UCaaS ROI formula calculations and methodology

Tom Nolle

It's difficult for any IT professional to get a project approved without a financial analysis to measure return on investment (ROI). In the old days of building applications by buying hardware and software and providing ongoing support, the ROI calculations were straightforward. In the cloud, that's not always the case, and that's particularly true for cloud versions of unified communications and collaboration (UCC). Unified Communications as a Service (UCaaS) is a hodgepodge of models and options, and each of them has a different slant on benefits and costs. Finally, UCaaS risk management can have a significant impact on ROI depending on the model selected. But there's good news: An orderly approach to ROI can cut through all this and produce the necessary project proof points for your UCC deployment.

UCaaS ROI formula variables

In the simplest terms, ROI is the benefit delivered per unit cost for a project. Every company has its own specific mechanism for calculating an ROI formula into which a project manager can plug information on costs and benefits -- generally provided by the chief financial officer (CFO). Where such a document exists, it's best to follow it and adapt the basic rules presented here to your own situation. For smaller businesses without a formal ROI validation process, these simple rules below should suffice. For them, all you'll need to do is lay out a simple side-by-side spreadsheet of costs and benefits.

The starting point for any UCaaS ROI project should be to set the baseline. There are two types of UCaaS deployment: There are brownfield UCaaS deployments that replace any UC deployed on a company's own servers, and there are greenfield UCaaS deployments, where no UC applications existed before. Greenfield UCaaS justifications will calculate ROI by looking at the benefits of UCaaS compared to its operating costs. Replacement projects substitute UCaaS for a current self-hosted UCC installation. Here the ROI is calculated by comparing the costs of the two UCC hosting models.

For both UCaaS and self-hosted versions of UC, the costs to be considered would include all of the following:

  • Platform costs: The basic charges for the UCC system and software
    • For self-hosted UC, use the annualized cost of the hardware and software needed to run the application. Most companies will presume a five-year useful life, so your annual cost is one-fifth the total platform cost. Add in any annual maintenance or license charges.
    • For UCaaS, get the total cost to run the application per year, including CPU, data and access charges. Some UCaaS vendors charge per seat, but the goal is to get the total annual cost of the service.
  • Adapter costs: The costs of connecting handsets, videoconferencing units and so forth
    • For self-hosted UC or UCaaS, use the cost of any equipment needed to connect existing devices to the UC system. In many cases, these will be the same because the same adapters may be needed in both cases.
  • Device costs: The cost of the actual handsets or other voice and video devices to be used
    • Beware here! Many UCaaS systems won't work with existing phones and video systems, so if there are any current devices in use, you may have to replace them for UCaaS.

Calculating the UCaaS ROI formula

UCaaS ROI formula calculation

1. Divide workers into job categories.

2. Average the value of labor per year.

3. Multiply the percentage of time savings UCaaS will bring to that category per year (for example, two hours per week is 104 hours per year).

4. Multiply that savings by the number of workers in the job category.

5. Sum the results across all job categories to achieve total savings.

6. Divide the total savings by the total cost of the solution. This should deliver a number between 1 and 1.8. If it is less than 1, no cost savings were achieved.

7. Subtract the 1 to calculate the cost savings percentage of your solution (that is, if the number that remains is .34, the UCaaS ROI percentage equals 34%).

Once the basic costs have been identified, it's time to move to benefits. For greenfield UCC projects, benefits stem from productivity improvements to workers, and it follows that UC is most likely to generate a good ROI when it targets workers with a high unit value of labor, and where those workers spend significant time collaborating with others who are also UCC-empowered. It's critical that UCaaS project targets don't stray to areas where worker productivity can't be improved much, because UCaaS costs will be proportional to the number of workers served. You must calculate a total annual benefit achieved by the expected worker targeting by grouping workers by job category, estimating time savings per job category, then multiplying hours saved per year per job by the average wage per job.

The ROI formula for a greenfield UCaaS implementation can be calculated by dividing the annual benefit by the annual cost, which will (hopefully) generate a number like 1.38. If the number is less than 1, the cost is greater than the benefit and the project has no ROI justification. It's time to recheck your figures or go back to the drawing board to look for more benefits. If the number is greater than about 1.8, you may have either underestimated costs or overestimated benefits. If the number is between 1 and 1.8, subtract the 1, and your ROI is what remains. Most companies will target an ROI of between 25% and 40%, depending on their cost of borrowing and the perceived risk of the project. If your ROI is above 40%, you're in the clear; if not, then it may be wise to look for better benefits (expand your target worker population) or lower costs (find another UCaaS provider).

Evaluating UCaaS ROI

When evaluating a switch from a self-hosted UCC installation to UCaaS, it's almost always safe to assume the same benefits, so compare only the annual costs. Most companies report that unless a new option like UCaaS is at least 25% cheaper than the current in-house system, they wouldn't consider a change because of the cost and risk of conversion. If you can't generate that level of cost improvement, the project may not be a good ideal.

One special issue to consider when a normal ROI evaluation doesn't justify the project is the issue of cash flow. UCaaS, as a service expense, is deductible as an expense in the year the cost is incurred. Capital equipment for an in-house hosted UCC installation must be depreciated over a period of three to five years (depending on tax jurisdiction). That means that while your company would spend the entire capital budget for UCC in the first year, only a third to a fifth could be deducted as an expense. That means your taxable income might be higher, even though the money was spent! The moral is that even when ROI doesn't justify UCaaS, there might be other factors, so check with the CFO or the company's accounting firm to be sure.

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