Decision at Hand Is Whether

¶ … decision at hand is whether to install Skype on the 70 relevant computers, in order to lower the firm's information technology expenses. We need to weigh the relative cost of this action, plus we need to weigh other advantages and disadvantages as well. In terms of cost, it will cost £500 to install Skype on all of the relevant computers. The software is free; the cost is the labor used to conduct the installations.

The benefit after one year will be £800 and we expect that this benefit will accrue every year. To determine this, we must take a present value of the cash flow benefit. For that, we will need an appropriate discount rate. The discount rate reflects the firm's cost of capital. We do not know the expected life of the Skype technology, so we will use 3 years as an estimate. We feel that this time frame is reasonable given the pace of advances in VoiP and telephone technology.

Using the cost of capital is typically reserved only for capital decisions, but in this case we will use it to examine the impact on operating expenses. In this case, we must find a reasonable estimate for the discount rate. We know the historic market return rate, which for the FTSE is 9.49% since the end of the second world war. It is not known how the firm's return compares to the market return.

However, if the bankruptcy of a client has sent the company into cost-cutting mode, we can assume that the firm has been accustomed to stable income streams in the past. Therefore, the historic market risk is likely to reflect greater risk than the firm faces. In the interest of being conservative, we will thus use the market rate as our discount rate. Therefore, we have an initial investment of £500 and annual future cash flows of £800 for three years. This gives us a net present value of £1507.

Because we had to make significant assumptions in our estimation of the discount rate, we should apply a sensitivity test to it. What we find is that even at a discount rate of 20%, which is much too high, the NPV is still over £1000. Therefore, using Skype will save the firm money. There are non-financial considerations, however. These include lack of emergency calling, call security, and sound quality.

Because VoiP providers, including Skype, are a bypass to the conventional phone system, they do not typically provide emergency calling services (Schueneman, no date). Thus, the firm will have a more difficult time accessing police or fire services. It must be considered how often such services are needed by the office. The second consideration is with respect to call security. Skype's security is proprietary and a closely guarded secret (the Economist, 2008). Thus, the level of call security on Skype is unknown.

For a legal firm, the potential outcomes in the event of a breach in call security can be catastrophic. Cases could be lost, sensitive information could be revealed and the firm's reputation could be damaged (Nugent, 2007). The final consideration is with respect to sound quality. Skype and other VoiP software are often of substandard sound quality. While they are improving in this regard, it should be noted that poor sound quality could reflect poorly on the firm.

It is unknown whether or not this would affect business, but it could potentially have a negative impact. We would still have land lines in order that clients can reach us with our old telephone numbers, but poor call quality could encourage our partners to use the land lines for long-distance calling,.