planning to increase their use of Expand solutions in the next 12 months.

Introduction
Companies of all sizes are scrambling to find areas to cut costs. When it comes to increasing profit, a dollar saved is as valuable as $5 in new revenue. Companies are getting back to basics and streamlining operations to save money is the first step in the process. With businesses in the U.S. spending over $100 billion on data services each year, this is the first area they should be looking into to drive significant savings. Businesses in the US are also scrutinizing in detail all capital expenditures so every dollar has to generate an outstanding return. Expand offers a simple network optimization solution that reduces telecommunication expenses significantly with minimum effort and capital. The purpose of this white paper is to outline a framework and analyze the financial performance and return on investment that real world customers have derived from using Expands network optimization appliances -- the ACCELERATORs. Among the customers discussed are: an international financial institution, a regional health care company in the U.S., and a global manufacturer.

Why Return on Investment (ROI)

ROI is a ratio of financial return to investment. It is the fundamental basis for comparing the relative performance and attractiveness of corporate investments and determining whether or not a project meets the benchmark for financial performance. Specifically, IT projects are particularly well suited to ROI analysis because they: Impact a variety of cost and profit centers Often represent significant investment of time, capital and other resources Enable greater operational efficiencies, increased customer satisfaction and employee productivity Are expected to have rapid impact on business process and the bottom line

For this study, Current Analysis undertook an annualized approach to ROI, meaning that the financial calculations generate the average annual return over the duration of the project. The components of ROI are after tax return, or the net value of all the quantifiable costs and benefits, and investment, or the resources utilized to deploy the Expand ACCELERATORs.

The Financial Model and Key Findings

Current Analysis used a financial model that analyzed the costs to implement the Expand ACCELERATOR and all of the benefits that were derived from the product. The goal was to represent the project in terms of annualized return on investment and to show the amount of time it takes to pay back the initial capital investment. On the cost side, we considered the capital cost of the Expand ACCELERATOR as well as on-going maintenance and support costs. On the benefits side we looked at three main categories. Reduced telecom expenses. These can be either reducing real network costs that are incurred today or deferring the increase of network costs in the near future. All business cases discussed below, incorporated these types of savings. Productivity cost savings. Expand ACCELERATORs significantly increase network throughput and decrease network response time for users on congested links. This has the impact of making line of business workers more productive through saving time and ultimately reducing headcount. Two of the business cases discussed incorporated these kinds of savings. Network infrastructure savings. By deploying Expand ACCELERATORs, all three companies profiled were able to reduce expenditures on network infrastructure items such as routers and DSUs.

ROI is a widely accepted management accounting ratio, intended to describe financial returns generated as a result of a particular investment over a specified period of time. It is typically presented in percentage format. In this paper, Current Analysis calculates ROI on an annualized after tax basis (the average oneyear return generated over the duration of a given project). All user projects discussed below are analyzed over a three-year period. Costs and benefits were discounted at 15% per annum to account for the time value of money and they were subject to an imputed tax rate of 40% after depreciation. All the business cases showed a payback of less than one year, which is a key decision criteria in todays economic environment. Also all projects demonstrated excellent ROI metrics. Typically an after tax return above 20% is acceptable. In all the following business cases where the ACCELERATORs were deployed, the after tax return was at least double the industry benchmark of 20%.

The Business Environment and Cost of Bandwidth

When companies need bandwidth, they add expensive telecommunications services. Companies today spend approximately $100 billion per year on data services and the Internet does not provide relief because it still is not used for mission critical data communications. Companies of all sizes, from Fortune 1000s to small, medium enterprises, are faced with a gamut of challenges when provisioning their networks. These challenges are exacerbated when companies increase the number of employees and locations or add new applications that increase overall network data traffic. Now is the time for these companies to think outside the box and not just throw more bandwidth to address network performance, growth and congestion issues. These companied need to investigate other innovative solutions to solve their network transmission needs in order to:

Shorten long lead times for network expansion Reduce monthly recurring cost Leverage existing network infrastructure Put in place the right long-term infrastructure by matching communications capacity to meet mission critical application requirements Simplify operations and infrastructure by using fewer lines Address both international and domestic capacity needs

Today, the way most companies handle these problems is to place more transmission capacity into the network. This approach is costly in terms of lost time, extra cost, and decreased productivity.

Expand ACCELERATORs: The WAN Optimization Alternative

As an alternative to continually adding expensive lines and hardware to acquire more bandwidth, Expand Networks has developed a unique, yet customer proven set of technologies called WAN optimization. WAN optimization is based on patented algorithms; this technology has been validated in enterprise networks across various industries with various networked applications. Expand Networks has made WAN optimization available to all types of networks via a suite of network optimization appliances called the ACCELERATORs.

The ACCELERATORs address the need for increased capacity and communications in the following environments:

Where enterprises encounter congestion for both domestic and international locations That have rollouts or upgrades of bandwidth-intensive applications such as Citrix, Siebel, Oracle, SAP, Microsoft Exchange and Lotus Notes Where connectivity is needed for new sites to handle expansion and growth That need to reduce telecommunication costs

The ACCELERATORs enable enterprises and service providers to "do more with less," allowing them to leverage their existing network by squeezing between 100 to 400+% additional throughput. The ACCELERATORs operate on all types of traffic by analyzing transmitted data and removing repeat data patterns from the network. Expand Networks' unique network appliances combine WAN bandwidth expansion with traffic monitoring and QoS management capabilities in a single device. The ACCELERATORs offer instant results, allowing customers a rapid ROI at a fraction of the cost of circuit upgrades.

Analysis Results
The following results show the range of benefits that are outlined in the business cases. The combination of these benefits resulted in cost savings and productivity increases that culminated in ROIs of over 40% and paybacks in 6 to 12 months.

These financial benefits translate into: Cost Reduction Significant reduction in telecommunications costs either by eliminating the need to upgrade capacity for new traffic or reduce present line speed and capacity Reductions in both present day as well as future spending for network expansion

Performance Increased overall network throughput and transmission speed Improved response time and latency on existing congested networks without adding more line capacity

Productivity and Efficiency Ability to meet capacity requirements for project deadlines required for application rollouts. Additional capacity available in days and weeks instead of months Improved productivity of professional and production staff through faster application response time Peak loading transport without having to add extra line capacity; especially important for call center applications where orders could not get processed Ability to add capacity that previously was not possible due to unavailable Telco upgrade services in certain regions, especially for Europe/U.S. to Africa and Pac Rim markets Simplification of network management operations and leveraging the existing infrastructure without having to add more infrastructure equipment such as line cards and routers

International Financial Institution

Background: This Company is a leader in international banking with operations in more than 100 countries. One of the key issues for the company is the ability to keep up with its growing operations and international bandwidth requirements. The focus of this case study is on the companys Latin American operations and how it handles network expansion using the Expand ACCELERATORs. Over 500 workers resident in 15 Latin American countries and more than 100,000 customers use this banking corporations network in Latin America. These workers are supported from data centers in the U.S. Networking environment: The Company has international links between several Latin American countries and its U.S. corporate headquarters. The IT department was required to consider urgent link upgrades of all international links as there were incessant complaints about network overloads bottlenecks, and poor application performance.

The problem: International links were reaching a 60% average with 100% peak utilization during business hours in all their international links, which contributed to significant network performance degradation resulting in longer response times. Growth in network traffic continued to be substantial, averaging a dramatic 20% plus per year due to increase in Internet-based applications. This traffic combines both internal traffic like e-mail as well as customer traffic such as automated teller applications. Challenges faced are application performance issues (i.e., slow response times from ATM machines by consumers and slow daily cash clearance transactions by employees), coupled with the high costs and limited availability of bandwidth in markets such as Asia, Africa and Eastern Europe. The company has an on-going program to deploy ACCELERATORs in order to keep recurring bandwidth costs flat and save the bank millions of dollars per year. The rationale: This Company decided to deploy the Expand ACCELERATORs primarily for two reasons: Telecommunications line upgrade cost avoidance Reduce time to implement capacity upgrades

Expand provides an overall lower cost solution compared to pure link upgrades. In addition, it provides a much faster upgrade cycle time compared to ordering and installing new international links. Expand ACCELERATORs can be up and running in one or two weeks (the time it takes to order and install the equipment) versus six or more months for international line upgrades. The analysis: The specific financial analysis of this company is as follows. In Latin America, the company has 30 international links connecting 15 countries, averaging 2 links per country. One line is a primary circuit and the other is the backup circuit. Speed ranges from 256 kbps to T1. The company was faced with the prospect of having to double the capacity of all of these links based on growing traffic requirements raising the overall cost of each link by 50%. The average cost per line today is $10,000 per month, and the company was facing the prospect of the cost increasing to $15,000 per month - a $5,000 per month increase. With over 30 lines, the increase would total $1,500,000 per year. With the Expand ACCELERATORs, the cost for the extra capacity was approximately $28,000 per primary and backup link, thereby totaling only $840,000 across the whole network. The calculated cost of the ACCELERATORs includes the cost of the Expand hardware plus the cost of installation and maintenance on each line. The overall savings over three years is six times the size of the investment. This equates to a 50% after tax return on investment with a payback of 6 months on a pre tax basis. This is a very favorable return for a telecommunications capital investment, where the average investment has a return of 20% to 30%.

The following shows the key financial metrics:

Capital Investment Telecom Savings ROI Payback

$840,000 $1,800,000 per year 51.4% 10 months after tax 6 Months pre tax

Number of Locations Scope

30 International

Dreyer Medical - U.S. Medical Clinic Case

Background: Dreyer Medical Clinic is a premier multi-specialty medical group. Expand Networks has implemented the ACCELERATORs in six of its clinics. This installation case demonstrates the benefits of deploying Expands network optimization solution on short haul data links. Dreyer Medical reports that network connectivity improvements averaged over 500%. Networking environment: Dreyer Medical is part of a large health support network connecting more than 125 physicians in 13 offices in the Chicago area. The key applications used by the clinic are Webbased applications that access medical records. All sites are connected via Citrix Thin Clients in a fully meshed network that is comprised mainly of 56 kbps links. Physicians and other professionals access these applications frequently, so any degradation in response time adversely affects their productivity in administering patient care. The problem: Dreyer Medical was faced with two problems. Degraded network response times that lowered the productivity of its physicians and the high cost of adding additional circuits. The rationale: Telecommunications cost savings Employee productivity

The assumptions: ACCELERATORs were implemented at six locations, which would impact four 56 kbps links. Most links are connected to a central location where the medical records are stored. All circuits have Expand ACCELERATORs deployed on them. The analysis: By deploying the ACCELERATORs, Dreyer Medical was able to defer adding four T1 links. The total cost for the network upgrade of these links was approximately $1,200 per month or $14,400 per year. With the ACCELERATORs providing the bandwidth boost, Dreyer Medical did not have

to purchase additional line cards and DSUs for these circuits. This approximated another $8,000 in additional savings. In addition to these hard network savings, Current Analysis estimates that there are significant productivity savings in terms of the better use of the physicians time due to improved application response time. The ACCELERATORs have positively impacted the 25 physicians. The organization has measured over a five times improvement in network throughput over the links where Expand ACCELERATORs were installed. This translates into a two to three second faster response time per minute. We estimate that over the course of the year this equates into savings of four hours per day (for all 25 physicians) or the cost of half of a physicians salary. Assuming a physician earns $150,000 per year, this equates to a savings of $75,000. When this is added to the network cost savings, the overall benefit per year of the Expand ACCELERATORs approximates $90,000 per year on an initial investment of approximately $40,000. This equates to an after tax ROI of over 50% with a payback in 5 months on a pre tax basis. Capital Investment Telecom Savings Hardware savings Productivity Savings ROI Payback $40,000 $14,400 per year $8,000 $75,000 per year 53% 9 months after tax 5 months pre tax Scope Domestic

Kennametal Inc.
Background: Kennametal is a diversified metal fabricating company with 160 locations worldwide. The company has grown through acquisition and, over the last two years has centralized its applications and processing operations. The main data center is in Latrobe, Pennsylvania. Networking environment: Kennametals network topology is predominately a hub and spoke frame relay configuration mixed with a minor deployment of point-to-point circuits. At Latrobe, Kennametal terminates nine T1 connections. Overall, telecommunications costs are approximately $5 million per year. These costs are growing as the company centralizes processing and roll outs of bandwidth intensive applications such as SAP across the entire organization. Indeed it was the recent upgrade of SAP from 3.0F to 4.6C that was the catalyst that drove Kennametal to consider alternatives to increasing bandwidth. The problem: Kennametal needed a way to cost effectively add capacity to its network. The company also needed to reduce the time taken to add network capacity especially for international links.

The rationale: International telecommunications cost savings Improved business efficiency by giving international sites faster access to mission critical data

The assumptions: Expand ACCELERATORs have been installed today on six international frame relay links in four locations. ACCELERATORs were installed either to eliminate the need to add an additional circuit (thus reducing the need for additional PVCs) or to reduce the current CIR. We will focus on two different cases for Kennametal. First, we will analyze the benefit that Kennametal has derived from the first four locations where ACCELERATORs have been successfully deployed. The benefit for these locations was primarily in not adding additional bandwidth to handle the SAP data processing load in two locations and reducing the CIR levels in the other two. Second, we will look at nine additional locations where ACCELERATORs will generate additional financial returns. The benefit from these additional locations will be derived through the reduction of line speed and concomitant decrease in monthly costs. The analysis: Kennametal has deployed Expand ACCELERATORs in four of its sites and is considering additional rollouts at nine locations over the next six months. This analysis will look at the return on investment of the current day deployment and the potential benefit when deployed across a larger percentage of the network. Expand ACCELERATORs are installed at the following Kennametal locations: Latrobe, Pennsylvania; Livonia Michigan; Furth, Germany; and Milan, Italy. Furth and Latrobe have multiple lines coming into these facilities. The following outlines the network considerations at each site. Between Livonia and Latrobe, Kennametal was going to have to double transmission speed going from a T1 Frame connection to an ATM connection. Deployment of ACCELERATORS made this unnecessary. Deferred operating costs are roughly $2,800 per month. Two connections between Latrobe and Furth could be downgraded from a 768 kbps line to a 512 kbps line. This resulted in a $4,000 per month savings. Between Milan and Furth, the circuits did not have to be upgraded, deferring additional PVC and access line charges of almost $3,000 per month.

Total operating savings for these network expansion deferrals and reductions total $112,000 per year. This resulted in a payback of slightly less than one year and an after tax ROI of 44%. When Expand ACCELERATORs are placed at nine other high volume locations, these savings and returns are just as impressive. The following table shows the locations that are slated for transmission line reductions due to the implementation of Expand ACCELERATORs. In many cases line speeds can be cut in half.

Site Asia: Shanghai Africa: Alexandria Asia: Singapore Europe: Two Kingswinford Europe: Arnhem and Leige Europe: Paris U.S.: Evans, IL

Type of Action Downgrade Downgrade Downgrade Downgrade Downgrade Downgrade Downgrade

Old Port KBPS 128 384 256 1024 256 384 1544

New Port KBPS 128 256 128 1024 128 256 512

Old PVC KBPS 96 192 128 512 128 192 768

New PVC KPBS 64 128 64 384 64 128 256

When these locations are added, the investment increases to $110,000. When these savings and costs are combined with the first four locations, the combined ROI is 41% with a payback in roughly 7 months. This is a very attractive return, given that we do not figure any cost savings due to enhanced line of business or telecom management productivity.

Capital Investment Telecom Savings ROI Payback

$110,000 $194,000 per year 41% 1 year after tax 7 months pre tax

Scope

13 International and domestic locations

Conclusion
In all three cases, the companies achieved extremely attractive ROI rates that carry little implementation or financial risk. The benefits we delineated in most cases are hard transmission cost savings. However, in all cases, we can also point to significant line of business productivity savings. Expand Networks offers a low cost, high return solution for companies that want to reduce existing network costs or slow down the growth of new network capacity spending.