So your company needs a new phone system. Should you stay with your fixed, on-premise PBX system or move to a subscription-based Cloud or “virtual” VoIP phone system?
The mistake many business owners make when trying to choose a phone system is how they evaluate their options. Instead of using a sensible methodology, the process can be a little too flippant:
- What’s the cheapest phone system we could get away with?
- What system are we currently using, and can’t we just upgrade it?
- What phone system are our competitors using?
- What phone systems are my mates’ offices using?
- What system does our phone provider recommend?
- I don’t care what we use. I let my IT manager make that decision.
- I’ve heard a lot about the cloud. Can’t we just have one of those?
So how should you decide what phone system is right for your business?
You might be surprised to hear it has very little to do with how much the system costs to buy vs. subscribe. Yes this is a factor, but it shouldn’t be the primary tool to determine your final choice.
Instead, what you need to focus on is the “opportunity cost”. That is, the financial consequence of choosing one phone system over another. Another way to look at it is the business revenue you potentially miss out on by choosing not to switch.
How does this relate to phone systems?
If you buy an on-premise phone system tomorrow, it will be obsolete within three years. Just look at how quickly mobile phone technology has changed and evolved in just the last three years… weight, screen size, camera resolution, processing speed, battery life and so on.Your company’s phone system is no different. The speed at which cloud telecom technology is advancing is frightening. There’s no reason to suspect its trajectory will flatten out any time soon.
In other words, if you keep an on-premise phone system for 10 years, your communications system will be outdated and obsolete for 7 of those 10 years. There is a financial opportunity cost associated with carrying outdated communication technology for 7 years. But how much is it?
Here’s an alternative method you can use to calculate the opportunity costs on critical business decisions like this. It’s served me well over the years, so I’m happy to share.
How to calculate opportunity cost of not switching phone systems?
Step 1: Evaluate the impact on payroll cost
Payroll is probably your company’s largest expense. Salaries, benefits, holiday pay, employer’s tax, liability insurance… costs you see every month on your P&L.
To grow your company, you’ll probably have to add more staff, which means increasing your payroll costs. But what if you could induce growth in your business, not by adding more employees, but by getting more productivity out of your existing workers? Let me give you an example.
Say your company has 40 staff, with an average payroll cost of £25,000/year per employee. Your annual gross payroll bill would be £1Million/year.
If your employees communicated better with prospects, clients and one another, would it be fair to assume they could increase their efficiency by at least 1%?
If so, then this means NOT allowing them to communicate more efficiently for 7 years would cost your company £70,000 (7 x (.01 x £1,000,000)).
That’s a big number. But just look at the next one.
Step 2: Evaluate the impact on sales revenue
Predicting sales is tricky. But it’s safe to assume that communicating better with customers will increase sales at least a little. For example:
If your salespeople had better communication tools, shouldn’t you expect to win an extra one or two customers per year?
And if your phone system had features that allowed you to communicate better with your existing customers and serve their needs better, surely you would retain at least one or two additional customers per year?
It’s therefore reasonable to assume that the combination of these two factors would lead to an increase of at least 1% in your gross sales. Conversely, it stands to reason that failure to improve your communications technology means you would miss out on a 1% sales increase each year.
Keeping with the same example calculations used in step one, let’s assume your company has £5M in Gross Yearly Sales. In this example, not having top-of-the-line communications technology for 7 years is going to result in an opportunity cost of £350,000 (7 x (.01 x £5M)).
When you look at the numbers in this cold, calculated way, it makes decisions much easier.
What are the risks attached?
OK, I accept there are many other factors involved and this method isn’t without its faults. But isn’t that what truly successful decision making is all about? For me, good decision making is about taking a sideways view and being bold enough to take calculated risks. They might not always work out. But if you apply a methodology in the process, you can tweak it based on known outcomes to help you refine your future decision-making.
The fact is, employee efficiency is a real thing that can be influenced by outside forces. So is retaining and selling new customers. And yes, the quality of your communications technology DOES affect those things. You just need to assign a number to them. The more accurately you can do this, the better your decision-making will be.
What do you think? I’d be interested to hear your thoughts on the logic used. It’s worked well for us and our clients in the past, but I’m always open to a good discussion.