Cisco Quick Hit Briefing Financial Selling for Dummies

1. Cisco Quick Hit BriefingFinancial Selling for Dummies Connect using the audio conference box or by calling into the meeting: Brian Avery Partner Development Manager – Cisco Systems December 19, 2013 Toll-Free: (866) 432-9903 Enter Meeting ID: 206 796 773 Press “1” to join the conference.

2. Agenda • Introduction • Quick Hit Overview • Why Learn, Objectives • The Cost of Capital • Financial Selling Tutorial and Case Study • The Power of Cisco Capital • IRS Section 179 • Tools and Calculators • Call To Action, Next Steps Brian J Avery • Partner Development Manager bravery@cisco.com Cisco Sales and Channels (8 yrs) • Priors: President and CEO (6 yrs)Cisco Premier Partner Director of Sales (2 yrs)Cisco Silver Partner Financial Analyst (7 yrs)Sprint Corporation

3. What Is a Quick Hit Briefing? A weekly partner briefing series designed for Cisco Commercial Territory partners Concise, relevant updates on: Cisco products and solutions Partner programs and promotions Partner Enablement – Demand Generation, Selling Skills, Closing Tools, etc. Next Quick Hit Briefing Cloud Opportunities for Cisco Partners Thursday January 9th, 2013 at 9:30 ET Check http://cs.co/quickhit for registration links and replays

4. Financial Selling for Dummies (No offense intended!)

5. Why Learn Financial Selling? • To impress your friends at parties • To improve your love life • To close more deals and make more money

6. The Cost of Capital • Every business deals with the “cost of capital” whether they pay cash, lease or use credit. • Cost of Capital (n) • the opportunity cost of funds employed as the result of an investment decision; • the rate of return that a business could earn if it chose another investment with equivalent risk • The value and cost of Capital • Cash in the bank – earns interest $$ • Cash deployed in the business – generates revenue $$ • Debt (bank loan, line of credit) – costs interest $$ • Lease – costs interest $$ (but generally less than debt)

7. Cost of Capital • Popeye’s Friend – J. Wellington Wimpy • “I’ll gladly pay you Tuesday for a hamburger today!” • Is it better to pay now or pay later? • Is it better to receive a dollar today or a dollar in a year? • What is a dollar that you will receive a year from now worth to you if you could get it TODAY?

8. Evaluating Capital Choices • Which choice (cash purchase, debt purchase, lease purchase) will offer the maximum benefit? • How much can you earn if you keep your cash and invest it in the bank or the financial markets? • How much revenue can you generate if you invest the cash in your business? • How much will borrowing money cost you? • Is leasing or financing a better choice? • All of these questions should be considered when making a capital purchase

9. Today’s Objectives • Help you to understand the importance of Financial Selling in today’s economic environment • Share with you techniques on how to apply Financial selling techniques • Share with you ways you can improve their Financial selling skills • Enable you to have CFO / Procurement team engagements • Help you to position both the business and financial benefits of a Cisco solution in order to prove the value of a potential Cisco premium

10. The Old Days Are Over Where it was once “nice” to understand the business (financial) justification for what the customer is buying… You now need to know in order to: • Be relevant or remain relevant • Address what is top of mind for your customers daily • Continue to successfully sell

11. WHY FINANCIAL SELLING IS IMPORTANT… THE FACTS Whether you’re aware or not, all proposals will at some point land on the desk of a CFO CFO’s / Finance / Purchasing will assess and appraise any proposal and ultimately approve or reject the solution or suggest alternatives that offer better value to the company Whether you’re involved or not, many companies & government departments apply some form of financing to most of their solutions and projects You need to be a part of the financial discussion to move up the value chain/secure sales

12. Why does a Customer buy a Cisco solution? • Why does a Customer buy a Cisco solution? • Performance • Security • Quality / Industry Standard • Features • Other Reasons

13. Why does a Customer buy a Cisco solution? • Why does a Customer buy a Cisco Borderless Networks solution? • Performance • Security • Quality / Industry Standard • Features • Other Reasons Cost savings and / or Revenue generation The motivation to purchase is, first and foremost, a financial decision

14. Getting This Right Means $$ • Getting access to more Influencers within your accounts • Positioning solutions that meet the company’s business objectives AND their financial metrics • Assessing if proposals will pass the CFO / Financing / Purchasing test to save you time and increase credibility • Anticipating customer objections by building the business / financial case before the proposal • Financing can equal upgrades every 3 years • Expanding the overall deal size and/or creating deals out of budget that doesn’t currently exist • Overcoming the “Cisco is too expensive” challenge and competitive threats

15. What financial tools do finance DMs use to assess an investment? • What financial tools do CFO \ Financing \ Purchasing staff usually use to assess an investment? • ROI • IRR • TCO • NPV

16. What financial tools do finance DMs use to assess an investment? • What financial tools do CFO \ Financing \ Purchasing staff usually use to assess an investment? • ROI • IRR • TCO • NPV

17. What is Net Present Value? • What is Net Present Value? • The net present worth of a time series of incoming cash flows • The cost of buying a net as a present for the angler in your family. • The net present worth of a time series of outgoing cash flows • A standard method for using the time value of money to appraise a series of incoming and outgoing cash flows

18. What is Net Present Value? • What is Net Present Value? • The net present worth of a time series of incoming cash flows • The cost of buying a net as a present for the angler in your family. • The net present worth of a time series of outgoing cash flows • A standard method for using the time value of money to appraise a series of incoming and outgoing cash flows

19. What is Return on Investment? • What is Return on Investment? • The internal rate of return on any given investment • When you make a withdrawal from the bank • The ratio of money gained or lost (whether realized or unrealized) on an investment relative to the amount of money invested • The ratio of money gained and realized on an investment relative to the amount of money invested

20. What is Return on Investment? • What is Return on Investment? • The internal rate of return on any given investment • When you make a withdrawal from the bank • The ratio of money gained or lost (whether realized or unrealized) on an investment relative to the amount of money invested • The ratio of money gained and realized on an investment relative to the amount of money invested

21. What is Payback? • What is Payback? • A cheesy 1990’s movie with Mel Gibson • The period of time required for the return on an investment to "repay" the sum of the original investment • The positive return from an investment after the original investment has paid itself off • The period of time required for the positive return from an investment after the original investment has paid itself off

22. What is Payback? • What is Payback? • A cheesy 1990’s movie with Mel Gibson • The period of time required for the return on an investment to "repay" the sum of the original investment • The positive return from an investment after the original investment has paid itself off • The period of time required for the positive return from an investment after the original investment has paid itself off

23. ROI, Payback, NPV, IRR How a CFO / Finance or Purchase Officer appraises an investment

24. 4 sides to the equation NET INVESTMENT NET BENEFITS TIMING ALTERNATIVES • Incremental net investments • Incremental profits • Incremental savings • Incremental costs • When do the above occur • How do they compare against alternatives

25. The New Normal – Some Stats Percentage of CFOs Who Always Use–or Almost Always Use–a Given Technique* * Source: “The Theory and Practice of Corporate Finance: Evidence from the Field”, Journal of Financial Economics 60, Figure 2

26. Return on Investment (“ROI”) The simplistic view used by many accountants Total benefits received from an investment – net investment Net return from an investment = Net investment Net investment Example: A company invests $75,000 in a machine that will save $18,000 per year over the 5-year life of the machine. Total savings = $90,000 ($18,000 x 5) Net return = $15,000 ($90,000 - $75,000) ROI = 20% ($15,000 / $75,000) Is this a good return?

27. Payback How long it will take a particular investment to pay for itself Annual savings x P = Net Investment Example: A company invests $75,000 in a machine that will save $18,000 per year over the 5-year life of the machine. Net investment = $75,000 Annual savings = $18,000 Payback = 4.2 years Is this a good payback?

28. Total Cost of Ownership • Useful for comparing competing offerings • Factors in the total costs over the life of ownership • Purchase Cost • Financing Cost • Maintenance costs, Upgrade costs • Services, Warranty costs • Move/Add/Change costs • Costs of required ancillary items • Savings or costs avoided • Productivity Gains • Revenues Generated • Simpler, easier to understand • Lowest TCO Wins!

29. TCO Ideas and Calculators • Productivity and the Business Case for SMB - Sage Research • 2005 study of 65 mid-sized organizations focused on measured productivity gains from the deployment of Unified Communications • Soft Cost and Benefits • Increased # of calls handled or orders placed • Faster response times • Reduced processing times • Increased productivity • Telecommunications Savings – SIP trunking, branch connectivity • Energywise Cost Savings Calculator

30. Time Value of Money Albert Einstein was once asked what is the most powerful force on Earth… What was his answer? 20 year old Britney makes a one-time $5,000 contribution to a retirement fund that grows at 8% per annum. If she never touches it until she retires at 65, how much will she have? $159,000 If she waited until she was 39 to make her one-time $5,000 contribution, how much would it grow to? ANSWER: Compound Interest E=MC2? Atomic Bomb? A Woman Scorned? $37,000 ‘A Dollar today is worth more than a Dollar tomorrow’ Compound interest is an example of growth that we all understand Discounted Cash Flow is it’s opposite…

31. Net Present Value Net present value is the monetary value today of all future cash flows discounted at some compound interest rate (the ‘discount rate’) plus any immediate cash flows QUESTION: Would a CFO or Financing Officer approve this? Present Value accounts for the time value of money. ‘A dollar tomorrow is worth less than a dollar today’

32. Net Present Value Net present value is the monetary value today of all future cash flows discounted at some compound interest rate (the ‘discount rate’) plus any immediate cash flows ANSWER: No Present Value accounts for the time value of money. ‘A dollar tomorrow is worth less than a dollar today’

33. The Discount Rate: The opportunity cost of Capital = the potential return the company could have made if it had invested in something else Weighted Average Cost of Capital is the rate that a company is expected to pay on average to all its security holders to finance its assets NPV depends heavily on the Discount Rate

34. Weighted Average Cost of Capital (WACC) ROI Risk

35. Cost of Capital By Industry Sector • http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/wacc.html.htm

36. Net Present Value Net present value is the monetary value today of all future cash flows discounted at some compound interest rate (the ‘discount rate’) plus any immediate cash flows Decision Rule Positive NPV = value created, investment should be made What should this be compared against?

37. Case Study – Phase 1 • Gerus rents flexible office space for small and medium sized businesses and includes in their offer a range of services from access to servers and telephony to catered lunches and boardroom facilities. • Gerus is exploring whether to set up Video Conferencing Units in 10 locations around the world offering collaboration services to its tenants. • Gerus has asked Cisco to submit a solution with costing and they would prefer the Cisco solution, given its branding and quality, which would drive adoption. • Cisco submitted a Statement Of Work that included the following: • Hardware for the 10 locations - US$1,400,000 payable within 30 days • Installation services - US$600,000, payable on installation • Maintenance services - US$150,000 per annum, payable in advance • A managed call service contract from a SP partner - US$90/ hour, decreasing 5% per year The CFO has rejected your offer! You want the deal. How would you respond?

38. Case Study Scenario - Phase 2 After repeated phone calls the CFO has agreed to provide you with her assessment of the Cisco offering, including the financial model she developed for Gerus: • In year 1, Gerus would sell 3,000 hours of Telepresence time increasing the usage by 20% annually for the next 5 years. • Gerus would charge US$300 per hour for a Telepresence session in year 1 but due to commoditization this rate would fall by 5% per year, as would the SP call costs of $90 per hour. • Above Cisco’s costs, Gerus expects space and administration costs to be US$70,000 per year. • Gerus’ Weighted Average Cost of Capital (WACC) is 20%. • The residual value of the equipment at the end of year 5, when Gerus expects to replace the equipment, is deemed to be US$70,000.

39. Customer Financials – Phase 2 • This is what she sent you. This looks great as it produces a profit. So what’s the problem with the CFO? • As you have no idea, you have now got your financial accountants on the case.

40. Investment Appraisal Techniques

41. Customer Investment Appraisal – Phase 3 • The financial accountants say this is not good. • What should they be? • ROI? • Payback? • NPV? • IRR? • You have asked your financial people to explain how these metrics are calculated.

42. The simplistic view used by many accountants Return on Investment (ROI) – Phase 3 Why is this ROI not acceptable?

43. The duration it will take for an investment to be repaid by the incremental net benefits Payback – Phase 3 Payback is 3 yrs 10.82 mths Why is this Payback not acceptable?

44. Today’s value of all cash flows after taking into account the time value of money Net Present Value (NPV) – Phase 3 Why is this NPV not acceptable?

45. Discount Rate used to arrive at an NPV of 0 Internal Rate of Return (IRR) – Phase 3 IRR = 13.54% Why is the IRR not acceptable?

46. You now understand why she has rejected your proposal. Investment Appraisal TechniquesCase Study – Phase 3 So what are you going to do now?

47. Potential Answers • Negotiate for better outcomes • Revenues • Other costs • Restructure the deal • Finance lease • Operating lease • Consumption model • Improve the costs from Cisco • Hardware discount • Services discounts • Timing of payments • Now get Cisco Capital involved!

48. Case Study – Phase 4 • You have asked Cisco Capital if they can rescue the deal. You think the customer’s problem is they do not have the money to finance the deal. • Cisco Capital says: • They can finance the deal with a cost of capital of 5%. • Over 5 years this will mean six annual payments of US$403,417 with the first payment due on signing. • They tell you this is not a CAPEX to OPEX deal. • You ask them if that will achieve the customers investment hurdles. They tell you to figure that out. What gives you hope?

49. Financial Outcomes – Phase 4 Hardware, professional services, and the up-front payment for maintenance is being financed by Cisco so no investment required by the customer.

50. The duration it will take for an investment to be repaid by the incremental net benefits Payback – Phase 4 Payback is now 3 yrs, 4.13 months Nearly there!