Introduction to VoIP for Small and Medium Sized Businesses

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1 Introduction to VoIP for Small and Medium Sized Businesses Understanding the Options and Opportunities April 17th, 2007 Notice Copyright 2009 Metaswitch Networks. All rights reserved. Other brands and products referenced herein are the trademarks or registered trademarks of their respective holders Marina Village Parkway, Suite 100, Alameda, CA94501

2 Contents 1. KEY QUESTIONS WHAT IS VOIP AND WHAT MAKES IT DIFFERENT Internet Phone Calls? WHAT KINDS OF VOIP PRODUCTS ARE AVAILABLE FOR SMBS? IP PBX Hosted IP PBX IP Business Trunking WHAT DO OTHER SMBS THINK ABOUT VOIP? WHAT DOES VOIP MEAN TO A BUSINESS OWNER OR MANAGER?...12 About Metaswitch MarketVisions...14 Introduction to VoIP for Small and Medium Sized Businesses Confidential Page 2

3 1. KEY QUESTIONS After neglecting the Small and Medium Business (SMB) Market for some time, VoIP service providers have finally started paying attention and offering a range of products to meet the needs of SMBs. Unfortunately, there has been very little practical guidance for SMBs wishing to upgrade their phone systems to VoIP solutions. In a 2006 study conducted by Savatar, SMB owners revealed their confusion about VoIP and a litany of telephony problems, all too familiar to the owners and managers of SMBs: It s too difficult to make a routine Move/Add/Change (a MAC change) to the phone system. The current system lacks features that are critical to business productivity, and it costs too much to add them. It is difficult to manage their system across multiple office locations, and it costs too much to expand VoIP can be the breakthrough technology SMB owners need to solve these problems while enjoying significant cost advantages. But with all hype surrounding VoIP, it is a challenge for a SMB owner to evaluate products and make smart business choices. Where do you start? This paper is the first in a series to help you learn about VoIP. It will answer the following key questions: What is VoIP and how does it differ from your current phone system? What kinds of VoIP products are available for SMBs? What are the pros and cons of each type of VoIP product? What do other SMBs think about VoIP? What does VoIP mean for my business? Introduction to VoIP for Small and Medium Sized Businesses Confidential Page 3

4 2. WHAT IS VOIP AND WHAT MAKES IT DIFFERENT Simply put, VoIP is a way of using the same communications protocol to carry voice traffic as the internet does for data traffic. When you use a browser to access a website, the data is transferred between the website and your browser using Internet Protocol or IP. With IP, the data is broken up into discrete chunks called packets. These data packets move across the internet with each packet taking its own route from the website to your browser. Once the packets get to your computer, the browser reassembles them into a web page. It s as if you and ten of your coworkers got into ten different cars to meet up at a client site. Each car might take a slightly different route to get from your office to the client, but once each car got there; your team would reassemble before entering the building. For decades now, when you placed a telephone call, your voice was carried over the Public Switched Telephone Network (PSTN). The PSTN is fundamentally different from IP because it is circuit switched. When you place a call, a dedicated circuit is established between your phone and the phone of the person you are calling. Your voice signal travels across that dedicated circuit continuously until you end the call. Using the PSTN to make a call is like you and your coworkers traveling in your cars and driving bumper to bumper along exactly the same route to your client meeting. Further, once you start on that route, it is closed to all other traffic and dedicated to your group of cars. Phone companies who own and operate the PSTN typically charge you tolls for using the route, usually for every minute that you spend on the toll road. VoIP is a way of bypassing much of the toll by avoiding the PSTN for a large part of the journey. When you place a call on a VoIP network, your voice is digitized and broken up into voice packets that move across the network in a way that s similar to data packets. If you walked into the phone closet of most SMBs today you would find a data connection (T-1 line, DSL or cable broadband) to carry the data packets and a connection to the PSTN to carry voice traffic. If the company was using VoIP, you d find just one connection because, for VoIP, voice packets and data packets use the same network. Introduction to VoIP for Small and Medium Sized Businesses Confidential Page 4

5 2.1 Internet Phone Calls? It s often said that VoIP is using the internet to make phone calls. That s not really true especially for VoIP systems that are used for business calls. The public internet is a chaotic place. Your data packets are moving across the internet along with those of tens of millions of other people. More often than you realize, one of your packets gets lost and never makes it to its final destination. For most routine data traffic like web pages, this is not a huge problem. However, for applications like video or voice, it is big issue. If voice packets get lost or don t arrive on time, the call quality will suffer and your conversation will sound like a bad cell phone call. For that reason, business class VoIP calls are carried over a private, managed network that ensures Quality of Service (QoS) for both voice traffic and data traffic. These private networks connect to the public internet and to the PSTN to ensure that voice and data traffic can reach users who are not part of the private network. Introduction to VoIP for Small and Medium Sized Businesses Confidential Page 5

6 3. WHAT KINDS OF VOIP PRODUCTS ARE AVAILABLE FOR SMBS? Today, SMBs use a variety of traditional phone systems. Key Systems, Centrex service and Private Branch Exchange (PBXs) are the most common. Often, a telephone system means one or more pieces of equipment, housed at one of your business locations, that connects your business to the PSTN. All of these types of systems provide several services. First, by connecting outside telephone lines or trunks, to the system it manages the flow of voice traffic to the PSTN to allow for incoming and outgoing calls. Second, the system provides a set of calling features like call transfer, conference calling, putting calls on hold, etc. Finally, the system may have a voice mail system associated with it. 3.1 IP PBX In the VoIP world, many manufacturers now offer IP PBXs. They operate much like standard PBXs except that they carry voice traffic as packets using IP. While IP PBXs offer many of the advantages of VoIP (lower cost calls, more features, etc.) they have some disadvantages. Cost Purchasing an IP PBX is a capital expense. The cost varies by size, capacity and manufacturer but it can easily run to tens of thousands of dollars even for a modest size business. Some service providers will lease their IP PBX to an SMB minimizing the upfront cost by spreading the payments of the life of a contract. Extra Equipment The cost of the IP PBX is not likely to be the only up front cost you encounter. Normally you ll end up buying new phones and other gear needed to take advantage of all that an IP PBX can offer. Obsolescence Like any other piece of equipment, an IP PBX can quickly become outdated. Just consider how slow the computer you purchased two years ago seems. Anyone can update a computer with more memory or a bigger disk but it costs money to do so. The same is true for an IP PBX: it can be updated and upgraded, but it will cost money. And, eventually, just like with an old PC, there comes a time when upgrading isn t possible and you ll need to purchase a new IP PBX. Management Expenses The technology in an IP PBX is sophisticated and managing it will require a specialized skill set. Most SMBs don t have that expertise in house, so many manufacturers offer to manage your IP PBX for you but at additional cost. Introduction to VoIP for Small and Medium Sized Businesses Confidential Page 6

7 Multiple Vendors The IP PBX is manufactured by an equipment provider but supplied to the SMB by a service provider or reseller. Because multiple vendors are involved, when problems arise it is often difficult to determine which vendor is responsible for troubleshooting and repair. 3.2 Hosted IP PBX Hosted IP PBX makes all of the IP PBX features available to a customer while a VoIP service provider owns, hosts, manages and updates the IP PBX equipment. Typically, a the service provider will charge the business a small up front fee to start the service and an ongoing monthly fee that includes all voice (local and long distance) and data (internet access) charges. Hosted IP PBX offers many advantages for SMBs. They include: Lower Capital Costs Since there is no IP PBX to purchase, the capital costs are limited to new phones and some networking equipment to ensure Quality of Service. Predictable Operating Expense Monthly voice and data charges are usually calculated on a per telephone basis. If you have 50 employees each with a telephone on their desk, your monthly operating cost will be 50 times a set fee. If you add people, you ll know exactly how your costs will increase. No Maintenance Expenses Because the VoIP service provider owns the equipment, they are responsible of all the costs associated with equipment and software upgrades. Ease of Management The VoIP service provider is responsible for managing the equipment. Routine changes like adding a new person to the system or changing an extension number are done by the customer using a simple, web interface. No Obsolescence The VoIP service provider hosting the system will routinely upgrade the service so that new enhancements are delivered on an ongoing basis at little or no cost. 3.3 IP Business Trunking One of the simplest ways for SMBs to switch to VoIP is IP Business Trunking solutions. Some service providers refer to this type of system as Trunking or Business Trunking. This VoIP solution allows a business to take advantage of the benefits of VoIP (unlimited usage, shared connection for voice and data, self-administrative portal, etc.) without replacing their existing phone system. In an IP Business Trunking solution, voice and data are carried over a single data circuit with part of the circuit used for data, the other part for voice. Because data capacity needs continuously fluctuate, IP Business Trunking solutions dynamically allocate bandwidth on the circuit to adjust for heavy data demands. When a business voice traffic is low, the circuit allots most of the bandwidth to data traffic. Introduction to VoIP for Small and Medium Sized Businesses Confidential Page 7

8 As soon as a call is placed, voice traffic gets priority, and the circuit will dynamically allocate more bandwidth to voice to ensure call quality. While IP Business Trunking solutions offer fewer features than the other types of VoIP, there are many advantages including: No Capital Costs These solutions allow businesses to use their existing phones and phone system so there are no upfront charges. Predictable Operating Expense Monthly voice and data charges appear on one bill often include unlimited local and long distance calling or a set number of voice calling minutes per month. Charges are calculated on a per telephone or per business line basis. No Maintenance Expenses Because there is no new equipment, there are no costs associated with maintenance. No Additional Management Expenses The VoIP service provider is responsible for managing system. Routine changes like adding a new person to the system or changing an extension number are done by the customer using a simple, web interface. Introduction to VoIP for Small and Medium Sized Businesses Confidential Page 8

9 4. WHAT DO OTHER SMBS THINK ABOUT VOIP? Since 2003, Savatar has been conducting research on the SMB VoIP market. Our findings have become a benchmark for how SMBs view VoIP, how and why they purchase VoIP systems and how service providers are addressing SMB market needs. If you are feeling confused about what VoIP might offer your business, you are not alone. Our most recent study, conducted in the third quarter of 2006, found that SMB owners and decision are aware of and interested in VoIP and thought switching to VoIP could provide real business cost savings. However, they are unsure of: What benefits VoIP can bring to their businesses Which type of VoIP system is right for them What kind of service provider they ought to contact to learn about VoIP But, SMBs are very clear on why they would switch to a VoIP solution We asked over 500 SMB owners and decision makers how they though a VoIP system would compare to their current system in four areas: cost, system management, migration and features. Did they think VoIP would be better, worse or about the same? The results were surprising and showed that SMBs have some misconceptions about how VoIP could benefit their businesses (see chart below). 54% of the SMB owners who responded said they thought VoIP would be more cost effective than their current system. This is true, particularly when you consider the Total Cost of Ownership (TCO) of a VoIP system. We will discuss TCO in much more detail in another White Paper in this series. Less than half (46%) of the respondents thought that a VoIP solution would have more features Introduction to VoIP for Small and Medium Sized Businesses Confidential Page 9

10 than their current system. This one is particularly shocking. All VoIP systems have all of the features you count on now (voice mail, call transfer, conference calling, etc.) and offer a slew of advance features that are only available with VoIP. Only 43% of the survey respondents thought that a VoIP solution would be easier to manage than their current phone system. This is very surprising and not an accurate assessment of VoIP systems. With a VoIP solution, all of the routine, day-to-day changes you might want to make to your phone system (adding or deleting users, changing extension numbers, setting permissions by extension or user, etc.) can be made by a designated administrator using a simple, intuitive web interface; no special technical skills are required. With most non-voip systems, routine changes require the intervention of a service provider (usually at some cost) or a highly skilled technical specialist. Finally, just a third of the survey respondents thought that switching to a VoIP system would be easier than switching to another traditional phone system. Again, it s just not true. For a Hosted IP PBX or IP Business Trunking solutions, there is little or no new equipment to buy, install and configure. Both can be up and running very soon after you select your solution provider. Confusion was also the rule when we asked what kind of VoIP system (IP PBX, Hosted IP PBX or IP Business Trunking) the survey respondents would be prepared to consider: Nearly 70% said that they weren t sure. Nor did the respondents have a clear idea on what kind of service provider could help them make the choice. We asked, Whom do you think of as a business VoIP provider? As you can see from the chart below, there was no single kind of service provider that garnered a majority of the response. Despite the confusion, we found a remarkable agreement in two areas: the types of problems SMBs had with their current phone system and why they would switch to VoIP. The problems most often cited will likely seem familiar to you. SMB owners said that they had issues with making changes to their systems (like adding, changing or removing extensions) and that their current system lacked features that were critical to business productivity. Other major Introduction to VoIP for Small and Medium Sized Businesses Confidential Page 10

11 complaints were the cost of adding features, the difficulty in managing their system across multiple office locations, and the expense of adding capacity to the system. Again, VoIP provides solutions to these problems. When asked, How important is each of the following factors in your decision to switch to a VoIP system: cost, system management, features, age of your current system? SMBs were very clear. Over 78% said that lowering cost was the most important factor they would consider when contemplating a switch. Introduction to VoIP for Small and Medium Sized Businesses Confidential Page 11

12 5. WHAT DOES VOIP MEAN TO A BUSINESS OWNER OR MANAGER? As VoIP has matured, it has emerged as an important technology that can help SMBs contain their voice and data costs. It is also a technology that is well within the reach of any business, any size. But, technology is not enough. VoIP can deliver real benefits to your business through: Reliability and Efficiency: IP is connectionless and doesn t require the always-open dedicated connection of the PSTN, and routing calls over VoIP private networks guarantees a high quality of service. In short, your calls are routed reliably and efficiently. Cost Savings: You don t need separate infrastructures to handle voice and data traffic, and you don t need to budget for long-distance toll calling either because VoIP treats your toll calls more like than PSTN calls, covering all traffic under one monthly rate. Further, if your SMB has more than one office, calls between your locations never cross the PSTN. These so called on net calls have no toll associated with them so that calls between your east and west coast offices are free. Ease of Management: VoIP systems are managed through an easy to use web interface that allows non-technical administrators to move, add or change an extension or assign specific features sets to individual users at the click of a mouse. Individual users will have their own web portal to control calls (place on hold, park, transfer, etc.), switch voice mail greetings, and set business rules for call routing. Big Business: Features: VoIP systems come with an array of features normally associated with corporate phone systems. VoIP systems include: Auto Attendant to help route calls made into your main number to the right department or individual, Conferencing that allows you to bring several extensions and outside calls onto one line, and Music on Hold so your callers can hear music or pre-recorded announcements while they are waiting. Productivity Enhancing Features: The advanced features associated with VoIP can be a real benefit to many businesses. SMBs will find that Mobility Features will make mobile workers like salespeople reachable at all times. In fact, VoIP systems are let your mobile or home based workers have access to all the system features. For example, outside callers can reach a home based worker at their home office or on their mobile phone by dialing their office number. The home based worker can also reach their colleagues by dialing a four digit office extension from Introduction to VoIP for Small and Medium Sized Businesses Confidential Page 12

13 their home phone, mobile phone or a phone on their PC (a softphone) Unified Communications features make it easier for employees to manage all their voice mails (office and cell) in one system using their computer or their phone. Introduction to VoIP for Small and Medium Sized Businesses Confidential Page 13

14 About Metaswitch MarketVisions Metaswitch MarketVisions is a unique Marketing support program offering a package of resources and services to support your growth. For Service Providers seeking business expansion into new regions, new customer markets and/or providing additional enhanced services to their existing customer base, MarketVisions will enable providers to more effectively and more rapidly launch and market end-user offerings. For more information about the program, please contact your Metaswitch Account Team. Metaswitch Networks 1001 Marina Village Parkway, Suite 100 Alameda California Tel. (510) Fax (510) Introduction to VoIP for Small and Medium Sized Businesses Confidential Page 14

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