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October 19, 1998

The Cost Of Networking

Managing the cost and complexity of the network is taking a large toll on IT resources. Can anything ease the pressure?

By Monua Janah

Illustration by David Flaherty

he cost of network hardware and bandwidth has fallen steadily over the last few years, making it possible for companies of all sizes to build bigger, better, and more far-reaching networks. But a combination of increased use and growing complexity has the total cost of networking spiraling upward. Managing the costs and complexity, while adding new capabilities needed to support increasingly network-dependent business operations, has become a major challenge.

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The scenario for many companies is something like this: New applications and added users are fueling demand for bigger pipes, more equipment, and faster replacement of existing network hardware. Network upgrades to add bandwidth, ensure uptime, expand remote access, and enhance manageability are costly investments, frequently justified by the promise of bringing down future networking costs. But--if not managed carefully--the cost of installing, maintaining, and troubleshooting network improvements can become a monetary sinkhole. On top of that, complex networks demand growing, more expert networking staffs--and salaries for these employees have become a big component of networking costs.

Upgrades, complexity, and ongoing maintenance of legacy networks are putting pressure on the cost side of the cost-benefit equation. Far from expecting networking costs to go down, nearly 80% of 200 IT executives polled by InformationWeek Research say they expect networking costs to increase in the next year (see chart, above). But increased costs aren't deterring most companies from spending more. IT executives' top priorities for next year are to improve network security, increase bandwidth, and centralize network management (see chart, below). Reducing costs falls lower on the priority list.

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But placing a low priority on cost control can only last so long, as Fidelity Investments discovered. "From 1995 to 1998, our spending on bandwidth more than doubled from $36 million to $75 million," says Leo Esposito, senior VP of telecom at Fidelity. "Finally, we said, 'Look, this is spiraling out of control. Even though unit costs are going down, our consumption keeps going up.'"

The evolution of some networks into a costly, complex monster reminds Mark Settle, CIO of Occidental Petroleum Corp. in Los Angeles, of what happened on the desktop. "At first, the desktop was simple," Settle says. "We let it get complex, and then we wonder why we need to spend hours and hours just to keep it running. With networks--remote access, virtual private networks, encryption--it's the desktop all over again. There's good value in terms of using the Internet and extending the corporate network. But before you know it, you have built up topsy-turvy."

Is there no way to tame the networking hydra? The prospects aren't totally bleak. Companies are deploying strategies to maximize the value of the networks and reduce costs. These include standardization, consolidation of vendors, outsourcing, new applications to minimize the load on the network, improved network management, and new tools to monitor and price network usage.

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Big, Pricey Upgrades
When it comes to upgrading the network, IT executives' goals are driven by business objectives that require functional improvements to ensure reliability, security, and quality of service (see chart). Many companies are implementing major network upgrades to keep up with increased demand for bandwidth and decreased tolerance of network downtime.

Insurer USAA in San Antonio has just completed a $103 million, 18-month upgrade of LAN and WAN equipment, moving mostly to Cisco Systems gear to provide added capacity to ensure a smooth-running network. "We touch our customers through the network. That's how they gain access to our products and services," says Reggie Williams, USAA's senior VP for operations support. "If something happens on our network, it has a very pervasive and negative effect on our business."

USAA's customers are increasingly expecting data access to be as consistent as the dial tone they get on their phones, Williams says. Whenever the network goes down, even for scheduled maintenance, it interferes with some part of the business. "Our biggest headache is how to make the network 100% available," he says. With the recent upgrade, LAN uptime is 98.6%, Williams says. For its frame-relay WAN, USAA has set a 98%-uptime service-level objective with AT&T.

Many companies hope upgrades will eventually lead to lower costs. AlliedSignal, for example, is spending more than $2 million to install a customized network management system in its polymers division, building on point tools already deployed in some units. As a result, the company expects to cut network support costs, says Fred DuBall, senior manager of technical services. "The return on investment isn't fantastic, but it's still a reduction in cost," he says. "There's not a lot that IS does these days that results in a cost reduction."

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Lower costs aren't the rule. Entergy Corp. upgraded its WAN backbone to ensure it was running consistently and cleanly, and the New Orleans utility's networking costs went up, says Troy Kent, an IT consultant at Entergy. But there are benefits from the overhaul because every time the network is down, it costs Entergy money, Kent says.

Read more about networking, see related story, "Big Pipes: Better Option?."

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The immediate financial impact of upgrades is to drive up networking budgets. The challenge is then to exercise enough discipline in spending to actually realize a cost-benefit from these upgrades. Commercial Financial Services, for example, spent $5 million, out of a total IT budget of $45 million, on a data-network upgrade last year. This year, though the IT budget has grown to $85 million, CFS expects network costs to stay under $3 million, says CIO Chris Horrocks. CFS has cut its total telecom spending per employee, which includes network equipment, by $1,000, from about $5,200 per employee in 1996 to $4,200 this year.