1 By Pat Moulton Is Hosted VoIP Right For You? Hosted PBX Overview: With the availability of cheap broadband services, migrating applications and storage from premise-based servers to the cloud has become a viable, cost effective, option for many businesses. Now that voice can be treated just like any other data application that utilizes IP transport, Voice Over IP (VoIP), businesses have the option of adopting this same out sourcing approach to their telephone services. However, there are many other factors involved in moving voice to the cloud than there are with other traditional data applications. Therefore, before you can determine if hosted VoIP is the right solution for your organization, you must understand the risks and benefits, calculate your total cost of ownership and take adequate care in planning the transition to a cloud based service. Today s article provides a comprehensive overview of Hosted PBX services utilizing VoIP and we begin in clear terms with the basic premise. Hosted PBX service is not a new concept. It has been offered by telephone carriers for over fifty years under the marketing moniker Centrex, which was an abbreviation for Central Office Exchange Service. Fundamentally, Hosted PBX services are nothing more than the relocation of the core call control or PBX (Private Branch Exchange), from your office to a data center. The reason hosted VoIP services have proliferated in recent years is due to the widespread availability of inexpensive bandwidth, the advent of IP transport and the low cost of entry. Previously, only large carriers like AT&T and Verizon could cost justify the high costs associated with implementing and supporting the switches required for Centrex service. Now, off-the-shelf servers can be utilized to support VoIP hosted services, which has resulted in literally hundreds of new companies entering the business, which is both good and bad. I ll touch upon that later in this article. I have no problem with the concept of Hosted PBX services. In fact, I firmly believe that it can be a reliable, cost effective, option for certain types of businesses, such as; firms with more than three small locations, very small firms (<10 phones), and firms with large seasonal call volumes. However, I do take issue with some of the sales strategies used to justify the investment and the way the services are typically deployed. Some of the main points used to sell Hosted PBX services include: 1: Lower Costs. This is by far the main selling point that every hosted vendor will stress. However, like with most things you rent, it s not less expensive, especially for long term investments. In addition, because the initial cost with a Hosted PBX is rarely the way you finish, you need to factor in all of the upfront capital and reoccurring monthly expenses to gain an accurate picture of the investment. Many features that are standard on a premise-based PBX cost extra, like automated attendants, voice mailboxes, mobility, meet me conferencing, call recording, softphone apps, etc. While it s true that some of these features may require an additional license on a premise-based PBX, it s a one-time charge. One of the other pricing strategies that can be deceiving is low monthly recurring fees for extensions. Typically, when the rates drop below $25/extension the more per feature or per use charges will be applied. For example, if you need extra auto attendants, or voic to support department, or after-hours mailboxes those will be monthly 1 P a g e I s H o s t e d V o I P R i g h t F o r Y o u?
2 recurring fees. It s also common for per minute use fees to be applied for all outbound calls, which can add a substantial amount to your bill, especially if you re involved in a phone intensive business. All of these extensions, features and usage charges can add up quickly and before you know it that initial quote you received for $ per month for 20 extensions, which you based your buying decision upon, balloons into $ per month. Therefore, be very leery of any ROI estimates provided to you by a Hosted PBX provider that does not include all of the features you may desire, along with factoring in your firms projected growth year over year. Also, bear in mind that these are eternal payments that never go away and will never go down. Later in this white paper you will see a Hosted PBX calculator that will make all these numbers come to life for you. 2: Eliminate Long Distance Charges. This is true, but also available from just about any carrier in the United States of America. In other words, whether you have a premise based PBX, or a Hosted PBX you can get unlimited long distance service for a very reasonable cost. 3: Eliminate Up Front Capital Expenditures. This is one of the biggest misconceptions of Hosted PBX services. Even though the call control function might be in the cloud, the telephone instruments and possibly other hardware will still be on premise, with voice packets running over your internal data infrastructure that means your data network will more than likely need to be upgraded. Therefore, whether you re looking to invest in Hosted or a Premise Based PBX the following components must be purchased for either solution: IP Telephones Layer 3 data switches with Power Over Ethernet (POE) Routers or Firewalls Installation of data wiring. (Common areas & wall phones typically don t have CAT5 jacks) Hosted PBX services do not typically include any of the above items in the base price, so these would all be upfront capital expenditures. Some providers may offer to lease you these items, but that will increase your monthly expenses and, in most cases, is not a cost effective way to acquire this equipment. The only item not being purchased in a Hosted PBX solution, is the core Premise Based PBX. However, the core of today s Premise Based PBX s for small to mid-sized firms are inexpensive, typically less than a $1,000, so ROI models are very compelling in comparison to Hosted PBX services. 4: Eliminate Obsolescence. This perceived benefit assumes that a Premise Based PBX will be outdated in 3 years and then you would have to make a major investment all over again in order to upgrade to support new features. This is simply a misleading premise. The useful life of a modern, software based, PBX is more likely years. Even legacy PBX s, that were based upon proprietary hardware, have proven track records of life well beyond 15 years. These older switches where hardware based, and thus where expensive to upgrade. Today s PBX s are software based, so when the time comes when the hardware needs to be upgraded/replaced to support a new release, the cost of the hardware is minimal. 2 P a g e I s H o s t e d V o I P R i g h t F o r Y o u?
3 Another point to consider, just because the service is Hosted does not mean your Hosted PBX provider is upgrading to the latest software available for their platform. Upgrades from Hosted PBX manufacturers are expensive, so not all Hosted PBX service providers keep up with their upgrades. In order to be fair, obsolescence also needs to be applied to the components that affect both services. IP Phones, data switches, routers and firewalls. They don t last forever either. 5: Look bigger, more professional to prospects and customers. This benefit is really targeted to the very small business with less than 10 phones. I am in full agreement that Hosted PBX for a small office can be a cost effective solution, if it s properly implemented. The problem lies in the fact that most hosted service providers can t afford to spend the time it takes to ensure that the customer s data network is properly configured to separate and prioritize voice packets. Typically, they just ship out some phones and let the customer fend for themselves. This inevitably leads to poor audio quality issues and unhappy customers. Business owners with 10 or more extensions will find that investing in a Premise Based IP PBX will not only provide them with all the same features/benefits, but it will pay for itself within months. Basically, after 18 months most business owners should be cash flow positive with a Premise Based PBX versus a Hosted PBX solution and that will be made clearer later on in this paper. 6: Multi-location networking. This is an excellent application for Hosted PBX services, especially if you have a large number of small sites, like retail store chains that only need a handful of phones per store. The only problem is the monthly recurring fees. How many extensions are actually included for a multi-site application? For example, if you have 3 sites with 20 extensions at each location and you are paying $20.00 per extension per month that would be $1, per month or $14,400 per year or $43, in 36 months. These monthly charges sneak up over time. Obviously if the multi-site application calls for 5 or 6 extensions at each site then the Hosted PBX solution is more compelling. More on this later. Other considerations when looking to invest in Hosted PBX services: Toll quality audio is a real challenge for hosted services to replicate. Bear in mind, that your calls may be traveling a great distance, over public internet connections, even when making internal, extension level, calls and that VoIP is a real time application, so even minute delays or jitter can lead to poor audio quality. Add on top of that, internal customer network issues that the service provider has little control over and it creates a very challenging environment, which is why audio quality issues are the number one reason why firms are switching back to premise based solutions. Be aware that the speed and type of broadband service used to support real time applications like VoIP requires a higher level of service than data. This is a critical component for hosted VoIP services to work properly, which may not be included in quotes you receive. An average VoIP phone call requires 80k- 100k of bandwidth. So if you want to make 10 concurrent calls that utilizes almost a full Meg of broadband. In addition, something called QoS or Quality of Service ( is a fundamental requirement within both your internal data network and your internet connection to prioritize voice packets. The most common types of broadband services that support QoS are Metro Ethernet and MPLS or Multi-Protocol Label Switching ( These services typically cost 3 P a g e I s H o s t e d V o I P R i g h t F o r Y o u?
4 significantly more than basic broadband circuits, and it s highly recommended that voice and data traffic is separated, which will require dedicated circuits. These expenses could cost as much, if not more, as the hosted VoIP service, so it s critical that they are factored into your monthly recurring charges. As mentioned above, QoS is a fundamental requirement within your internal data network and is managed within your data switches and router. More than likely, your network is not configured to apply QoS tagging to prioritize voice packets. In addition, voice traffic needs to be separated from data traffic via a feature called Virtual LANS (VLANs). Once again, it s not likely that your existing data network has a VLAN configured for voice. Therefore, the labor associated with implementing QoS & VLAN s needs to be factored into your nonrecurring costs. This applies to either Hosted or Premise Based PBX s and is one of the most commonly overlooked requirements, which results in poor audio quality issues. International locations cannot be supported. The majority of hosted service providers can only provide service for locations within NA. Therefore, if you have branch offices overseas, you ll have to be purchase a separate service/premise-based PBX, which probably won t be able to connect to your sites in NA. This negates one of major cost saving benefits of VoIP. If you deploy premise-based systems, they can be seamlessly networked together, so internal calls can route over the internet for free and international calls can use the internet to reach local trunks connected to the PBX in the foreign country. This allows local usage rates to be applied, instead of international rates, which can save some firms a significant amount in toll charges. In addition, employees who travel overseas can leverage this same trunk hopping ability to make/receive calls, via their smartphones. This can save some firms tens of thousands of dollars every year, by avoiding international cellular roaming and long distance charges for executives who frequently travel. It also allows them access to all of the same features they have on the phone at their primary office, so they can be work productivity and be easily reached on their local DID number via a feature called hot desking. Another consideration is that 100% of your phone service is now over broadband. If you lose your broadband you lose your phone service! This reliability concern can be addressed by implementing redundant broadband circuits, but that cost would need to be factored into your ROI calculations. While broadband services in the US are getting better, it is difficult to beat the reliability of a standard analog telephone line or T1/PRI circuit. ( In summary, Hosted PBX services can be as reliable, and potentially more reliable, than a premise based PBX. Having your core PBX service at an off-premise facility like a data center that typically has multiple Internet service providers with redundant fiber entries and great battery backup can offer a high degree of resiliency. In addition, most providers have redundant core PBX s, which is difficult for most smaller firms to cost justify with premise based solutions. Bottom line, if you implement redundant broadband circuits, it is really hard to have a complete telephone outage when using Hosted PBX because the core phone service is so well protected. Even if you lose the broadband at your local office, with services like FindMe/FollowMe, incoming calls can still be re-directed to cell phones ensuring you would not lose any calls. The real weak point of a Hosted PBX offering is the never ending and ever increasing monthly recurring fees. To gain some insight into how much is does cost, below is pricing grid that focuses only on the core services. Meaning, items like, IP phones, data wiring, data switches, routers, installation and training are NOT included in this comparison because they are virtually the same in both hosted or premise based solutions. 4 P a g e I s H o s t e d V o I P R i g h t F o r Y o u?
5 This pricing grid shows the cost of a Hosted PBX service by quantity of users over 12 to 60 months that is based upon the industry average of $29.95/mth/user. I chose to use this pricing because it s what most services work out to cost after factoring in all the incidental charges, e.g. extra automated attendants, mailboxes, mobility, usage, etc. While a Hosted PBX service will typically cost approximately 25% less than a premise based system in year one, they are essentially equal in year two, and by year five the average premise-based system is almost a third cheaper than the average hosted offering. Even for firms with a small number of users, that can equate to a significant amount of money. For example; if you are currently paying $30.00 per extension per month for Hosted PBX and you only have 10 extensions you could have purchased your own IP PBX and had it paid for within months. Just look at the grid to determine how much you would have paid after 24 months regardless of how many extensions. Hosted PBX Cost Analysis Users 10 Users 20 Users 30 Users 40 Users 50 Users 60 Users 70 Users 80 Users 90 Users 100 Users Hosted PBX $29.95 $29.95 $29.95 $29.95 $29.95 $29.95 $29.95 $29.95 $29.95 $29.95 Per User Monthly Fee Hosted PBX Monthly $ $ $ $1, $1, $1, $2, $2, $2, $2, Hosted PBX 12 months $3, $7, $10, $14, $17, $21, $25, $28, $32, $35, Hosted PBX 24 months $7, $14, $21, $28, $35, $43, $50, $57, $64, $71, Hosted PBX 36 months $10, $21, $32, $43, $53, $64, $75, $86, $97, $107, Hosted PBX 48 months $14, $28, $43, $57, $71, $86, $ 100, $115, $129, $143, Hosted PBX 60 months $17, $35, $53, $71, $89, $107, $ 125, $143, $161, $179, Hosted PBX Cost Analysis: So if Hosted PBX services are more expensive, why are they gaining so much traction in the market place? The primary reason has to do with the marketing tactics hosted vendors use and the perceptions buyers have. 1: Perception of lower cost. I believe this perception persists because buyers don t look at the long term numbers, or are unaware that they need to compare the cost of leasing, which is how most capital equipment is procured. Even if you do some basic math, the cost differences should be pretty clear. Let s take a look at a pricing scenario: o Quote #1: is for a premise based PBX solution for 20 IP Phones; installation and training. Purchase price $6,000.00, or $ if leased over 36 months. At $ per extension without cabling, this is an industry standard price. We also need to add phone service for the premise based system so let s add 10 phones lines at $25.00 per month or $ Adding the two together equals $ per month. But after 36 months the $ payment ends and all that is left is the phone service. o Quote #2: is from a Hosted PBX provider for 20 extensions at $24.95 per month or $ per month. The Hosted PBX quote however, does not include any IP Telephones. That is still an up-front cost. o o Even if the quote for the Hosted PBX came in at $20.00 per extension or $ per month, leasing a phone system is still the better deal. In addition, if you added 5 more extensions over the course of the next three years, the hosted service payment would increase by over $ per month, while the owner of a premise based solution would incur a one-time charge of ~$350 for some licenses. Ouch! 5 P a g e I s H o s t e d V o I P R i g h t F o r Y o u?
6 2: Perception that no ongoing maintenance/administration is required With Hosted PBX services everything can be done remotely. You can purchase your IP phones and router from the Hosted PBX provider and they can send you instructions on plugging everything in. That sounds great on paper, but as with most things that sound too good to be true, the reality is a little different. You will need to get an IT person involved to ensure that all the data cabling in the office is done properly. This you cannot get away from and I do not recommend you do this yourself. You also will need an IT person to make sure your data network and router is properly configured with VLANS & QoS tagging to separate and prioritize the voice packets. A Premise based IP PBX solution can be deployed in the same remote manner, if desired. However, in most cases, you ll be better off hiring a vendor to perform an on-site installation. After all, there are a lot of details associated with deploying a communications system and it s one of the few mission critical applications running in your office, so it s not something you want to be experimenting with. 3: Perception that it s easier to maintain. This is simply not true. The User Interface on just about every IP PBX is very simple. End users can easily learn how to perform all common tasks in a matter of minutes. If you add IP Phones in the future they can be pre-programmed and shipped to your location for plug & play deployment For end users who don t want to self-administer their phone system, they can just pick up the phone, or send an , to place a change order. The PBX vendor has remote access, so they can include changes for a small monthly service fee. Decision Point: In closing, the two biggest strengths of a Hosted PBX solution are continuity of service and the elimination of core system maintenance. It can be a cost effective solution for small business owners with fewer than 10 extensions, but that all depends on the monthly per user rate they are paying. For business owners above 10 extensions and especially above 20, purchasing a phone system through a lease is by far the better solution from a financial standpoint. The telephone business is changing and the cloud is a key part of that change. Migrating your telephony system to the cloud does not guarantee savings, and any number of factors can have a negative impact on cost and reliability. That said, more and more CIOs are looking at outsourcing the responsibility for a premise based system and are looking to the cloud to get them out of the phone business. However, securing a good value will mean knowing what you need, understanding all the costs and avoiding the traps that lay along the way. 6 P a g e I s H o s t e d V o I P R i g h t F o r Y o u?
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