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State Cuts Its Telephone Costs by Switching Away from Centrex.

State Cuts Its Telephone Costs by Switching Away from Centrex

A long-term plan was initiated in 1979 by the State of Montana to investigate alternatives to Mountain Bell Telephone's Centrex service. The government had been finding it difficult to budget for rate increases from the operating company for telephone equipment rental charges on Centrex CU switches used throughout the state. These customer-premises Centrex systems served the state's five largest institutions and represented more than 61.3 percent of its annual telephone expenditures.

Moreover, the state realized that these high costs were in part the result of its use of outdated equipment. All of these factors combined to produce inefficient and unsatisfactory communications service within the Montana State Telephone Systems (MSTS)--an operation that serves 15,000 telephone users.

The smallest of the five Centrex users, Western Montana College (WMC) in Dillon, was selected for a pilot project. An independent telecommunications consulting firm, Telecommunications International Incorporated (TII) of Denver, was contracted to assist the state in evaluating Centrex and, ultimately, in conducting a competitive bid process and overseeing the installation of a new switching system. Government and university administrators were directly involved in all phases of the project.

Evaluation Points the Way

The evaluation of WMC's telephone system indicated that a new system could improve cost and service levels. Factors influencing the decision to install a replacement switch included system lifecycle costs, technology and industry deregulation. The assessment of these same factors proved the feasibility of replacing the remaining four systems. Those systems, referred to as the "Big Four,' involved the State Capitol Complex in Helena, the University of Montana in Missoula, Montana State University in Bozeman and Eastern Montana College in Billings.

Studies at each of the involved sites consistently revealed that the Centrex CU service was inefficient. The existing Centrex systems were evaluated in comparison with contemporary PBXs, and it was determined that replacing these systems would provide both short-term and long-term savings in all categories.

Cost Avoidance Becomes Clear

The anticipated cost avoidance of this three-year Centrex replacement project is now evident. Since completion of the project in December 1983, the cost of Direct Distance Dialing has been dramatically reduced. Furthermore, although unforeseen in 1981, the state has also realized significant savings in federally mandated access-line charges because the new switches use PBX trunks instead of a line per instrument. And these are only two of many savings generated since the acquisition of the new computer-controlled switching system (based on 10 Northern Telecom SL-1 PBXs) that now serves the largest users within the MSTS.

The cost of retaining the existing Centrex services versus purchase of new PBXs was compared utilizing a 10-year cash-flow analysis. The analysis assumed generally accepted and consistent indexes for inflation, private system costs, common charges (such as trunking and Direct Inward Dialing), current interest rates, and a discount rate to reflect the existing system's cost at a net present value. As a result, the difference between the cost of maintaining the present system and that of the proposed system's financing options became more apparent. A new PBX was found to be more efficient for all study locations, according to the state's TII consultants.

Equipment and cost profiles performed during the state's study at each Big Four site revealed that Centrex CU rental charges (service and equipment) from Mountain Bell constituted the major portion of the telephone expenditures, with periodic telephone company rate increases, primarily due to inflation, multiplying these costs.

Results from the consultants' study predicted significant savings for the state with a seven-year lease/purchase option on modern PBXs for all sites (see table and graph, page 77). Therefore, they advised the state to solicit bids for the purchase of new systems. Other considerations included the additional benefits of technically advanced, contemporary PBXs; reduced costs for adds, moves and changes; and optimized long-distance calling. However, a long-term financial analysis comparing Centrex service to that of a PBX was essentially impossible; at that time, it was believed that Mountain Bell would not continue Centrex service for another 10-year period. The Bell operating companies were still migrating customers away from Centrex prior to the announcement of divestiture.

Inadequacies with the Centrex CU systems were made evident by TII's Feasibility Analysis and Needs Assessment study. System profiles compiled at each site disclosed fundamental deficiencies, which included frequent system busy conditions; lack of efficient features such as pushbutton dialing, and call forwarding, transfer and conferencing; as well as limited or no access to the Telescience toll-accounting device, providing access to the MSTS itself. It is important to note that Centrex service was a widely accepted and viable alternative to standard phone systems for institutions facing rising prices and stagnant technology during the 1960s.

However, subsequent rate increases for equipment and service have posed the most-pressing problem for the state, and demanded immediate attention. The consulting firm's recommendation was based on the construction of replacement systems for each site that corrected both cost and service deficiencies.

Network control and management features of modern PBX systems, as well as the elimination of some off-premise extension (OPX) mileage charges, also offered significant savings. In order to benefit from these considerations and avoid the ever-increasing rental charges, the state solicited proposals from vendors for a replacement telephone system.

Specifications embodying a minimum of 50 standard capabilities were developed by TII and state personnel, and released through the state's Purchasing Division in May 1982. The state, however, was able to obtain features in addition to those specified due to the competition engendered by an RFQ (request for quotation) among the various bidders.

By the third week in July, the state had received nine initial vendor responses with bids ranging between $7.2 and $12.6 million. All bids were reviewed for compliance with the original RFQ and subsequently evaluated on a points-earned matrix basis. The matrix was comprised of three evaluation areas--financial, operational and technical. Financial and operational categories were each appraised at 40 percent of the total possible points, while the technical category was allotted 20 percent of the points.

Contract Follows Assessment

Following a two-month assessment period, Centel Business Systems was awarded the Big Four contract, handling the project out of its Western Division headquarters in Las Vegas. The state later contracted for the purchase and installation of the Northern Telecom ESN/CMC (Electronic Switched Network/Communications Management Center) package to provide statewide networking and accounting capabilities to the telecommunications system.

Financing for the project was provided primarily through certificates of participation underwritten by E. F. Hutton & Company and Merrill Lynch Capital Markets. An effective interest rate of 9.6 percent, with the state taking advantage of its tax-exempt status, resulted in a $3 million savings as compared to an equivalent taxable lease at 14 percent. Jack Noble, deputy commissioner for financial affairs for Montana's university system, was directly responsible for the design and implementation of the university's portion of the project financing.

One of the provisions of the generalcontract was Centel's obligation to provide a full warranty for one year following completion of the installation. The company was also hired for the maintenance of the project for a second year.

The four phases of the general system installation procedure for each of the sites included: outside station plant, inside station plant, switch on site and cutover. Due to the standardization of this installation procedure, the state realized economies-of-scale savings throughout the entire implementation process. Although discrepancies among the sites did arise during installation, careful planning resulted in minimal variation from the outline. For example, coaxial cable was installed in Helena to support high-speed data communications on the campus. Also installed in Bozeman was a local-area network. Such customization was included in anticipation of future needs.

Grade of service for state telecommunications was greatly enhanced through the integration of Northern Telecom's ESN/CMC package--a system option the state chose for call-detail recording and automatic route selection, among other features. While the state's project initially included only minimal data integration, it did allow for its future (now current) inclusion in the voice-dominated system. The ESN/CMC increased the system's efficiency by providing immediate management information and improved control of its remote peripheral equipment as well as allowing for future expansion and added data integration.

Each Site Houses Its Own

Each site now houses its own ESN/ CMC components; formerly, Helena had been the hub of the communications system, providing dial access to WATS facilities and tie lines.

Easing the transition to the new system involved prefix changes and seminar orientation programs. In addition to the reorganization of telecommunications-related departments, three new positions were created to support the central management efforts of the Communications Division in Helena. These were specialists in operation and service, and repair and maintenance, as well as an accounting technician.

Partly as a result of TII's sustained three-year involvement with the state, Montana's own personnel are now able to make professional decisions about technical communications matters. Montana is one of the first states to procure and maintain its own communications system. Its telecommunications system is even more cost efficient than originally projected three years ago. Moreover, with the telco's subsequent announcement of the discontinuation of Centrex CU service and equipment by 1986, Montana's transition decision--in both timing and technology--was auspicious.

In appreciation of the expeditious and prudent manner in which state personnel sought and administered the PBX system, Montana's governor presented the telecommunications task force with a commendation, citing both the immediate and ongoing benefits to taxpayers. Indeed, the savings, initially estimated at $8 million, have already been projected to surpass this figure by at least $10 million.


Table: TELECOMMUNICATIONS SYSTEMS Projected Cash-Flow Comparison

The cost of maintaining Montana's then-current Centrex CU service versus purchasing new BPXs was compared using a 10-year cash-flow analysis that assumed generally accepted cost indexes.

Photo: John Neraas is the administrator of the Communications Division for the State of Montana.

Photo: Above is the new telecommunications control center at Montana's Helena Capitol Complex.

Photo: Adjoining the control center at each phone-system site are cabinets housing an SL-1 PBX.
COPYRIGHT 1985 Nelson Publishing
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Copyright 1985 Gale, Cengage Learning. All rights reserved.

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Publication:Communications News
Date:Jan 1, 1985
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