Many of us look at insurance as a "necessary evil." We need automobile insurance so we can register our car. In order to get a loan for our mortgage, we must have fire insurance. And of course, health insurance is now mandatory.
We understand the need for insurance in our personal lives, so what does insurance have to do with the IT/Telecom world? Actually, quite a bit, as we use the same principles of insurance when making numerous decisions in IT/Telecom. Just as in our personal decisions, insurance is a series of prudent decisions in our work life.
Value of Insurance
By definition, insurance is a poor financial value (we pay more than what we will get back). After all, we are paying a 3rd party (insurance company) to make us whole (indemnify) when we suffer a loss. At a minimum, an insurance company has to pay for its overhead (and generate a profit). Thus, we may spend $100/month for insurance, for losses that historically average $80/month.
Catastrophic Event – Individual Perspective
Insurance is viewed as a good value to help us with catastrophic events. Very few of us have the financial resources to spend hundreds of thousands of dollars to rebuild our home after a fire. Nor do we wish to be financially wiped out because of the cost of treatment of a debilitating disease or accident. On an individual level, we value insurance so we can maintain a certain level of financial stability and lifestyle. We see that insurance provides a certain "Peace of Mind."
Catastrophic Events – Company Perspective
Do companies have comparable issues with catastrophic events? The smaller the company, the more they look and think like individuals. However, large companies will start to look at insurance in a different way. Because of the number of employees, they run the numbers and see that it is more cost effective to "self insure" than to buy separate insurance.
Big companies use the Law of Large numbers. For a given number of employees (10,000), you can predict, with a high level of confidence, the number of incidents/accidents that will occur. For example, most large companies will "self insure" for their employees' health care. They will still use an insurance company to administer the program, but will directly pay the medical bills. For 10,000 employees/dependents, statistics (Actuarial tables) will indicate that a certain number of employees and covered dependents will require high cost treatment. After running the numbers, a large company decides they could either spend $60,000,000 to buy outside insurance policies for all employees, or spend $52,000,000 and pay the medical bills directly.
Risk Management – Company Perspective
Since there are few catastrophic events for a company, the next reason to look at insurance is risk management, the practice of appraising and controlling risk. Managing and controlling risk is a common part of your job, which is where your judgment and experience come into play.
Call Centers
One of the most obvious areas for Risk Management is in call centers. Since you are placing a lot of your business in one basket, what happens if the center goes down? What are the financial and other associated costs when one of your centers goes offline?
Sometimes you'll hear an executive say that for each hour a center is down, we lose $12,000 in revenue. This provides you with one side of the equation, which is the financial loss. The other side is determining what the price is to ensure that your center is able to handle the problem. There are various types of issues, such as losing power, a fiber cut, network performance, equipment failure, etc. that you take into consideration.
Diversity
One way to address potential problems is by building in diversity. Specifically, diversity in networks (using 2 carriers), diversity in vendor routing (T1/DS3's from different vendor Central Offices and/or SONET), diversity in access (different entry points at your site), diversity in access methodology (wireless T1s), and diversity in location (multiple call centers). All help improve Risk Management, but all add incremental costs.
Risk Management Review
Every now and then, you should perform a Risk Management Review (or Sanity Check). While the current set up may be OK, there may be ways to improve and/or reduce costs.
ANALOGY - Auto insurance. How can you improve your policy and/or reduce costs? Checking other auto insurance companies, you may be able to save money. Realizing your vehicle is 7 years old, you may wish to drop collision and comprehensive insurance. Learning that spending a little bit more with an umbrella policy increases your coverage to $1,000,000. These principles can be used in assessing your call center.
REAL WORLD EXAMPLE- A client's Regional office also hosted a call center, and is paying $400 more to have some of their T1s routed from the carrier's secondary Central Office switch. Subsequently, the call center moved and Regional office reduced the number of T1s. Yet the site maintained the diversity of 2 vendor CO access points.
SANITY CHECK #1- Comparative Analysis. While it is nice to have diversity in routing, is it worth $400 a month? This site is now an "average" (non critical) site, performing the same functions as other sites. Question- If having diverse routing is so important, shouldn't the client spend an additional $400 per site per month for the other 10 sites?
SANITY CHECK #2- Historical Perspective. How often has this diversity in CO's been used in the past 12 months? In the past 3 years? 5 years? If never, or no one can tell, then is it worth spending $4,800 a year for something that is very unlikely to occur?
SANITY CHECK #3- Worse Case Scenario. What happens if the Long Distance T1s go down? Will traffic be rerouted over your Local T1s? In a "pre-Internet" environment, such "insurance" made sense, since this was the only means for your customers to reach you. While still important, the "catastrophe" of having your call center unavailable now is lessened.
SANITY CHECK #4- Opportunity Costs. $4,800/year for insurance may be a reasonable amount to spend. However, is this the best use of these funds? Could this $400/month be used for a backup generator?
In my next No Jitter article (5 weeks), we will look at a couple of popular Telecom insurance "policies."
The Society of Communications Technology Consultants (SCTC) is an international organization of independent information and communication technology (ICT) professionals serving clients in all business sectors and government worldwide.
