The Business Case for Voice Over IP What do large VOIP rollouts truly cost and how do vendors compare?

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1 ISSUE PAPER The Business Case for Voice Over IP What do large VOIP rollouts truly cost and how do vendors compare? By Robin Gareiss, Executive Vice President & Sr. Founding Partner, Nemertes Research Executive Summary Nearly every company or organization is doing something with voice over IP today, ranging from evaluations to full adoptions. A continued area of interest among IT executives is total cost of ownership. Until 2005, organizations that implemented VOIP did so because of a real or perceived cost savings over traditional telephony. In many cases, they found substantial savings by eliminating costly third-party contracts for Moves, Adds and Changes (MACs), reducing the amount of cabling required in new buildings, or leveraging idle capacity in their data networks. But for the past two years, cost has been a secondary driver to futureproofing the network. Rarely do we find IT executives who can justify investing in TDM technology when their PBXs must be replaced. They see IP as the platform for the future, and they want to be prepared for new applications starting with voice with a converged infrastructure. The focus on cost has shifted from proving VOIP s numbers vs. TDM s numbers to comparisons between vendors. It s no longer a matter of if a company goes to VOIP, it s when. And when that time comes, they want to understand the different cost components of VOIP and how key vendors compare with one another. Nemertes has been tracking VOIP costs for four years and interviewed nearly 400 organizations of all sizes during that time. We will review 2007 trends in VOIP adoption and architecture and associated costs based on this extensive research. For actual costs, we will focus specifically on organizations with more than 1,000 end units on their VOIP systems. The Issue What companies spend on VOIP depends largely on a few factors: How large their deployment is, which vendor they use, how they architect the network. The trouble is, most companies can t calculate accurate costs until they re well into the rollout. This is particularly true for operational start-up and ongoing operational costs. It s vital to understand the cost components of VOIP, what Nemertes Research 2007

2 factors affect them, and how cost influences overall VOIP decisions. For example, it s great to find very low-cost VOIP options, say with an open-source solution. But if that solution requires significant training and programming with mediocre support, then the upfront savings may not be worth it. This paper defines the specific hard-dollar costs associated with VOIP. We strongly encourage companies to use this information as a data point in a multi-faceted decision when selecting a VOIP vendor. Decision-makers also should consider vendor experience, financial viability, management tools, customer service, technology and product features, among other criteria. VOIP/Convergence Overview Nemertes has been tracking VOIP deployments for the past four years with both quantitative and qualitative data. Year after year, a growing number of organizations move toward VOIP and away from TDM technology. This year, only 1% of the benchmark participants have no plans for VOIP. That s not to say that everyone is using VOIP all the time and in all locations. But what it does mean is that nearly all organizations are doing something with the technology running a pilot to evaluate vendors, implementing VOIP only in strategic locations, or using VOIP everywhere. (Please see Figure 1: VOIP State of Deployment, page 2. This chart includes all sizes of organizations). Figure 1: VOIP State of Deployment Nemertes Research 2007

3 Dissecting VOIP Rollouts About one-third of organizations are engaged in a growing rollout, which means they have decided to move entirely to VOIP, and they re in the process of installing it. That process could be quick if it s a midsize company with a small number of locations, or it could take years, if it s a global multinational trying to coordinate telecom contracts. All sizes of organizations are in the growing-rollout state of deployment. The largest percentage of growing-rollout companies is those with $20 billion or greater in annual revenue (28%), followed by those with $1 billion to $9.9 billion (18.8%). Overall, more than half of the organizations (about 56%) in the growing-rollout phase are large, in terms of revenue. Not surprisingly, large companies take longer to get the technology deployed, despite the fact that they have larger IT staffs to handle the rollouts. Small and midsize companies generally take less than two years to fully implement VOIP, while large enterprises can take up to eight years to fully deploy the technology. Other companies about 28%, to be exact have no intentions (for now) to implement VOIP throughout the organization. But they have found reasons to implement VOIP in a tactical manner only at new locations or certain types of sites. We call those rollouts limited deployments. The majority of participants (78%) in the category of limited deployment are large in terms of revenue. They often find themselves in situations where their TDM PBX is at the end of its life, and they must replace it. Rather than investing in another TDM switch, they opt for IP. In doing so, they wind up with isolated deployments at various locations when they replace end-of-life PBXs or install new equipment at new offices. Most small organizations find it more effective to adopt an all-or-nothing approach because they don t have a large enough organization to merit staggered rollouts or using the technology in a specific type of location. They are more apt to do a rip-and-replace VOIP deployment, often in conjunction with a network upgrade or other IT project. Nearly 20% of organizations have VOIP fully deployed. Interestingly, 59% of them started their deployments in recent years (11.7%) or 2005 (47%). Nearly 12% started and completed their deployment in What does this indicate? Most organizations with 100% VOIP are small to midsize companies that can quickly roll out a new technology without spending years and tens of millions of dollars on it! Nearly one in five organizations (18.7%) are conducting pilots of VOIP or planning to use the technology within two years. These pilots, of course, can last for years in some cases. All of the participants engaged in pilots now are midsize or large, earning $1 billion or more in annual revenue. And many of the decisionmakers at these organizations say they want outside help for implementation and management Nemertes Research 2007

4 The Master Plan: Architecture Decisions One of the big changes with a VOIP infrastructure, as opposed to TDM, is that communications becomes more networked. In the TDM world, it s common to see independent key systems and PBXs at different locations that operate in isolation. With VOIP, companies want to remove boundaries between locations. So regardless of where someone is located, he or she can use the same features to contact another individual, whether he or she is down the hall or across the globe. VOIP adopters are using a few different architectures to accomplish this: distributed, centralized, regional and hosted service. We asked participants how they were bringing or planning to bring VOIP to their remote locations to create a consistent communications infrastructure with common features, reliability and predictable performance across all sites. Here, we begin our focus on rollouts with more than 1,000 units. None in that group is using hosted services, though about 8% are evaluating hosted offerings. (Please see Figure 2: VOIP Architecture, page 4). Figure 2: VOIP Architecture Most commonly, they distribute switches to various sites and network them together. That distributed architecture, in about 58.3% of large rollouts, places an IP PBX at all or most locations. Similarly, one-third of organizations Nemertes Research 2007

5 adopt a regional approach, whereby they break their geographic locations into different regions, and implement any number of IP PBXs in key sites within each region, with small branches connecting directly to them. The PBXs in each region then interconnect. Overall, that means 92% of organizations have some level of distribution to their IP PBXs, increasing the management challenge. Figure 3: Plans for Hosted VOIP Services In fact, management issues and having hands-on control of the IP PBX is a big reason about 8% of companies implementing large VOIP rollouts prefer a central architecture. Going along with a consolidated data-center where they centralize all or most applications, they install a huge IP PBX in a central location with a back-up IP PBX at a secondary site for business continuity. Business Drivers for VOIP The most often-referenced business driver underscoring the movement toward VOIP is futureproofing the network. IT executives view the strategic move toward VOIP as the first step in preparing their networks for the future of convergence and multi-application IP infrastructure. Other business drivers include improving employee productivity, streamlining communications features and reducing costs. Those are the high-level drivers. But here s what s happening in practice at most large enterprises: Nemertes Research 2007

6 Their TDM PBXs, which generally include dozens of brands, are reaching the end of life. And IT executives do not want to invest in old TDM technology. So if they haven t started their VOIP migration yet, they re scrambling to develop a strategy and set of standards for how to do so. As they run their cost analysis, they find a mixed bag of results. Capital costs for IP telephony are equal to or greater than TDM, and operational startup costs are higher initially. Ongoing operational costs drop about 20%, except when it comes time to troubleshoot an outage. Then, it takes one to three times longer to isolate and repair an IP-telephony outage than a TDM outage. So the idea of going to VOIP solely to save money has slowly subsided. In the early years of VOIP, companies had to find an ROI in order to justify replacing tried-and-true equipment for new technology. Now, they re moving more into the TDM-replacement phase, so ROI becomes less important. To be clear, there can be a net savings after the first two years, but organizations are focusing on other benefits, such as streamlined features, improved productivity, and integrated voice/data/video collaborative applications. They then face the challenge of running this new telecom network internally, or relying upon third parties who now have some experience to reference. Many are simply applying the money they had been spending on maintenance for MACs to overall management and monitoring of IP telephony. (External MACs for TDM environments cost $168 on average, and range from $65 to $400 each. IP MACs cost only about $10. So these budgets quickly added up). The bottom line is that enterprises are willing to spend money to outsource management of IP telephony. It s something they have been doing for years with their telecom maintenance contracts. Now, they can just get more for the dollar in the IP world. Vendor Assessment & Selection On average, organizations with large VOIP rollouts assessed 3.6 vendors, which is more than the average for all sizes of rollouts (3.15). Half evaluated either two or three vendors, and the other half evaluated four or more. (Please see Figure 4: Number of Vendors Evaluated, Page 7). Those with large rollouts often have more time resources to evaluate a good field of vendors than those with small rollouts, and they are more concerned with doing a detailed assessment of technology, product features and financial viability. Nemertes recommends organizations do a cursory assessment of six to eight vendors or carriers, and a detailed evaluation and pilot of three to four vendors or carriers. One key change this year is that more organizations have more than one IP-telephony vendor. Year over year, the percentage of multi-vendor VOIP deployments has increased from 10% to 20%. This is driven by a few factors. In some cases, companies use one vendor in the contact center and another for overall communications. In others, it s the result of merger and acquisition. And in others, it s driven by the desire to use locally strong vendors in each region of the world Nemertes Research 2007

7 Figure 4: Number of Vendors Evaluated The Business Case Nemertes has tracked VOIP pricing for four years by conducting detailed interviews with more than 300 organizations. We also have developed a calculator for tracking total cost of ownership by vendor over specific time periods. We track costs by asking IT executives for their total costs and dividing those totals by the number of units online. The components are: Operational startup costs: These include planning, installation and troubleshooting. We track the amount of people hours organizations spend internally on each of these functions, and multiply that by the average hourly rate of the staff involved. We also add in outside consulting costs companies incur. Capital costs: We track capital costs for IP switches, phones, gateways, network upgrades related to the VOIP implementation, IP video and audio bridges, management tools, unified messaging, and traditional voic . For the purposes of comparison based on the statistical response we received, we included only VOIP switches and phones in these figures. Ongoing operational costs: This covers the time and money companies spend managing and maintaining their VOIP systems Nemertes Research 2007

8 We have gathered figures for several vendors, but only four vendors garnered enough response to be counted individually. They include Avaya, Cisco, Nortel and ShoreTel. We also gathered directional findings with lower statistical validity for Alcatel, Mitel, NEC, and 3Com. For the purposes of this paper, we will highlight the four statistically valid vendors. One of the biggest shifts we ve found in the past four years is with Avaya, which has gone from being the high-price provider to one of the lowest-priced vendors. In the 1,000-plus VOIP rollouts, Avaya s per-user prices were the lowest; ShoreTel s were lowest in rollouts with fewer than 1,000 units. (We discuss the smaller rollouts in our full Cost Analysis benchmark volume). Cisco and Nortel have the highest per-user prices. One conclusion we made as the result of this research is that as rollouts get larger, centralized architectures help to reduce per-user costs. When we asked IT executives how they extended VOIP to their branch offices, the centralized approach emerged for 1,000-plus rollouts only with Avaya. In examining Avaya s largest rollouts, we find the IT staffs spend significant time implementing the large IP PBX in the data center and back-up data center(s). This would result in a high per-user cost if they were not planning to connect a correspondingly large number of end units to those PBXs. As the companies extend VOIP to more and more users, the per-unit cost drops because they can benefit from economies of scale. All of ShoreTel s deployments were distributed (not surprising since this is how ShoreTel s solution is intended to be implemented). Cisco and Nortel customers use a combination of regional and centralized architectures, respectively. And Avaya customers use a combination of distributed, regional and centralized architectures. The more distributed architectures don t always equate to higher costs. In some cases, organizations may not have enough internal expertise to affordably install IP PBXs throughout the distributed enterprise. Or, they may not be able to send the top experts to every implementation, thus raising costs. We certainly do see individual cases within this rollout size where a distributed deployment is not more expensive than a centralize implementation. But on average, these types of rollouts may contribute to the higher costs, particularly if the company size isn t properly matched with the architecture. For example, a large, distributed company without a large, distributed IT staff may run into problems with a distributed or regional rollout. Start-up Costs (Operational and Capital) For operational costs, Cisco has the highest per-user prices among rollouts with more than 1,000 end units. These figures follow qualitative analysis we ve gathered, as well as more specific vendor ratings: Cisco rollouts are complex and require a lot of expertise. Cisco customers generally devote the most time and money to the installation itself, followed closely by planning and then troubleshooting. Avaya s operational start-up costs are lowest for rollouts of greater than 1,000 users. As stated, Avaya s largest rollouts use a centralized architecture, so they install large IP PBXs that support multiple sites and users. They spend a lot Nemertes Research 2007

9 of time and money to implement the initial system, but once that s done, they allocate those costs across more users. VOIP Startup Costs by Vendor, 2007 Capital (IP Vendor Operational switch/phone) Total >1,000 users >1,000 users >1,000 users Avaya $37 $310 $347 Cisco $327 $602 $929 Nortel $201 $1,305 $1,506 ShoreTel $114 $532 $646 Table 1: VOIP Costs, By Vendor, 1,000 or more units Capital costs are lowest per user with Avaya, followed by ShoreTel, Cisco and Nortel. Avaya (and ShoreTel) customers tend to re-use their analog or digital handsets with their IP or IP-enabled PBXs. In cases where companies opt not to buy new IP phones, it reduces their per-user cost on capital equipment by an average of $325. Cisco customers almost exclusively buy new IP phones, raising the per-user capital cost by comparison. Two factors are influencing Nortel s high costs. First, most companies are simply paying more for Nortel s IP PBXs than its competitors. Second, a high percentage of customers are buying Nortel s IP handsets, and they re spending more than they re spending with competitors ($437 with Nortel vs. $204 with Avaya, $332 with Cisco, and $250 with ShoreTel). Overall, startup costs increased year over year in all categories. Per-user prices this year ranged from $347 to $1,506 for implementations of more than 1,000 users, vs. $350 to $800 last year. Ongoing Operational Costs Ongoing operational costs varied by vendor and rollout size, as well. Perhaps the most interesting general finding is that operational costs scale quite well. The more users on the system, the more users each IT staff member handles. In other words, the per-user cost drops drastically (except in Nortel s case) when the rollout sizes increase. VOIP Ongoing Operational Costs, 2007 Vendor Operational >1,000 users Avaya $14 Cisco $87 Nortel $324 ShoreTel $11 Table 2: VOIP Ongoing Operational Costs, 1,000+ end units Overall, ShoreTel is the least expensive to operate, followed by Avaya, Cisco and Nortel. Cisco is six times more costly to operate than Avaya and eight times more expensive than ShoreTel with rollouts of more than 1,000 users. But Nemertes Research 2007

10 it s Nortel that is the most expensive to operate in this band, at $324 per user. This is primarily because Nortel still isn t posting as large of rollout sizes as its Avaya or Cisco. As its rollout sizes increase, the cost per user will decrease. But also, we find Nortel customers tend to keep their expensive telecom staff members on board to run the new IP telephony network, rather than move them to other parts of the company or eliminate their positions entirely. The real news in this section is in the difference between Cisco and Avaya or ShoreTel. In some cases, it s simply that Cisco customers spend a lot of time trying to troubleshoot, only to learn the problem is the result of a bug or inherent problem. Further, the lifespan of the system is of concern. A VP of telecommunications for a large financial-services firm removed Cisco after a twoyear implementation because of the number of hardware changes required and the longevity of the system. We got rid of Cisco. Anything you buy from Cisco and do more than a three-year amortization, you re pushing it, he says. That, by definition, increases operational costs. Examples from Nemertes TCO Calculator Nemertes TCO calculator is a model that figures total cost of ownership by vendor over a specified period of time. For each example, we assessed a five-year TCO with the following costs, using real data from the research participants: Operational startup; Capital startup; Ongoing operational; Software-maintenance fees; VOIP-management tools; Network upgrades; Training (IT staff only). The calculator contains pricing for various vendors, but we mirrored the vendors they companies in our examples actually assessed. In some cases, they may have assessed additional vendors, for which Nemertes does not have price points. We entered the number of end stations each company planned to implement in each of the five years. The calculator adds both one-time costs, such as capital and training, and repetitive costs, such as ongoing operational costs and licensing fees Nemertes Research 2007

11 Midsize Company This example is from a manufacturer with $400 million in annual revenue that deployed 2,000 IP phones to 30 locations over five years, comparing Avaya, Cisco and Nortel. TCO Overview for IP Telephony Prepared for: Sample Midsize Company Cost Analysis The Nemertes Cost Analysis Tools has calculated the following results for your organization. This section provides an overview of the cost benefits of this technology. Total Cost of Ownership $2,886,340 with Avaya Number of Years Assessed Total number of handsets over term Percentage of revenue Percentage of IT budget 5 2, % 12.83% IP Telephony TCO Total TCO Per Year $6,000,000 $2,000,000 $5,000,000 $4,000,000 $3,000,000 $2,000,000 $2,886,340 $5,409,492 $3,393,520 $1,500,000 $1,000,000 $500,000 $1,000,000 $0 $- Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year Per User Costs $3,000 $2,500 $2,000 $1,500 $1,000 $500 $- $2,705 $1,697 $1,443 Detailed Analysis The Nemertes Cost Analysis Tools has calculated the following break-out costs for your IP telephony deployment Operational Startup Costs $ 633,500 $ 879,500 $ 637,500 Capital Costs $ 1,232,500 $ 1,078,000 $ 1,492,500 Ongoing Operational Costs $ 314,000 $ 2,920,000 $ 536,000 Network Upgrades $ - $ - $ - VOIP Management $ 50,000 $ 50,000 $ 50,000 Licenses $ 622,740 $ 448,392 $ 643,920 Training $ 33,600 $ 33,600 $ 33,600 Detailed Summary (Click here) Nemertes Research 2007

12 Large Company This example is from a financial-services company with $23 billion in annual revenue that is deploying 120,000 phones to 2,230 locations over five years, comparing Avaya, Cisco, and Nortel. TCO Overview for IP Telephony Prepared for: Sample Large Company Cost Analysis The Nemertes Cost Analysis Tools has calculated the following results for your organization. This section provides an overview of the cost benefits of this technology. Total Cost of Ownership $128,947,600 with Avaya Number of Years Assessed Total number of handsets over term Percentage of revenue Percentage of IT budget 5 110, % 2.74% IP Telephony TCO Total TCO Per Year $250,000,000 $200,000,000 $150,000,000 $100,000,000 $50,000,000 $0 $184,336,800 $194,525,600 $128,947,600 $120,000,000 $100,000,000 $80,000,000 $60,000,000 $40,000,000 $20,000,000 $- Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Per User Costs $1,600 $1,400 $1,200 $1,000 $800 $600 $400 $200 $- $1,437 $940 $713 Detailed Analysis The Nemertes Cost Analysis Tools has calculated the following break-out costs for your IP telephony deployment Operational Startup Costs $ 6,820,000 $ 16,060,000 $ 14,520,000 Capital Costs $ 45,100,000 $ 55,330,000 $ 95,425,000 Ongoing Operational Costs $ 8,250,000 $ 9,570,000 $ 9,570,000 Network Upgrades $ 50,490,000 $ 80,960,000 $ 36,410,000 VOIP Management $ 50,000 $ 50,000 $ 50,000 Licenses $ 18,204,000 $ 22,333,200 $ 38,517,000 Training $ 33,600 $ 33,600 $ 33,600 Detailed Summary (Click here) Nemertes Research Nemertes Research 2007

13 Conclusion VOIP clearly is a critical and common application at the vast majority of organizations. As companies start or continue their VOIP deployments, they must consider each vendor s price relative to the others, as well as total cost of ownership. They also should look beyond the actual dollars. If a price seems reasonable but doesn t come with the necessary service, support and tools, it may be worth exploring other options. About Nemertes Research: Founded in 2002, Nemertes Research specializes in analyzing the business value of emerging technologies for IT executives, vendors, and venture capitalists. Recent and upcoming research topics include security and information protection, mobility and collaboration technologies, and outsourcing Nemertes Research 2007

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