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IP Telephony Total Cost of Ownership:
A case for the Implementation of
IP Centrex Hosted Service
O ctober, 2001
Executive Summary
This white paper is focused on the subject of IP and convergence. There has been much written about IP and convergence, but typically from a manufacturer’s perspective – that is to say, a company that has a vested interest in the emergence of a telephony replacement market. The many applications and benefits of IP and convergence are being proven by adopters of the new technology. The jury has returned, and the verdict is in – IP and convergence have a positive impact on an enterprise’s bottom line.
Once the decision is made to implement IP and a converged communications infrastructure, a more difficult decision remains. That decision is which technical solution alternative to deploy. There are three primary alternatives to choose from for implementing IP and convergence. The first two options garner a lot of media space. This media attention is primarily due to the fact that IP and convergence represents a major discontinuity in the existing TDM-based PBX telephony systems market. Manufacturers of the new solutions recognize the size and potential of the embedded PBX market, and have been exhaustive in their efforts to increase the awareness of buyers.
The first implementation is a traditional PBX with trunk and station gateways that support IP. This option may be attractive based upon the recent vintage of an existing PBX, especially if the in-place PBX is less than 3 years old. The second implementation option is a pure IP – PBX. This option is a replacement for the traditional PBX in which virtually all communications are IP. In both the traditional PBX and IP – PBX scenarios, there is a need for capital expenditure, and the equipment is owned and maintained on the customer’s premises.
The third implementation option is to attain IP and convergence as a hosted service. IP-Centrex is a service provided by the Local Exchange Carrier, and operationally, it is much like its TDM-based predecessor, Centrex. As an outsourced service, IP-Centrex provides the benefits of IP and convergence, but it does not require the same level of capital expenditure as a premises-based solution. Further, IP Centrex has a significant advantage in that it can be implemented on the basis of one station at a time. This flexible capability will enable an enterprise to move to IP and convergence at its own pace. IP Centrex could be advantaged to support single departments or classes of employees, such as “tele-workers” (work-at-home) or “road warriors” without the immediate removal of the existing premises-based system.
This white paper is a report of the promise of IP and convergence and the operational improvements realized by early adopters. The paper compares the three options available for implementation of a converged environment on the basis of positive attributes, and on the basis of total cost of ownership.
The comparison is based upon a new system implementation because of the time and space included to cover the multiples of possible permutations. A consideration of alternatives, such as department-level PBX migration or an IP Centrex-based one-phone-at-a-time transition/implementation, one should consider cost impact differences relative to end-user training and differing levels of service interruption with each solution in order to accurately predict first year costs and the impact upon total cost of ownership.
A total cost of ownership model was developed in an attempt to compare all three alternatives on a “level playing field” over a three-year period. In the analysis, it is assumed that each alternative is a new installation. In order to measure the cost impact of a system addition, the model reflects the addition of new users in year three of the analysis. Also included in the analysis is the support of “tele-workers” as an extension of the system. This work-at-home population is configured in a manner to utilize all system features. Further, the analysis includes views of a 100-user and a 400-user enterprise. In the 100-user enterprise, 10 workers are designated as “tele-workers”. In the 400-user enterprise, 80 workers are designated as “tele-workers”.
“Tele-workers” were included in the financial analysis by design. Given that the World Trade Center tragedy of September 11 is expected to most likely add velocity to the existing trend toward telecommuting, the inclusion of a representative sample of “tele-workers” is considered an important aspect of the analysis.
All of the details of the IP and convergence financial analysis follow the body of this white paper, in the addendum. As depicted below, IP – Centrex is a significantly more economical IP and convergence solution in the 100 user enterprise.
The Hosted Service IP – Centrex solution has an $80,000 first year advantage over the IP – PBX solution and a $100,000 advantage over the traditional PBX- IP Enabled solution. The incremental impact of the addition of 20 users in year three is consistent across all three solution. However, to add 20 users to the IP – Centrex solution is $2,000 less than the equivalent addition to an IP – PBX solution. In year two, the IP – Centrex solution advantage is $25,000 and this advantage increases to $27,000 with an addition of 20 users in year three. Admittedly, the traditional PBX solution is somewhat disadvantaged in that it is configured as a new installation to provide the equivalent services of the other two options, and in most cases, enterprise buyers will consider only new technology.
A second financial analysis was conducted on 400 user size alternatives with 80 “tele-workers”. In this analysis, IP-Centrex had a significant advantage in year one and a smaller advantage in years two and three against the alternative solutions.
The year one IP-Centrex advantage over IP – PBX is $327,000. The IP-Centrex advantage is $51,000 and $55,000 in years two and three, respectively.
In both analyses, the IP – Centrex solution proved to be the least expensive option to implement IP convergence. The first year capital outlay and on-going cost delta is extraordinarily significant. Based upon the results of this analysis, IP – Centrex should be carefully considered and selected as the vehicle with which to implement IP convergence.
The Promise of IP and Convergence
Traditionally, business communications systems have been, like the technology they represent, dedicated to enabling pre-defined communications. For the most part, the primary focus and orientation of these systems has been voice. Support for data communications flows has largely been assigned to applications processors or pre-defined end points. This approach was fine for its time, but it forced enterprises to operate under the dictation of its systems’ “rules” and conversely, it forced customers, suppliers and partners to also have these same systems’ “rules” dictate how they interacted with the company.
The astounding growth of the Internet and the use of the PC as a personal information and productivity tool have helped to re-define how businesses and individuals live and work. IP (Internet Protocol), the language of the Internet, has emerged as the common language of voice, data and video communications through a common appliance. This evolution has in turn enabled us to visualize the application of converged communications and applications.
Enterprises are quickly realizing that, to be successful, they must treat technology as a strategic asset in order to improve the supply chain, to enhance the customer experience, increase revenues and decrease costs. In short, enterprises are becoming customer-centric, and they are adopting new technology to provide differentiation from their competition and to ensure their very survival. Those that “get it” are taking immediate steps to implement the technology required to become customer-centered.
“Getting it means that understanding that the consumer occupies the center. Connectivity allows customers to drive companies."
Chuck Martin, Harvard Business Review
Benefits and Issues
Today, enterprises face unprecedented challenges. Competitive pressures are higher than ever, partially fueled by the Internet Web Site’s ability to make virtually any company appear valid. Enterprises are focused on supply chain enhancement, collaboration, relationship management and enterprise resource planning in order to maintain and grow share. In addition, there is extraordinary pressure to grow revenues and decrease costs – on a quarter by quarter basis.
Convergence and IP are the tools of the successful enterprise in the Twenty First Century. The benefits of convergence and IP span customer, supplier/partner and employee, and it is fast becoming a critical factor of success.
Converged or unified communications supports the management of contacts, information and collaboration. It allows a company to leverage the Internet and all communications channels in support of its supply chain, its customers and its employees. It also supports ubiquitous applications and unified services. Because a converged system provides a seamless environment, the enterprise is able to provide unified services to customers, “tele-workers” and “road warriors” alike. These corporate segments are of extreme importance in that “tele-workers” comprise some 20% of the workforce while “road warriors” comprise some 10% of an enterprise. It is also the basis of a virtual work environment that allows anyone inside or outside of the company to participate in a call, adding efficiency, responsiveness and broader ownership.
Converged message management of e-mail, fax and voice mail through a phone, PC or PDA ensures prompt and appropriate response. Combined with a contact management system, the callback can be personalized, and the transaction included in the enterprise information system in real time.
Convergence also translates to increased employee productivity. Users of IP telephony systems report an average of 2% increase in productivity for virtually all users.
From a systems perspective, the hard cost savings of converged IP telephony are very strong. Savings are attained from the centralized administration of a single network; reduced networking costs; reduced costs of moves, adds and changes; network and premises reconfiguration and end-user support. On average, a minimum of 57% of adopters of converged systems have reported reduced costs of aspects of system management.
The actual experience of those enterprises that have implemented IP and convergence bears out the promise. In IP convergence implementations, as shown in the following graph, budget decreases of a minimum of 10% savings has been realized in areas of systems management and administration. Users have reported a 37% reduction in adds, moves and changes, a 23% reduction in toll, a 10% reduction in maintenance and the ease of administration has enabled a 30% reduction in staff.
In short, the early returns are in and convergence has been deemed a requisite of success. Many enterprises have adopted and many more are planning to adopt IP telephony solutions over the near term.
Based upon current plans to implement converged communications systems, fully 91% of all large enterprises and 61% of small and mid-sized businesses will be “IP Converged” by 2004. This adoption trail is marked by significant growth in 2002 and 2003. Given the business improvement that IP convergence offers and its impact on the bottom line and competitive position, all enterprises need to begin to develop an implementation plan.
There is no doubt that enterprises of all sizes will move to a converged communications environment, and in some cases the market leaders may lose their advantage as a converged environment allows the competition to move and react to market conditions faster.
Enterprise Choices
Clearly, convergence and IP can have a profitable impact on an enterprise’s bottom line, and many enterprises are planning to implement a converged communications environment. However, this directional decision is just half of the total decision. The technical decision, how to implement a converged communications environment, is a harder decision, and requires investigation into the alternatives and a comparison of the total cost of ownership.
Traditional PBX
The PBX solution consists of a traditional PBX with trunk-side and line-side gateways provided for IP traffic. This solution combines the proven PBX TDM technology with an ability to selectively add IP traffic. For many enterprises, this “adaptable” PBX solution is only preferable in the short term as a means of extending the useful life of an installed PBX or completing the amortization of a PBX asset.
IP-PBX
The IP-PBX solution is available in a couple of “flavors”. There is the PBX replacement, “all IP” version in which the architecture and terminals are pure IP. In this implementation, call traffic is distributed over a LAN infrastructure and telephony features and intelligence are provided by a network-attached server. A second version of the IP-PBX combines a TDM switching matrix with a LAN, IP and server environment. This implementation enables an enterprise to converge all of its communications traffic onto a single infrastructure. “All-in-One” systems, available to small and medium-sized businesses, provide a single box solution that includes IP and circuit switched communications, router and LAN hub.
Hosted Service – IP Centrex
IP Centrex is a converged solution that provides converged communications an IP on a system or user-by-user basis. This solution enables the enterprise to lease converged IP telephony service rather than purchasing the equipment required to support this environment. In addition to a lower capital requirement, IP Centrex also includes protection from technological obsolescence through the transfer of communications system technology planning and implementation to the service provider.
Each of the three solutions has discreet advantages. As shown in the following chart, the Hosted Service - IP Centrex solution is the most flexible. This is largely due to no requirement to the ability to migrate on one’s own time schedule, improved/less expensive support for “tele-workers” and “road warriors” and the reduced requirement for capital outlay.
Comparison of Converged IP Communications Solution Advantages
PBX Advantages -
Extend useful life of existing telephony infrastructure
-
Reap some advantages of convergence
-
Lower demand for end user training
IP-PBX Advantages -
Reap full advantages of convergence and IP
-
Implement totally converged CRM, ERP, messaging and collaboration applications
-
Some user training cost advantage
-
Improve support for “tele-workers” and “road warriors”
Hosted Service – IP Centrex Advantages -
One phone-at-a-time migration or full advantage of convergence and IP
-
Implement totally converged CRM, ERP, messaging and collaboration applications
-
Low user training costs
-
Less expensive support for “tele-workers” and “road warriors”
The Financial Case for IP Centrex – A 3 Year Financial Analysis
Financial analysis was completed on the three alternatives (a traditional PBX, IP-Enabled, a “pure” IP – PBX and a Hosted Solution – IP Centrex) for converged IP communications in both a 100 user configuration with 10 “tele-workers” and a 400 user configuration with 80 “tele-workers. All of the analyses included a 20 user addition in year three. It was assumed that all three options were installed as new systems and that the installation and year three additions occurred on January 1. Additional options, such as PBX migration or a smooth, one-phone-at-a-time implementation were not included in the analysis due to the high number of possible implementation permutations and in the interest of clarity and ease of understanding. However, if considering a change to IP, one should assume additional cost impacts for different user training requirements and service interruption.
Financial Analysis Approach
A determination was made of the components required to implement each solution, with an emphasis on, as closely as possible, comparing “apples to apples”. These components included physical equipment, the communications facilities, implementation costs, maintenance costs and other support costs, such as system and phone maintenance, staffing, and space, HVAC, Power and Insurance. The following figure depicts all of the elements included in the analysis. Some of the elements are applicable to only one solution, but are listed here to promote understanding of the depth of the analysis.
Elements Included in the IP Converged Solutions Analysis
First Costs (Implementation)
-
System
-
Phones
-
Gateways
-
Installation
-
LAN Costs (In addition to existing network)
-
Administrator Training
-
User Training
-
Soft Client Phones
-
DSL Modems
-
Remote Modules
-
Local Facilities Installation (Trunks, PRI, ISDN and ADSL)
On-Going Costs -
IP-Centrex Line Charges
-
Facilities Charges (Local Trunks, PRI, ISDN and ADSL/Cable)
-
Hardware Maintenance
-
Space, HVAC, Power, Backup and Insurance
-
Staffing
Soft Costs
Average prices or costs were developed for each element. First costs were developed using average street prices. On-going costs were developed with assumptions based upon actual end user experience. All assumption and unit costs used in the analyses can be found in the Addendum section of this white paper.
The Results
The analyses reveal that the Hosted Service IP – Centrex is the most advantageous option to implement IP convergence. The following table depicts the costs and the cumulative IP – Centrex advantage over the three-year analysis period. This analysis suggests that both a 100-user and a 400-user enterprise should strongly consider IP – Centrex as the vehicle for IP convergence implementation. This analysis is especially important in light of the on-going profits crunch and softness of the economy.
100 User IP System Total Cost of Ownership Analysis
|
Year 1 Costs
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Year 2 Costs
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Year 3 Costs
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Traditional PBX
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$237,283
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$105,724
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$126,399
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IP – PBX
|
$219,229
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$85,220
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$109,434
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IP – Centrex
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$135,001
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$60,192
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$82,480
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IP – Centrex : IP – PBX Delta
|
$84,228
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$25,028
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$26,954
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IP – Centrex Cumulative Advantage
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$84,228
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$109,256
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$136,210
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The 400 user IP system total cost of ownership analysis produced similar results.
400 User IP System Total Cost of Ownership Analysis
|
Year 1 Costs
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Year 2 Costs
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Year 3 Costs
|
Traditional PBX
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$729,232
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$240,496
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$272,351
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IP – PBX
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$754,016
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$252,880
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$275,234
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IP – Centrex
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$427,425
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$201,816
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$220,252
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IP – Centrex : IP – PBX Delta
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$326,591
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$51,064
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$6,582
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IP – Centrex Cumulative Advantage
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$326,591
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$372,655
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$432,637
|
The primary difference between the 100-User and 400-User models is that in the 100-User Model, 10% of the workforce are Tele-workers” while in the 400-User Model, 20% of the workforce are “Tele-workers”. The cost offset created by this portion of the users accounts for the smaller cumulative advantage in the 400-user Model as compared to the 100-User Model.
The bottom-line is that a Hosted Service IP-Centrex implementation of IP convergence is the least expensive option. Given the increased pressure for enterprises to increase profit on a quarterly basis, IP – Centrex is the logical choice.
Addendum Assumptions and Calculations
The following pages present the full analysis, assumptions and detail of the Total Cost of Ownership comparison.
100 User PBX System With IP Gateways
100 User IP - PBX System
100 User Hosted Service IP - Centrex System
400 User PBX System With IP Gateways
400 User IP - PBX System
400 User Hosted Service IP - Centrex System
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