Best Practice: Having a 'Big Picture' View of IP Telephony Will Give the Buyer More Control
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1 Research Publication Date: 12 February 2008 ID Number: G Best Practice: Having a 'Big Picture' View of IP Telephony Will Give the Buyer More Control Steve Blood Companies spend too much on IP-PBXs and on supporting legacy PBXs because of a historically fragmented approach to buying telephony. A centralized view of procurement will enable companies to negotiate better with suppliers, leverage economies of scale in telephony and develop a stronger road map for unified communications (UC). Key Findings Decentralized telephony buying patterns mean that large companies have several vendor products in the network. No single vendor typically has more than 20% share of a company's telephony estate. The competition for UC is intensifying and telephony vendors want to secure enterprises as strategic customers, with telephony bundles including mobility, conferencing and collaboration software. Companies need the "big picture" view of telephony to ensure that they get the best deals and don't invest in technology they don't need. Selecting a single telephony supplier can't be conducted in isolation of a broader UC strategy. No single supplier can provide all your UC needs; hence, the strategy is essential to ensuring that companies select the most-appropriate suppliers for each component. Recommendations Select a telephony partner based on your broader set of UC needs. Suppliers should be flexible in enabling integration with preferred providers of other technologies. Negotiate an enterprisewide license for the telephony component and a deployment for an agreed-on duration, just as you did with ERP, CRM and messaging infrastructure products. Separate software purchases from hardware purchases, and carefully consider which devices your users need today and will need in the future. Avoid buying proprietary handsets that can't be used with other applications in the UC suite. Ensure that you're adequately covered with support programs in all office locations. Expect to pay more for software and less for hardware, and think carefully about whether you really need to buy handset maintenance. Reproduction and distribution of this publication in any form without prior written permission is forbidden. The information contained herein has been obtained from sources believed to be reliable. Gartner disclaims all warranties as to the accuracy, completeness or adequacy of such information. Although Gartner's research may discuss legal issues related to the information technology business, Gartner does not provide legal advice or services and its research should not be construed or used as such. Gartner shall have no liability for errors, omissions or inadequacies in the information contained herein or for interpretations thereof. The opinions expressed herein are subject to change without notice.
2 WHAT YOU NEED TO KNOW If you investigate the PBX estates of most companies, you'll find employees across the company using a range of different equipment (and the larger the company is, the more fragmented the installations are). Historically, companies purchased PBX platforms on a location-by-location basis, primarily because voice was owned locally by the facilities manager. Now that decision making for voice is increasing (see Note 1), companies can make more-strategic decisions regarding telephony suppliers, especially in conjunction with a broader UC strategy, where telephony vendors can be key providers of functions such as live communications, live conferencing, and clients and endpoints (see "A Framework for Unified Communications"). ANALYSIS Many enterprises have already started (if not completed) the process of replacing branch office telephone systems with a single IP telephony application that can support many thousands of users. For example, the retail banking industry has begun this practice, with many household names replacing hundreds (if not thousands) of small, key telephone systems, one at each branch office with a centralized IP telephony application. Instead of having 1,000 systems supporting an average of 10 users at each branch, the bank now supports a single system with 10,000 users, which happen to be distributed across many sites. The realized savings in administration is straightforward enough, but in the procurement benefit, there's an opportunity to secure additional discounts from IP telephony vendors through an economy-of-scale principle. Gartner estimates that the telephony estate of an average large business (more than 1,000 employees) traditionally will have at least six vendors of PBXs and IP-PBXs, with each supplier accounting for no more than 20% of the total number of users. Therefore, by moving to a singlesupplier relationship, each of those vendors are competing to increase their share of telephony in the company at least fourfold; or for a new entrant, to secure 100% of the estate. As a result, the market is extremely competitive, and companies can secure significant extra discounts for a single-supplier relationship. Gartner has witnessed combined hardware and software discounts increase from approximately 35% to 60% for a enterprise that's prepared to move to a singlesupplier relationship. Notably, these variations depend on the size of the deal and on the number of countries; however, for taking a more-strategic view of how companies purchase telephony, the cost-savings opportunities are obvious. In addition, investment in UC technologies is enabling companies to secure even-greater discounts because bundles of mobility and/or conferencing software are being offered for 25% of the original list price of each component. Here, it's important that companies have a clear view of their UC strategies. New players entering the market (such as Microsoft and IBM) also have competitive capabilities, and companies must be sure they don't buy the same technology more than once (see "Predicts 2008: New Names, Offerings Drive Enterprise Telephony"). However, total consolidation down to a single supplier may be challenging because enterprises have adopted different strategies for managing communications locally, and these may be difficult to change. Centralization of procurement is a process that companies have adopted for ERP (SAP, for example), CRM (Oracle, for example) and messaging infrastructure (Microsoft, for example). There may also be technical limitations to consolidation for global organizations; however, this shouldn't prevent companies from adopting centralization wherever possible (perhaps by country or by operating region). Selecting the telephony supplier must be a strategic endeavor to account Publication Date: 12 February 2008/ID Number: G Page 2 of 6
3 for market conditions and pending competition created by UC (see "How to Choose an IP Telephony Vendor in a Turbulent Market"). Even when companies are served via a single or a chain of re-sellers and value-added partners, it's important to establish direct strategic contract negotiations with the vendor. The partner should always be involved, but the final decision regarding the level of discount should be left to the company and the vendor. Finally, although the mix of users' communications will continue to change (and we expect the role of the IP-PBX to be increasingly "dumbed down" over time), a foundation framework must still be provided, from which to extend voice communications to enhance customer service operations (see "Companies Should Use IP Telephony to 'Virtualize' Their Contact Centers") and to develop stronger links between communications and business processes. Companies should investigate new telephony procurement strategies in several areas: Separate Hardware From Software Licenses In most IP telephony architectures, the cost ratio between hardware and software has been shifting in favor of software, while proprietary processor hardware is being replaced with industrystandard "appliance server" architecture. We recommend that companies think of telephony as an application with enterprisewide licensing. Instead of buying several IP-PBXs each with their own licenses, processing and gateways to meet the number of users at each individual site, the enterprise should negotiate for enterprisewide licensing to cover the needs of all users throughout a defined migration program. If the migration will take several years, then the contract should include annual reductions in the cost of the telephony license to reflect the market trend toward less-expensive voice communications (see Note 2). Some vendors are indicating a more software-oriented approach to charging for their products, including concurrent and software-as-a-service models. Companies and suppliers can review how these models may be more-appropriate procurement models. Architecturally, when it comes to hardware and gateways, enterprises should take a networkwide view of their estates. With IP telephony, all locations wouldn't necessarily require gateways. If an enterprise has multiple offices located in a single city or geographic region, then the number portability could be used to consolidate inbound and outbound traffic to a smaller number of access points. Extrapolated across the estate, this could represent a significant savings in local hardware. Some companies have even been known to move to nongeographic numbering to remove the need for local access in small branch office locations altogether. Consider Buying Handsets Separately and From Other Providers Companies are overspending on IP-PBX handsets, not only by buying more capabilities than they'll ever use, but also, with increasing enterprise mobility, companies will likely need fewer wired devices in the future. With the increasing availability of third-party SIP devices, companies have more choices in the types of terminals they can deploy on their desktops. Some vendors, however, are discouraging the connection of third-party devices (see "Third-Party SIP Phones for IP PBXs Are Undermined by Hidden Costs"), but companies could find an economy of scale in purchasing third-party devices. This could be a negotiating factor for vendorowned brand devices or a cost savings in the overall project. In certain scenarios, it will still be appropriate to use the vendor's brand handsets (especially with enhanced functions such as integrated contact centers, manager-secretary combinations and switchboard operators), but these may account for only 10% to 15% of users. Third-party SIP handsets can offer attractive alternatives, especially if enterprises expect to buy large quantities of telephones. Adopting SIP Publication Date: 12 February 2008/ID Number: G Page 3 of 6
4 will make it easier for enterprises to connect to and interact with different types of devices, especially the emerging wireless smartphones, whenever it's appropriate (see "How to Overcome VoWLAN Challenges"). Negotiate Hardware and Software Maintenance Separately Historically, companies could expect to pay between 10% and 15% of the negotiated cost of the PBX for annual maintenance (depending on the contract terms, response times and hours of support). Today, it's relevant to separate out hardware and software support. Vendors are starting to offer software support for IP telephony, which includes ongoing software updates, in which IP- PBX software typically requires significantly more-frequent upgrades than traditional PBX platforms. This can benefit the better management of ongoing operational costs, but companies must be sure they're getting more than just new software releases to fix errors in vendors' products. Companies also should carefully review the contents of software support (major/minor software releases) and decide whether they represent a benefit, especially if they include upgrades for UC technologies. Software support will vary more than traditional maintenance. Microsoft, with its entry into UC, charges 25% per annum of the list price for Software Assurance, whereas Cisco charges 29% for a three-year software support contract with Unified Workspace Licensing. The two players are, of course, very different in their approaches to the hardware on which the software will operate. Microsoft is platform-neutral and will find that supporting its products is more expensive than Cisco, which specifies a reduced hardware platform set (HP and IBM, in addition to its own) and, therefore, won't have as many support issues to deal with. Wherever vendors specify the hardware that's approved for their products, companies should expect to pay lower support fees. If the vendor is offering a wide choice of hardware, then companies should expect the support fees to be higher. This is also true for other hardware components. Vendors generally specify their own hardware gateways and common equipment, which are proprietary and not subject to the level of failure. Companies should compare vendors' published mean-time-between-failure figures and negotiate maintenance on that basis. Companies also should expect to pay approximately 8% to maintain proprietary hardware. The above figures are guidelines for support during normal working hours, with typically a fourhour response time (telephone call) and next-day on-site visit (if required). These will vary depending on the level of support provided by the vendor or its partner. Companies should devise a range of support programs to reflect the needs of each office. Companies should refrain from handset maintenance contracts. Instead, they should negotiate extended warranties and implement a stringent inventory management process to ensure that units that fail under warranty are replaced. Minimizing the range of units and the holding of local stock will ensure that faulty units are replaced quickly. Beware of "Attractive" Discounts Off Global List Prices The greatest challenge in procuring central telephony is that the price varies greatly worldwide, including regional variations. For example, North America is the most-expensive place to buy telephony and is typically 25% more expensive than Europe. In Europe, the cost varies by as much as 35% among countries, with Italy and France the most-inexpensive places and the U.K. the most expensive. A discount of 35% in North America would need to be at 50% in Europe, and as much as 60% in France and Italy. When negotiating a global contract with a vendor, companies should ensure that the discounts reflect local market conditions. Publication Date: 12 February 2008/ID Number: G Page 4 of 6
5 Include the Channel in Your Vendor Negotiations Many telephony providers sell their products through channels, so be sure to include the channel as well as the vendor in your negotiations. It would be easy for the vendor to pass on greater discounts to you simply by reducing the margin for the channel. Your channel partner will quickly become disinterested in supporting a project in which its margin is reduced. The vendor and the channel benefit from the consolidation exercise, and by having both parties involved in negotiations, you can more-easily achieve mutually acceptable contract terms. RECOMMENDED READING "A Framework for Unified Communications" "Predicts 2008: New Names, Offerings Drive Enterprise Telephony" "How to Choose an IP Telephony Vendor in a Turbulent Market" "Companies Should Use IP Telephony to 'Virtualize' Their Contact Centers" "Third-Party SIP Phones for IP PBXs Are Undermined by Hidden Costs" "How to Overcome VoWLAN Challenges" "Determining Which UCC Approach Best Fits Your Planning Cycle" "Forecast: Enterprise Telephony Equipment, Worldwide, " Note 1 Decision Making for Voice Is Increasing In a Gartner 4Q07 study of 300 infrastructure and operations leaders across the U.S., Canada, the U.K., France, Germany and Spain, we found that 65% of the decision makers for voice were IT directors, IT managers or worked in management information systems. Telecommunication managers and facilities accounted for only 18% of decision makers. Note 2 Telephony License Should Include Annual Cost Reductions According to "Forecast: Enterprise Telephony Equipment, Worldwide, ," the average IP line selling price for IP telephony in the corporate and major enterprise segment of the market is predicted to fall by a compound rate of 6.7% between 2007 and Publication Date: 12 February 2008/ID Number: G Page 5 of 6
6 REGIONAL HEADQUARTERS Corporate Headquarters 56 Top Gallant Road Stamford, CT U.S.A European Headquarters Tamesis The Glanty Egham Surrey, TW20 9AW UNITED KINGDOM Asia/Pacific Headquarters Gartner Australasia Pty. Ltd. Level 9, 141 Walker Street North Sydney New South Wales 2060 AUSTRALIA Japan Headquarters Gartner Japan Ltd. Aobadai Hills, 6F 7-7, Aobadai, 4-chome Meguro-ku, Tokyo JAPAN Latin America Headquarters Gartner do Brazil Av. das Nações Unidas, andar World Trade Center São Paulo SP BRAZIL Publication Date: 12 February 2008/ID Number: G Page 6 of 6
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