How Cisco IT Helps Manage Operations Expenses

By Lance Perry, vice president, IT Customer Strategy and Success, Cisco

Editor's note: This month we focus on how IT can help with total cost of ownership. In our feature story, we look at how IT can be more efficient about using existing resources. We asked Cisco IT to describe how it has worked toward controlling costs.

In the first years of a company, especially a Silicon Valley startup, executives don't pay as much attention to budget line items as they do in later years. Take telecommunications expenses. It was more than a decade after the 1984 founding of Cisco before executives realized that the company was spending more than $200 million per year to a broad range of telephony and data service providers.

Worse, it became clear that these costs were essentially unmanaged. Each business group received its own invoices, which were paid without any corporate or departmental approval process in place. "Most companies today set up a telecom infrastructure and then walk away from the ongoing management of it," says Mark Edmondson, manager of IT services expenses for Cisco. "But telecom is a dynamic part of any company. "When the company's growth necessitated such large operating costs for telecom, management asked IT to investigate ways to track and control the expenses. It became clear that IT needed a strategy to analyze and manage telecom costs "so that we could make informed decisions about future operations," Edmondson says.

Getting Costs Under Control: The Beginning

To effectively manage the company's telephony and data expenses, Cisco created the Telecom Cost Management (TCM) program, with IT project manager Pam Lisotta as the first employee. Her job: centralize all U.S. invoices. "Managers would come to me about their departmental costs," she recalls. "They were being charged back for pagers and phones, but they had no idea how the money was being spent. They wanted to know the costs being invoiced by each vendor, the cost of each service from those vendors, and how much each of their employees was spending. They also wanted to know how to negotiate better contracts with the vendors, and other ways to drive down costs." Lisotta set out to get answers to all those questions. She began by gathering data. She instructed all vendors to send their invoices directly to her, and she started tracking them with a Microsoft Excel spreadsheet. She confirmed charges, confirmed that services were still needed, and cancelled those that weren't. Once Lisotta had centralized the invoices, Cisco assigned a senior financial analyst to look at the consolidated data. That analyst started tracking where money was being spent and where costs were increasing (and how fast), and evaluated overall telecom spending trends and potential problems. Working with the analyst, Lisotta generated summaries of costs by service and created tools to track and analyze variances.

Even with just two people focusing on it, this initial phase of the TCM program changed the company's overall view of those operating costs. Telephony was no longer viewed as a fixed expense, but as an operational variable that could be managed strategically to contribute to the company's success.

The TCM program continued for five years, at which time it became clear that it would have to be revamped for a variety of reasons, including:

• The company's growth taxed the manual process, and it was clear that an automated system was necessary for both processing and analyzing telecom expenses.
• As the number of employees increased, so did the number of services they purchased and frequently the number of vendors they used. Employees were using company-paid cell phones, pagers, and calling cards without oversight, and Internet access costs for telecommuters were increasing.
• Differences in vendor business practices added layers of complexity to the billing management task. Vendor accounting and invoicing processes, service product structures and bundles, accrual practices, and many other variables were also taxing the tracking and analysis process.

Taking these conditions into account, the TCM group set out to implement an automated telecom billing solution. It faced several challenges during this process:

• Global diversity of practices: Data collection in the United States was relatively straightforward, but analogous practices varied greatly in other countries. An international solution required an in-depth understanding of global currencies. In response, the TCM group initially designed the solution for the United States, with plans to implement it globally later.
• Data inconsistencies: Having dozens of different accounts payable teams meant having to resolve differences in payment timing, accrual practices, spending categories, and other parameters.
• Vendor technology variances: Supported media, Web access, electronic data entry capabilities, and other characteristics varied widely from vendor to vendor, with some still relying on paper invoices.
• Data complexity: Some vendors issued a single invoice for charges on multiple services, such as billed local calls, long-distance calls, calling cards, and ISDN lines.
• Attitude adjustments: Although executives realized early the importance of analyzing telecom costs, the perception still existed among users that telecom costs were a fixed cost of doing business. To counteract this, the company had to make information available to user about their resource usage (for instance, some users routinely used cell phones even when lower-cost landlines were available).
• Entitlement policies: Because no overarching policies existed, service allocations were left to managers' discretion. But many users believed that every employee was entitled to every service.

Creating The Vendor Services Database

The resulting telecom billing solution uses a centralized provisioning database. When employees join Cisco, their names are entered into the database with details regarding the telecom assets they're approved to use. As Cisco provides equipment and services to that employee, the database is updated to track status and inventory. For telecom billing, the database also includes information regarding the accounts to be billed, the managers who approve the related invoices, and recipients of the reports generated regarding the service. Although Cisco has outsourced the data entry of the initial billing information, the Cisco IT team receives the information immediately so that the internal network handles the bulk of invoice billing. The invoice workflow incorporates reconciliation methods for identifying asset-billing discrepancies. With this function, Cisco can quickly notify vendors of billing errors, including overcharges, deviations from contract terms, and charges for previously cancelled services. Vendor management teams have accurate, up-to-date data in hand when they meet with vendors to review services and contracts.

A second Web-based tool—called the Services Expense Reporting Tool (SERT)—generates reports about telecom costs and makes that information available to the global Cisco community. Individual usage reports are sent to users and their managers, and monthly billing summaries are available to various management teams. The tool allows managers and executives to gain in-depth understanding about telecom spending and the impact of new services on operating costs. By using an internal solution for expense reporting, they retain the ability to get real-time access to expense information in a variety of formats. IT can modify reports quickly to suit operational needs, without waiting for a vendor to respond. The new SERT reports have had an impact on both users and management at Cisco. Users now receive detailed expense reports, which are also sent to their managers. The IT team also sends out communications that help increase awareness of telecom expenditures, which have resulted in dramatic decreases in spending.

Part II looks at the financial results of the new applications.