In Lippis Report Issue 54: The Hybrid Public/Private IP Telephony Model, I introduced the option of deploying hosted IP telephony (HIPT) for remote offices while large facilities tend to keep their deployments private. The public/private decision usually comes down to control versus cost. The more control an IT department requires over its IP telephony implementation the higher the cost.

Nearly every company over the next three to five years will conduct a public/private analysis as the service providers and new entrants gear up to offer HIPT solutions. Companies such as AT&T, MCI, Sprint, Verizon, COLT Telecom in Europe, Telecom Italia and Equant to name a few are either offering or planning to offer HIPT solutions. Over the next several weeks I expect to see at least ten additional announcements of HIPT offerings from various service providers and those who you would not expect to offer hosted services such as equipment supplier channel partners. In this Lippis Report, we´ll review what the cost could be and let you decide how much control you want.

IP Telephony Total Cost of Ownership

The cost of ownership of an IP telephony implementation has three components: 1) acquisition cost; 2) operational cost; and 3) facilities cost. Acquisition cost is the capital dollars spent to purchase hardware and software such as IP phones, softphones, IP PBXs, gateways, etc. If your IP network is not ready for IP telephony, then you may have to upgrade your switches and routers which would increase acquisition cost. Operational cost is people cost, that is the cost to operate, maintain, manage and troubleshoot. Operational cost is the sum of salaries and fringe benefits for those who support the IP telephony network, an element that is often overlooked when evaluating a hosted solution. Facilities cost include wide area services such as broadband access, MPLS, frame relay, etc., as well as system maintenance and lease cost for space occupied by equipment (also, power, security, HVAC, etc). When I conduct cost of ownership studies I calculate these three costs over a three year period to provide a realistic picture of the total cost of ownership or TCO.

A Few Caveats

Every firm is unique. They staff differently, they invest in IT differently, their business process is different, their cultures are different, their call patterns are different, the type of files being transmitted are different, etc. What that means is companies of the same size and number of sites can have very different TCO. In particular operational and facilities costs differ widely, making comparisons between firms either difficult or meaningless. Acquisition cost, however, tends to be nearly the same between businesses of similar employee pools and number of sites, as the largest cost component of an IP telephony installation is end-points or IP phones by far. If a major upgrade of the IP infrastructure is required to support IP telephony, then the sum of the upgrade cost could be the largest cost component within a converged network acquisition budget.

For most of my clients I find that facilities cost is reduced significantly, in the 30% to 50% range, when transitioning to a converged network, especially if frame relay has been employed for more than five years. Facility cost is very important as every dollar saved is added to the profitability of the company. In short, you´re reducing expenses when you reduce facilities cost. For one of my clients, facilities cost savings drove up profitability by 7% by switching to MPLS! As facilities cost savings can be so large many firms pay for their converged network through these savings. All of the major service providers such as AT&T, Sprint, MCI and Verizon are aggressively promoting and pricing their MPLS networks as a platform in which to offer a wide range of applications and hosted solutions such as IP telephony.

Facilities cost savings would be gained independent of a public or private IP telephony implementation. The public vs. private cost decision is governed by equipment cost and traffic patterns, thus toll charges. If your company´s call volume is more then 50% internal then your savings will be greater, as these VoIP calls will traverse the MPLS network then those with higher external call volume which will not traverse the MPLS network. So how do you think about the cost of a private vs. a HIPT solution? It´s mostly an acquisition vs. a lease cost decision.

Hosted vs. Private TCO Analysis

Based upon my consulting practice, the loaded acquisition cost per end-point varies by the number of employees within a site. For example, sites with 1000 or more employees pay an acquisition cost per person of approximately $1,400. But for sites with lower than 100 employees the cost per person ranges from $670 to $570. Why such a big difference between the 1000 and 100 person site? The main reason is that IP telephony implementations centralize call management, i.e., the setting up and tearing down of voice sessions. This cost is usually not distributed across the entire employee pool but allocated to those employees where the communications manager resides. This inflates the larger sites cost per employee. The above numbers are loaded with servers, gateways, memory, power cords, IP phones, software, etc. Also, for the 1000 employee site, the maintenance cost on equipment would be in the $10,000 per year range.

So how does the economic picture change if a HIPT solution was chosen? The scenario becomes simple. The average cost per month for a HIPT solution with messaging is $30, or $360 per year, excluding transport charges. In the hosted scenario, the service provider manages the communication manager, provides IP phones, gateways and dial-plan design. In short, there is no acquisition cost associated with a hosted solution; however, there may be an installation cost. Depending on the size of the company, many HIPT providers waive installation cost.

The hosted solution trades off acquisition and operational cost for facilities cost. That is, the HIPT monthly cost is treated, from an accounting point of view, like wide area bandwidth cost. Therefore, with no acquisition cost and little operational spend, the only significant TCO component for the HIPT solution is facilities cost. On a purely dollar for dollar basis the private and hosted solutions break even after two years and four years for the smaller and large sites respectively. The hosted solution is a lower spend over the first two and four years. But this dollar for dollar comparison does not include operational cost which is the dominant TCO component representing as much as 40% of TCO based upon Lippis Consulting client engagements. Operational cost is much higher in the private solution as IT staff is responsible for operations, management and troubleshooting. When the proper accounting of all cost and the CFO applies depreciation and its internal rate of return, the hosted solution usually looks even more attractive from an economic point of view.

HIPT Risk Mitigation Value

The HIPT solution offers many of the same benefits of hosted contact centers which were discussed in Lippis Report Issue 52. These benefits are risk mitigation:

Financial Risk Mitigation: HIPT offerings are available as turn-key solutions with a monthly usage-based pricing model. This can eliminate major capital outlays, improving cash flow, asset utilization and return on assets, because businesses don´t account for these assets on their books. Since HIPT is located at the service provider facility, corporations will realize a variety of financial benefits such as reduction in operational costs, data center space, power, equipment, and management burdens. In the uncertain business times in which we now live, the HIPT economic model mitigates many of the key financial risks which concern CFOs.

Technology Obsolescence Risk Mitigation: Technology obsolescence is mitigated in a HIPT as the service provider owns and maintains the solution. For example, Avaya, one of the leaders in providing HIPT solutions to service providers, includes free software updates to their service provider customers, which guards against obsolescence for service provider and enterprise customers.

Integration Risk Mitigation: Since the entire HIPT is tested and packaged together in a kit, the service provider becomes a single source provider of the solution made up of best-of-breed equipment vendors, saving customers the arduous task of evaluating, negotiating and testing a complex IP telephony environment themselves. Skipping this process can be a big time saver for many companies.

Business Discontinuity Risk Mitigation: One of the best design benefits of HIPT solutions is that they are hosted in a service provider´s facilities which provide disaster recovery through redundancy and security built into their considerable data centers. Service provider facilities are often designed with the highest concern for availability and reliability. Redundancy, security and disaster recovery are provided at the facility and the infrastructure layers. This eliminates the design and cost of HIPT business continuity from corporate IT departments. In addition, most corporations can measure, to the dollar, the economic impact of lost phone service. In some cases, a short time discontinuity in phone service could be material to the quarterly economic performance of the company.

The HIPT solution offers a range of risk mitigation and at first look economic advantage. The real question then comes down to how much control does an IT department require over their IP telephony implementation? Many service providers offer service level agreements (SLAs) to ensure availability and performance. Also, modular solutions being deployed by the service providers allow customers to customize HIPT functionality to meet their unique business requirements. Those who are programming communications into their business process may require more control. But for the vast number of companies in the economy, service providers will be offering a strong economic incentive to let them handle your IP telephony implementation.

Posted 14 April 2006 at 7:37 am under Lippis Report. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.