Like many large financial institutions, Sovereign Bancorp Inc. frequently moves employees around, whether it's just to the next cubicle or across town. Most of those moves require calling in a telephone contractor, who shifts wires around inside an office's phone closet or reprograms the private branch exchange (PBX) serving the particular office so staff members can keep their phone numbers.
Since those contractors charge as much as $125 per visit, these changes can cost a bank like Sovereign $250,000 a year, according to John McCarthy, the Philadelphia-based company's chief technology officer. He bases his estimate on the expense of moving lines for a quarter of Sovereign's 9,500 employees each year.
However, with the advent of new phone systems based on Internet communications, the expense of a move should start to shrink. The reason: Internet-based telecommunications involve programming modifications that can be made centrally at the computer as opposed to requiring a technician to physically switch wires around. Once systems are installed, calls made over these networks are free of telecom carrier-imposed charges.
Benefits like this have created excitement around the technology known as Voice Over Internet Protocol (VoIP), or "IP Telephony." While there are some subtle differences that determine when it's appropriate to use one term over the other, both refer to the general process by which telephone calls are made over data network lines rather than standard telephone land lines or wireless links (see sidebar, page 8). Appropriately implemented, these systems provide productivity gains as well as cost savings.
VoIP is of interest to many different industries, but advocates say its potential could be especially significant in banking. Banks, whose offices and staff are geographically dispersed, make a lot of inter-company calls. With VoIP, most of those calls could be handled over the bank's data network and, therefore, free of charge.
The technology merits careful study. Costs, staff impact and sound quality will influence decision-making.
The economic case is much stronger for replacing fully depreciated equipment or when building new facilities. Sovereign, for example, is focusing its efforts on new offices and branches of acquired banks, where it is performing work on existing data networks in the course of converting branches to its computer system. Though its IT executives are enthusiastic about the future of VoIP, the bank has deployed it in just over one-fifth of its phone extensions so far.
As with many technology implementations, the cost of employee training must be factored into the equation. VoIP can require a steep learning curve for many workers.
The issue of sound degradation is another consideration. Since the technology of Internet communications involves compression of digital files, sound quality can suffer depending on the extent of that compression.
Keeping those limitations in mind, however, Internet-based telephony is likely to play an increasing role in bank telecommunications in the years ahead. "I don't think there's much chance of it not becoming the standard," McCarthy says.
Don Ellis, chief financial officer with American Community Bancshares Inc. in Charlotte, says installing an IP phone system in a branch costs between $6,000 and $8,000, compared to a range of between $10,000 and $12,000 for traditional systems, of which the PBX constitutes the major share of the expense. Approximately 70% of the carrier toll charges, whose monthly ongoing costs averaged between $500 and $600 a month per branch, were eliminated, according to Ellis. American Community, which has $400 million in assets, installed IP systems in all 11 of its branches in May 2003.
Separate telephone and data staffs can also be merged, often improving productivity. And when legacy gear is replaced with IP switching and IP phones, nearly everything Ñ from system troubleshooting to assigning an extension to the newest employee Ñ can be managed from a computer keyboard anywhere on the system.
Birmingham-based SouthTrust Corp., which undertook one of the largest multi-location deployments to date, estimated its annual savings at $5.7 million before it was acquired last November by Wachovia Corp, Charlotte. Those savings include a 40% reduction in local charges and leased lines, a 75% drop in move/ add/change expenses, a 95% reduction in conference calling expenses and a 60% decline in outbound long distance charges, according to Carl Owen, leader of the SouthTrust project.
Now senior vice president and head of converged networking for Wachovia, Owen says the ability to control the system centrally has significantly reduced the operational cost of the converged voice and data system.
John Studdard, senior vice president and chief information officer of Lydian Trust Co., based in Palm Beach Gardens, Fla., agrees with Owen on the benefits of centralized management. Lydian Trust, which is the parent of $1.3 billion Lydian Private Bank, installed 1,000 IP phones in 17 offices around the country. Just two telecommunications engineers are required to keep those phones in working order.
"That would not have been possible with a legacy PBX infrastructure," Studdard says.
IP Catches On
Though VoIP and IP telephony aren't household terms yet, they're clearly attracting interest, according to Yankee Group, a Boston-based telecom research and consulting company. Most large companies have begun deployments, albeit quite small in scope, says Zeus Kerravala, vice president for enterprise infrastructure with Yankee.
Of the approximately $12 billion corporate America spent on total voice infrastructure last year, about $2 billion was on VoIP and IP telephony, Kerravala says. He expects investment in IP gear to catch up to spending on traditional telephone equipment by 2006.
Major solutions providers in this space include Cisco Systems Inc., San Jose, Calif.; Avaya Inc., Basking Ridge, N.J.; Toronto-based Nortel Neworks Corp.; AT&T, Bedminster, N.J.; ShoreTel Inc., Sunnyvale, Calif.; and US LEC Corp., Charlotte.
Based on published reports and industry sources, the biggest banking deployments to date appear to be those initiated by SouthTrust and Abbey National plc in the United Kingdom. They'll be eclipsed by Charlotte-based Bank of America Corp., which last fall announced a plan to install 180,000 IP phones over three years. Building on SouthTrust's experience, Wachovia plans to deploy IP telephony across most of the merged company over the next two and a half years, covering about 65,000 phones, according to Owen.
Banks should be thinking about converging all their networks onto an IP system at the same time, rather than just adding voice to the main data network, recommends Rob Malnati, product development manager for US LEC in Charlotte. This means, for example, using IP to connect automated teller machines with the data center.
Malnati adds that bank reliance on old computer systems that don't use modern communications standards may impede their ability to take full advantage of IP.
Telephony experts agree that the time and place to consider IP systems depends entirely on company-specific and site-specific factors. Characterizing an average ROI potential is impossible because analyses depend on the age and depreciation status of existing systems, whether a company's existing data network has capacity to support voice traffic without a major upgrade, and the status of existing plans with traditional carriers. Banks need to take into consideration, for example, whether they pay a flat rate service for local calls or by the minute.
In addition, the cost of a new system varies dramatically with several choices that companies will make. IP telephones, for example, can cost several hundred dollars. Most desktop computers, however, can do the same work with inexpensive software, a headset and a microphone. It's not surprising, then, that even banks that are sold on IP telephony are picking and choosing where to install it.
SouthTrust and Abbey National, which was acquired in November by Grupo Santander of Spain, installed new phones and phone systems throughout their branch systems. Both have done far less in their buildings housing back office staff. Those facilities are typically served by huge PBXs, costing hundreds of thousands of dollars. Replacing these systems with costly IP switching gear just doesn't make sense until the PBXs live out their usefulness, Owen says.
What Can Go Wrong
With all its benefits, VoIP or IP telephony is not without its technical challenges. One has to do with the quality and configuration of the network. Routers and switches need to be configured in such a way that voice packets always have priority over all other system traffic. Minute delays in the transmission of data are never noticed, but will ruin the quality of sound.
"Most network managers have never dealt with an application like voice before," says Yankee Group's Kerravala.
The voice problems have led to some horror stories. In the summer of 2003, for example, F&M Bank in Clarksville, Tenn., started a deployment in its accounting department. The quality of sound was so poor that it yanked the phones after just four days. Terry Skillington, an assistant vice president and head of the bank's telecommunications, says F&M never did figure out exactly what went wrong.
One tricky aspect of voice transmission over Internet lines is the tradeoff between compression and sound quality. Much of the cost savings in VoIP comes from compressing the digital files that carry the sound. But "the more you compress, the lower the quality of the sound," says Gary Wass, head of communications architecture and planning for Abbey National.
Abbey National executives say they are pleased with a deployment that replaced the phone systems in the company's branch offices over six months in 2003. And they calculate that the changeover has achieved savings worth more than $5.3 million annually. But Wass says it required serious deliberations and questioning of its vendors Cisco Systems Inc. and British Telecom. "We debated long and hard with both Cisco and BT as to what was an acceptable quality for phone calls."
Banks that outsource management of their data networks need to carefully assess their vendors' voice capabilities, rather than just assume they're up to the job, agrees Studdard at Lydian Trust.
Bankers also need to keep training top of mind. A VoIP deployment can backfire if employees can't operate the equipment efficiently. While simply picking up the phone and making a call isn't difficult under the new system, many users falter when they move on to more complicated things like transferring calls or setting up conference calls.
"That is where we started to get into problems," says Wass at Abbey National, who likens the situation to programming a home VCR: Some people take to it right away while others never figure out how to do more than the simplest tasks.
At Abbey National, customer complaints started coming in when calls were cut off or transferred into oblivion. In response, the bank stepped up its training as the implementation progressed. Wass and his colleagues asked branch staffers to call friends and then to set up conference calls with company employees in other branches, just for the sake of gaining experience. Results were mixed, however.
Despite such problems, executives at Sovereign, SouthTrust, and Abbey National all express confidence that installing Internet-based phone systems was the correct thing to do. Sovereign, for example, ran into voice problems with the new system but simply concluded that its network configuration needed work.
Says McCarthy, "We have not had an instance yet where we said, 'Oh, God, why did we do this?'"
Mr. Stoneman is a freelance writer based in Albany, NY.
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