CASE STUDY I-2 VoIP2. biz, Inc. : Deciding on the Next Steps for a VoIP Supplier Lawrence R. Milkowski, President and CEO of VoIP2. biz, Inc. , an Indianapolis-based start-up supplier of Voice over Internet Protocol (VoIP) telephony to the small and midsize business market, knew he had a difficult job ahead of him. It was Friday, June 23, 2006, and he had to prepare his recommendations on the next steps for his fledgling company to the board of directors at its meeting on Tuesday, June 27, 2006.

While Larry was a firm believer in the direction of the company, he knew that the board was anxious to resolve the future of the firm given the slower-than-hoped-for progress in getting the company’s cash flow to break even. 2. The Company In 2006, VoIP2. biz considered itself a systems integrator that worked with business customers to help them move their voice communications from legacy technology to VoIP technology. Through these activities, VoIP2. biz would become its clients’ telephone company, thus earning a recurring revenue stream.

Management’s plan was to continue to gain dominance in the Indianapolis market, expand the company’s business activities throughout Indiana, and then open additional sales offices throughout the Midwest, gaining a first mover position in the marketplaces they served. Management believed that success in this strategy would make them an attractive acquisition target in the 2009 to 2010 timeframe. Management thought that VoIP2. biz’s business opportunity came from the recognition of five basic marketplace facts experienced by business customers with less than 400 voice telephone lines: 1.

These businesses had often invested in separate voice networks, data networks, and Internet access technology 5. 3. 4. Copyright © 2007 by Daniel W. DeHayes. This case was prepared by Daniel W. DeHayes and Stephen R. Nelson. It is intended to support classroom discussion rather than to illustrate either effective or ineffective management practices. The names and figures are disguised. whereby they had two distinct and separate monthly cost streams—a network for voice and one for data. Moreover, the voice network was often over configured and underutilized.

In addition, specialized circuits for transporting voice calls often cost more, sometimes twice as much as the equivalent data circuit cost. Most voice communication systems, called private branch exchanges (PBXs) or key telephone systems (KTSs), were special purpose machines with both proprietary hardware and software. As a result, they were expensive to buy, in the $1,000 to $2,000 per user range; expensive to maintain; and lacked the flexibility to easily adapt to specific user needs.

They generally required specialized skills for moving, adding, or changing end-user stations—and therefore had a significant maintenance expense once installed. Business customers understood that customer relationship management can be enhanced and additional sales can be made by the effective handling of their customer communication. For many businesses, the cost to purchase and implement the automated call distributors (ACDs) and the interactive voice response (IVR) applications required were just too expensive to be practical.

Business customers, particularly those with one to a hundred employees, or several hundred spread over several facilities, received very poor service from the traditional phone companies. They were often served by under-trained account managers with little technology experience or business knowledge, so it was difficult for the customer to get his or her questions answered or specific needs addressed. Many customers lacked experienced networking people to help them make telephony decisions, and they often lacked a strong data processing staff with any experience in voice processing. 60 Case Study I-2 VoIP2. biz, Inc. : Deciding on the Next Steps for a VoIP Supplier 161 In order to meet these market needs, VoIP2. biz sold systems that: 1. Provided the economic benefits of collapsing the voice and data networks together into a consolidated network— one network instead of two, 2. Included the call origination and termination services in lieu of traditional phone company services, including low-cost long distance, E911, and all of the advanced features available through any traditional telephone carrier, 3.

Utilized an open-source call processing platform that operated on commodity hardware in place of proprietary telephone systems, which was 10 percent to 20 percent of the cost of a competing technology, and 4. Were sold, engineered, installed, and supported by an experienced team of data and voice networking professionals. Progress to Date The concept behind VoIP2. biz came from some experimentation in early 2004 by personnel working for the Harley Services Corporation (HSC).

HSC began business in 1995, providing outsourced engineering, installation, and marketing services to telecommunications carriers throughout the United States. By utilizing HSC’s services, carriers were able to speed implementation of new customer services, such as DSL, and reduce costs by outsourcing central office engineering and equipment assembly. As a service provider to the carriers, HSC was in a unique position to understand and review new telecommunications technology prior to its general availability.

In 2003, engineers at HSC started to investigate broadband applications, including video and voice over internet protocol (VoIP) applications. During 2004, Milkowski and other personnel in HSC explored the market for VoIP and evaluated several then-current VoIP service providers. As a result of these investigations, the HSC project team designed a system to deliver a cost competitive IP PBX solution for implementing VoIP via an open source software platform.

They selected an open source solution because it had the advantages of: (1) implementation on a commercially available commodity PC server, (2) high quality application code due to the ongoing review of a large user community, and (3) no licensing fees. Milkowski believed that the open source approach provided the best technological platform for smaller business customers due to its advanced call processing capability and significantly lower monthly telecommunications expense. Beginning in October 2005, VoIP2. iz was spun out of HSC as a separate corporation, owned by several outside investors, Milkowski, and HSC. HSC retained 70 percent of the stock in VoIP2. biz. Milkowski then developed what was called internally the “Phase I Plan. ” In this plan, the infrastructure and staffing of the business had to be completed and some presence in the market had to be accomplished. During late 2005 and the first half of 2006, employees at VoIP2. biz added to the functionality of the open-source IP PBX and entered into several reseller relationships with equipment manufacturers and carriers.

These actions gave VoIP2. biz the ability to offer a complete end-to-end VoIP solution for business customers. Milkowski and his team of five engineers and sales professionals also sold the VoIP2. biz solution to several customers. VoIP2. biz signed agreements with four authorized distributors in Central Indiana to help sell the service to the business market. The team also developed a set of features for their product via internal work and relations with outside providers. Through its business activities to date, management was convinced that the open source solution offered by VoIP2. iz provided a small to midsize business customer a complete telephone system solution for 10 to 30 percent of the cost of a new proprietary solution from traditional vendors. For a detailed description of VoIP2. biz’s services, see Exhibit 1. By June 2006, VoIP2. biz was well on its way to completing the Phase I Plan. The company had sold several customers (the current count was 22), resolved several knotty technical issues, and completed hiring a small team of engineers (three) and sales/customer service people.

However, the company was yet to break even financially from either a profit or cash flow standpoint. Revenue for October through December of 2005 totaled only $88,000 but resulted in a net loss of $86,000. Financial results for January through June 2006 were expected to be somewhat better with revenue expected to be nearly $150,000, but earnings before taxes were expected to be a negative $66,000. Several members of the board of directors thought that the company should be generating a profit or at least be at breakeven by June 30, 2006.