Developing a Cost Based Rate Model for Telecommunications Services

Developing a Cost Based Rate Model for Telecommunications

Services

Rohit Ahuja

Patricia Nelson

Scott Sheavly

2

Cornell Overview• Cornell is both a private endowed university and the

federal land-grant institution of New York State

• 260 major buildings on 745 acres

• 7 undergraduate units, plus 6 graduate and professional units:– 4 in Ithaca, NY (grad school, law, mgmt and vet med)

– Medical schools in New York City and Qatar

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Voice and Data Network Facts• Students ~ 20,000 (14,000 undergrads, 6,000 graduate)

• Faculty ~ 3,100

• Staff ~ 8,700

• Cornell Data Network: – Active Ports ~ 23,000 (6,000 student)– Active IP’s: ~ 29,000– Traffic: 60% intra campus; 40% internet

• Cornell Voice Network:– Phones ~ 18,000– Long Distance Minutes ~ 8 Million

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Charter of Cornell Information Technologies

• Cornell’s enterprise information systems, services and support department

• Approximately 1/3 of the university IT staff are part of CIT

• Provides– General Campus Services (E-mail, Helpdesk, Backup)– Administrative Systems– Distributed Learning Development and Support

(Academic Technology Center, Public Labs)– Data Network Services– Voice Services (Phones, Long Distance, Moves, Adds and

Changes)

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CIT Sources of FundingIT

Funding FY94-FY03(in $1,000's)

$-

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

Mainframe, Administrative SystemsDevelopment and Maintenance

Special Funding (Distributed Learning,Classroom Technologies...)

Cost Recovered Services (Voice andDataServices, EZ Backup, ETV and WPG...)

General Appropriations (General CampusServices...)

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CIT FTE GrowthFTE

FY96 - FY03

230

240

250

260

270

280

290

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

FT

E

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Problems and “Drivers”

• University administration’s perspective

– Where was all the money going???

– Lack of accountability and

understanding

– Perception of inefficiency

– Frustration in determining

optimal funding level and

continual requests for “more”

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• Customers’ perspective– Voice and data were too expensive– No knowledge/understanding of how prices were

derived– Viewed CIT as “empire builders”; too rigid,

disjointed and hierarchical

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• CIT’s perspective– Didn’t know what most of our services truly cost– When we did know, we couldn’t explain it very

well to each other, let alone our customers and the university administration

– Operated in a very division/unit-centric manner rather than with product/service focus

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What Did We Do About It?

• At direction of VP for IT, VP for Finance, and VP for Budget, we formed a university wide committee to analyze IT costing methodology:

Cost Analysis Manager, Division of Financial AffairsDirector of Finance & Administration, Student & Academic ServicesIndirect Cost Financial Analyst, Division of Financial AffairsAssistant to the Vice President, ITAccounting Manager, ITBudget DirectorAssistant Controller

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Objectives

• Needed to identify full costs for each service, including staff effort expended in other CIT units in support of services

• Identify all implicit and explicit subsidies and allow university to determine if and when subsidies were to be allowed

• Any permanent or temporary subsidies needed to be explicit and sustainable

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Objectives

• To develop a preferred cost recovery mechanism for CIT network costs

• To address ResNet and other student use as well as academic and administrative use of IT services

• To address labs, public areas, and classroom ports cost recovery mechanisms

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7 Steps on the Road to Recovery

1. Define IT services 2. Define direct costs of services3. Define indirect costs of services 4. Allocate indirect costs to services5. Identify voice and data costs6. Allocate voice and data common costs to

services7. Recover costs

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1.Define IT services

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Step 1. How Do We Define IT Services?• General Campus Services

(E-mail, Backup, …)

• Administrative Systems (Payroll, Student Systems, Mainframe, …)

• Distributed Learning and Development Support (Academic Technology Center, Public Labs…)

• Data Network Services

• Voice and Other Telecommunications (Telephones, Long Distance, Moves, Adds and Changes,…)

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2. Define direct costs of services

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Step 2. How We Define IT Direct Costs?

• Direct costs: Cost which can be identified to a specific service

• Examples of Direct costs include:– E-Mail servers (e-mail)

– PeopleSoft Site License (payroll)

– PBX maintenance (voice services)

– Routers (data services)

• We reviewed an entire year of expenses recorded in the general ledger– HR, staff support costs, capital, and general expenses

– Identified direct expenses

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Mainframe and Production Control-Direct

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PBX-Direct Cost

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Student Lab-Direct Cost

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Server Farm-Direct Cost

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NOC-Direct Cost

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Public Facility: Direct Cost

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3. Define indirect costs of services

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Step 3. How Do We Define Indirect Costs?

Indirect costs: Costs which cannot be identified to a particular service (internal IT costs only)

• Technical Management

• Administration and Finance

• Internal IT Desktop Support

• IT Publications

• Help Desk

• IT Server Management

IT Indirect costs15%

IT Programs and Services

(~60 )85%

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IT Facilities-Indirect

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Help Desk-Indirect

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Business Admin Center-Indirect Cost

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HR Administration-Indirect

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Total Cost of Each IT Service

Direct Costs Indirect Costs

General Campus Services

Administrative Systems Distributed Learning and Development Support

Data Network Services

Voice and Other Telecommunications

+Technical Management

Administration and Finance

Internal IT Desktop Support

IT Publications

Help Desk

IT Server Management

= Total cost of each service

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4. Allocate indirect costs to services

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Step 4: How Are Support Costs Allocated to Services?

Allocation Method

Finance and AdministrationInternal IT Desktop SupportTechnical Management

IT Publications

HelpDesk


FTE's

% of time

# of trouble calls

# of servers

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Total Cost of Each IT Service

Direct Costs Indirect Costs

General Campus Services

Administrative Systems Distributed Learning and Development Support


Voice and Other Telecommunications

+Technical Management



IT Publications

Help Desk


= Total cost of each service

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Total IT Services Costs After Allocation of Support Costs

19%

29%

10%

19%

20%

3%

General Campus Services (E-mail, CU Info, Help Desk, EZ Backup, …)

Administrative Systems (Payroll, Student Systems, Mainframe, Authentication, …)

Distributed Learning and Development Support (Academic Technology Center, Public Labs,Faculty Fellowships, …)


Voice and Other Telecommunications(Telephones, Long Distance, Moves, Adds andChanges,…)

OIT Campus/National Programs

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Accounting Challenges

• Identifying costs of IT services

• Educating IT staff about required accounting

• Communications with university financial offices

• Maintaining accounting structure

• Keeping up with changing technical environment

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Total Cost of Voice and Data Services

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Technical Management



IT Publications

Help Desk


Indirect Costs

+ Total cost of each service

=

Direct Costs

Costs Directly Assigned to Voice

Services

Costs Directly Assigned to Data

Services

Costs Common to Both Voice and Data

Services

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5. Identify voice and data costs

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Step 5: How Do We Define Voice and Data Costs?

• Direct Costs of Voice Services:– PBX costs, maintenance, and staff – Long distance usage

• Direct Costs of Data Services:– Data electronics, maintenance, staff– Data usage billing – Security

• Costs Supporting Both Voice and Data Services– Network Operations Center (NOC)– Plant maintenance (cable and fiber)– Inventory supplies and management– Utilities– Billing, work order, and trouble tracking systems

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Costs Common to Voice and Data

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Costs Common to Voice and Data

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6. Allocate voice and data common costs to services

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Step 6: How are Costs Supporting Both Voice and Data Services Allocated?

Plant MaintenanceInventoryUtilities

Network Operations Center

Billing, work order, and trouble tracking

50%Voice

50%Data

80% Data

20%Voice

Data Services

Voice Services

Based on Revenue

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Technical Management



IT Publications

Help Desk


Indirect Costs

+ Total cost of each service

=

Direct Costs

Costs Directly Assigned to Voice

Services

Costs Directly Assigned to Data

Services

Costs Common to Both Voice and Data

Services

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Elements of Voice Services Costs

50%

11%

31%

4% 4%Direct Costs

IT Indirect costs

Plant Maintenance,Inventory, Utilities


Billing, work order, andtrouble tracking

Elements of Data Services Costs

37%

18%

27%

14%

4%

Direct Costs

IT Indirect costs




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STEP 7. Recover Costs

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Step 7. Recover Costs

Total Cost of Service

÷ # of Units

= Rate Per Unit

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Rate Calculation

Service Annual Cost

# of Units Unit Rate

Analog $3.9M 15,000 phones ~$22/month

Digital $1.6M 3,500 phones ~$38/month

avg

Long Distance

$0.4M 8,000,000 Minutes

~5.5 cents per minute add on

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Data Network Recovery

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What’s Next?

How do we recover costs of Data Services?

37%

18%

27%

14%

4%

Direct Costs

IT Indirect costs


Network OperationsCenter


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Data Network Cost Recovery Background

• In prior years phone service had subsidized data service

• CIT implemented cost based rates on July 2001

• This cost recovery mechanism was based upon an assumption that there is one user for each data port network connection; no longer true

• The mechanism was based upon average cost recovery per port which does not recognize the variation in individual usage

• As a result some users elected to increase number of devices per data port via hublets

• Internet usage was growing dramatically

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WAN Consumption: All Users

40%

60%

Academic/Administrative

ResNet

WAN Consumption by IP: All Users

4%

12%

84%

80% of all IP addresses



WAN Consumption by IP: Academic and Administrative Users

3%11%

86%




WAN Consumption by IP: ResNet

9%

25%

66%




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How Did We Address the Problems?• Formed a cross campus Network Task Force

Director, Finance and Budget, Office of Information Technologies

Manager, Indirect Cost, Division of Financial Affairs

Associate Director, University Budget Office

Assistant Vice President, Student & Academic Services

Associate Dean for Business Administration, Hotel Administration Accounting Services

Director, Computing Facility, Laboratory of Nuclear Studies

Customer Services Director, Cornell Information Technologies

Computing Facilities Director, Computer Science Department

Business Operation Director, Facilities Services

Business Services Director, Campus Life

Communications Products Director, Cornell Information Technologies

Dean, Johnson Graduate School of Management

Director, IT Architecture, Office of Information Technologies

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Data Network Cost Recovery Guiding Principles

• Cost to the cost causer• Rate structure should support unified campus network architecture• Affordable access to basic services for all• Premium services to allow world-class research and education• Competitive network with our peer institutions in features • Competitive network with commercial service providers in cost

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Associated Conditions

• Campus rewire cost should not be reflected in network costs charged to colleges and departments

• ResNet expenses should not be recovered through inflated general campus network cost recovery charges

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How Did We Address the Problems?• Spent six months examining the issue

– Analyzed options– Financial analysis– Network usage analysis

• Spent six months getting campus feedback– Faculty Senate– Student Assemblies– Campus IT Directors– Faculty Advisory Board on Information Technology– Executive Budget Group– Executive Cost Committee

• Estimated financial impact on departments based on revised rate structure

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Scenarios ConsideredFull Recovery Options Advantages Disadvantages

Fixed Network Port •Operational simplicity

•Continuity with current practice

•Near term revenue and expense predictability

•No feedback for excessive consumption

•Creates economic incentive to install hublets

Headcount Tax •Operational simplicity

•Near term revenue and expense predictability

•No economic incentive to disconnect ports

•No feedback for excessive consumption

•Does not document and justify expansion for CIT resources

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Scenarios Considered

Full Recovery Options Advantages Disadvantages

Usage-based Billing •Feed back to consumer

•No economic incentive to disconnect ports

•Fully documents fees based on consumption

•Allows demand to justify expansion

•Unpredictable revenue stream

•Operationally complex and expensive

•Limited ability to reduce cost due to decline in consumption in the short term

Hybrid •Feed back to consumer

• Less economic incentive to disconnect ports

•Allows demand to justify expansion

•Some revenue stability

•More operationally complex than fixed port fee or headcount tax based systems but less complex than pure usage-based billing system

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How We Define Data Services?LAN (Local Area Network)

Provides in the building connections to end user equipment in offices using structure wire, fiber optics, and network electronics. Provides physical and link layer for end users and departments.

CAN (Campus Area Network)

Provides a gigabit Ethernet based campus network monitored 7 x24 by the Network Operations Center. This makes network based services reliable

available to the Cornell community.

WAN (Wide Area Network)

Wide area network connections which provide worldwide access to and from the University.

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CANAcross campus Network &

Communication Services provides aGigabit Ethernet based campus area

network monitored by 7*24 by theNetwork Operation Center making

network based servcies digitial assetsand service reliably available to the

Cornell campus community.

WANNetwork & Communication Services

establishes wide area networkconnections to provide world access toand from the University for information

resources.

LANIn the building Network & Communication

Services provide local area networkconnections to end user equipment in officesusing structure wire, fiber optics and networkelectronics. Provide physical and link layernetworking for end users and departments.

Local printer

Local File server

Ethernet Switch

IDF

IDF

IDF

IDF

BDF

Ethernet Switch

CommodityInternetService

Internet2and

NYSERNet

Ethernet Switch

Router

Router

Backbone Switch

Backbone Switch

WAN Router

WAN Router

Local InternetProviders

Off CampusCornell Sites

NOC

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How Do We Recover the Costs of Data Services?

How do we recover costs from the LAN,

CAN and WAN?

37%

18%

27%

14%

4%

Direct Costs

IT Indirect costs




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Allocation to LAN, CAN, and WANLAN CAN WAN

LAN Direct Costs XCAN Direct Costs XWAN Direct Costs X

Security XData Usage Billing X

IT Support X X X

Plant Maintenance X X XInventory X XUtilities X XBilling, Work Order,… X X X

Network Operations Center X

IT INDIRECT COSTS

DIRECT DATA COSTS

ALLOCATED COSTS

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Focus Group Findings

ResNet WAN Use

• Frequently mentioned online activities included instant messaging, email, downloading songs and videos, Web surfing for fun, and research for school

• ResNet subscribers will change their habits under the new billing model and be more aware of ways they transfer data across the Internet

• Students will not be willing to pay for additional WAN usage over and above included in the base charge

• In marketing the new billing model, students suggest emphasizing a majority of ResNet subscribers will save money

Academic and Administrative WAN Use

• Personal (non-business) use and worms/viruses infecting network computers is behind much of the high volume WAN use on campus. Better detection and prevention of worms/viruses will be necessary

• Administrators do not anticipate users exceeding the billing threshold established under the billing model

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Projected WAN Consumption

• The feedback from 38 administrators representing some of the top 300 academic and administrative WAN users suggests that under the new billing model data volume transferred by the large users is likely to decrease by 70%

• Based on students input it is estimated that their consumption will drop by 75%

• These findings are consistent with empirical evidence from a similar study (Berkeley INDEX Project) which shows that 75% of users managed their needs within basic service charges rather than paying extra for premium services

• With introduction of new rate structure the composite of students, academic, and administrative WAN consumption is likely to drop by 72%

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How Do We Recover?

LAN- Recovered thru port charge-ResNet port charge included in room rate

CAN-Recovered thru departmental tax-Includes public ports, wireless, intranet traffic

WAN-Recovered thru usage charge-Off campus traffic, to and from -$4 per IP/month, includes 2000mb-3/10th’s of a cent/mb >2000mb

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Data Costs and Recovery

37%

18%

27%

14%

4%

Direct Costs

IT Indirect costs



Billing, work order, andtrouble tracking 20%

80%

ResNet

Academic andAdministrative

22%

60%

18%

LAN

CAN

WAN

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Some of the Challenges of Usage Based Billing

• Perceived conflict with academic mission

• Requires significant investment of administrative time to assign usage to users for billing

• Worms/Viruses causing unintended usage

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Student WAN Usage(in MB)

0

10,000,000

20,000,000

30,000,000

40,000,000

50,000,000

60,000,000

70,000,000

July August September

MB FY2003

FY2004

Academic/Administrative WAN Usage(in MB)

0

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

30,000,000

35,000,000

July August September

MB FY2003

FY2004

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Customer Commentary

Sample

Faculty

/staff

Policies

• Department will pay for one jack and base usage charge for each faculty office; for labs, no more than two base usage charges. Costs will likely increase where existing hublets are in use; no new ones will be allowed.

• Department will pay for one base usage charge for each grad student; overages must be reimbursed from personal or adviser funds.

• 2 gigabyte baseline will be exceeded if user is downloading MP3s and/or videos; this is NOT an allowable expense to the University, so please use home connection for this activity.

Sample

Student

Comments

CONTRITEIn August I was billed $400+ due to my careless use of Kazaa . . . I have now disabled the supernode and limited my sharing to one person at a time. It would be greatly appreciated if you could give me relief for my ignorance in bandwidth and give me a credit for August and September.

ANGRYThis is bull****. I have downloaded about 1 gig of information yet I’m being charged for 7 gigs. I understand small amounts of memory are transferred while being on the web, but not 6 gigs. Furthermore, I have not uploaded any information. Many people on my floor share my concerns . . . I was wondering if you could comment.

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Voice and Data Price MigrationRates shown are representative estimates not actual prices

FY 01 FY 02 FY 03 FY 04

Analog phone (admin & student/in room rate) $35 $21 $22 $22

Digital phone $45-$65 $35-$50 $35-$55 $35-$50

Domestic LD ~15¢ per minute

(average)

~12¢ per minute

(average)

~11¢ per minute

(average)

~8¢ per minute

(flat rate)

International LD ~$1.00 per min

(average)

~90¢ per minute

(average)

~80¢ per minute

(average)

Cost + 5.5¢/min

(down 30-40%)

Voice Mail $4 $4 $4 $3

10/100 Mb Data port $10 $28 $30 $8 + usage

Single-port gateways:

10 Mb 100 Mb 1 Gb

$100$400N/A

$450$1,500$3,000

$700$2,000$3,700

N/A

ResNet ~$150 per year

(student billed)

~$200 per year

(student billed)

~$400 per year

(student billed)

~$250 in room rate + usage

billed to student

Wireless $10

(+ data port)

$10

(+ data port)

$10

(+ data port)

Included in CAN tax

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Contacts/InformationRohit Ahuja Financial 607-255-5954 [email protected]

Pat Nelson Financial 607-255-5525 [email protected]

Scott Sheavly Financial 607-255-1363 [email protected]

Dave Vernon Network Architecture

607-255-6461 [email protected]

Rick Jones Billing Software Development

607-255-8458 [email protected]

Network Task Force Report http://www.cit.cornell.edu/oit/Arch-Init/papers.html

Developing a Cost Based Rate Model for Telecommunications Services

Documents

classroom technologies

ez backup

internetcornell voice

cornell data network

intra campus

data network factsstudents

new york city

long distance minutes