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How to build the NFV business case

Building a compelling business case for NFV is challenging, but essential. Telecom expert Tom Nolle explains how to convince CFOs that the time is right for implementation.

Network functions virtualization (NFV) has swept the industry since the notion was launched by international network...

operators in 2012. It now has almost universal support among network operators and their suppliers. Making a business case for implementation isn’t easy, however, because while NFV's long-term impact is broad, the early focus of trials and proofs-of-concept is very narrow.

The first step in making an NFV business case is to find out exactly what information your CFO will need. In most cases, cost-based justifications for NFV will have to be based on comparative total cost of ownership (TCO) and revenue justifications on net revenue generated. Check to validate the requirements of the CFO and to determine whether there’s a specific outline or spreadsheet that’s expected.

One very important point to include in this step is the timeline over which TCO or revenues are to be assessed. The CFO will generally set an expectation of useful life for installed technology based on tax and accounting practices, and this will set the horizon for measuring benefits.

The second step in building a compelling NFV business case is to identify the benefits of implementation. Revenue augmentation and cost reduction are the two benefits of NFV that most CFOs expect. A large-scale NFV project will almost surely involve both, and you should clearly identify whatever benefits justify your NFV project, taking steps to quantify them.

Since all your justifications for NFV will involve an assessment of NFV versus an alternative approach, your third step is to quantify the current or reference costs and revenues, so you'll have a baseline to compare to the NFV implementation.  Once you have reference values for cost and revenue, you’re ready to do an NFV comparison.

For revenue-based benefits, first define the specific way NFV will allow revenues to be augmented. Think in terms of revenue-generating events -- things that can be billed for. The revenue gains offered by NFV will consist of the number of those events in the measurement period, multiplied by the revenue per event.  This total must be compared to the cost of the NFV deployment needed to secure the revenue.

Be sure to account for the difference between new revenue and revenue acceleration.  NFV can often reduce provisioning time, which can result in a faster time-to-revenue for moves, additions and changes made to services. These gains, which can total multiple weeks or even months, accrue per change, rather than every year, but they are often calculated as though they were recurring annual revenue. CFOs are already watching for that in project proposals.

Cost reduction benefits are -- on one hand -- the most credible for CFOs, and -- on the other -- often the hardest to develop and substantiate. The easiest way to get a credible cost reduction assessment for NFV is to first get the CFO’s help in identifying the principle cost categories and then analyze the impact of NFV on each. Network operators, for example, typically spend about 20 cents of each revenue dollar on Capex, 60 cents on operations and administrative costs and return the remainder as profit. The breakdown of the operations and administrative costs will likely be critical to your analysis.

Capex reduction is often the primary focus of an NFV business case proposed by a vendor, but this can be problematic. The financial industry primarily judges operators on a measure called EBITDA, or Earnings before Interest, Taxes, Depreciation and Amortization, which excludes Capex. 

Every type of network operator -- mobile, MSP, full-service, metro, etc. -- and every operator within a given type, has a different distribution of operations and administrative costs. Ideally, you’ll create a pair of cost models, one representing the current TCO, and one representing the TCO presuming an NFV deployment.

The most significant issue with TCO-based assessment is the lack of concrete information on how NFV will impact management and operations systems and practices. This lack of clarity is even more important given that, since NFV substitutes a series of network-connected-and-hosted software elements for a network appliance, it’s inherently more complex and, thus, presumably more costly to manage. Operations management is typically the purview of the network operator’s CIO, and, like the CFO, the CIOs have been only recently engaged in NFV assessment.

Scale and first cost are the final points in an NFV justification. NFV presumes that a pool of resources -- the NFV Infrastructure (NFVI) -- can host virtual functions efficiently. This is true if the resource pool is large, but building a large data center or multiple data centers to host virtual functions will introduce an immediate capital and operations cost, and revenue or cost reduction gains may come more slowly. That results in negative cash flow in early NFV deployment.

Some vendors have proposed to use a form of customer premises equipment (CPE) capable of hosting virtual functions to scale costs to the pace of new revenues by eliminating early need for data center hosting. Cash flow curves for both strategies can be presented as part of the NFV business case, and these curves can help identify a point where central or distributed hosting of virtual functions would reach the scale needed to deliver economy versus hosting on CPE.

Ultimately the most complex question for the NFV business case may be whether NFV is an infrastructure revolution destined to touch every service, or simply a way of doing one or two services differently. If it’s the former, then it will be critical that early NFV steps support a holistic operations and resource vision, or broad economies will be hard to develop.  If it’s the latter, then it’s likely that benefit case for those services that do get NFV support will have to be stronger to offset the fact that specialized hosting and operations practices will have to be justified. Time will tell which vision gets the most operator support.

Next Steps

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This was last published in November 2015

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