Communications on the Premises or in the Cloud: How do you Make the Choice?

As promised, I continue to share my thoughts on the dichotomy of hosted/cloud communications and premises-based infrastructure. Eventually, I will have to deal with the differentiation (if any) between cloud and hosted, but for now, I am not yet sure where to draw the line.  Although some tend to believe that these are two completely different animals, I believe the two have one major element in common: businesses adopting hosted or cloud communications should be willing to outsource all or most of their communications infrastructure and infrastructure management from a third party. Therefore, in discussing the potential for cloud communications, it seems imperative that we look at how the market has evolved over the past decade and what have been some of the factors determining customers’ choice for hosted or premises-based communications.

Historically, businesses around the world have favored premises-based implementations. The U.S. and Canada boast some of the highest adoption rates for hosted telephony, and yet the segment represents around 15 percent of installed business lines in those markets. Several factors have contributed to this uneven distribution and will continue to play a role in the future; the move to IP telephony and UC will, however, change the nature of these factors and their impact on communications investment decisions.

a) Supply-Side Factors

Functionality: Historically, hosted services have offered more limited functionality compared with premises-based solutions. Although TDM Centrex supports most key PBX features, such as abbreviated dialing, call forward, call park, call transfer, DID, DOD and music-on-hold, businesses are frequently drawn to PBXs for their superior functionality. With the advent of hosted IP telephony, however, more comprehensive service bundles (including messaging, presence, conferencing and other applications) are making the hosted offerings more appealing than alternative premises-based solutions.

Contract Terms: Centrex and other hosted services deliver greater flexibility, especially in terms of capacity adjustments at times of downsizing or rapid growth. Centrex contracts typically last two years, allowing customers to more frequently change solutions or providers based on new requirements.

Marketing and Awareness: The advent of IP telephony has further boosted PBX penetration as PBX vendors have been faster to market with advanced IP telephony platforms and have marketed them more aggressively than hosted services providers. Incumbent service providers have been slow to upgrade their communications infrastructure to VoIP and have only cautiously pursued IP communications offerings for fear of cannibalizing their existing Centrex and other legacy services. Service providers are, however, becoming more confident in marketing their next-generation services as they ramp up their cloud architectures and IP communications capabilities.

b) Demand-Side Factors

Security: Historically, telecom managers have considered multi-tenant, outsourced platforms to be less secure than premises-based systems, and IP telephony has raised even more concerns in that area. As security technologies rapidly improve for hosted solutions, we expect this concern to dissipate.

Control: Similarly, concerns about control continue to favor PBX implementations, in spite of the fact that advanced, hosted IP telephony offerings provide in-house staff with greater control than traditional Centrex services. For example, graphical management interfaces allow IT/telecom managers to perform moves, adds, and changes (MACs) quickly and conveniently without having to contact the service provider or pay for a technician to visit the site. These interfaces also allow managers to configure some features and settings on the go, based on user needs.

Businesses also tend to believe that they have greater flexibility and control over features and capabilities with a premises-based solution, since they can purchase or develop those internally as the need arises. In reality, the increasing complexity of communications architectures favors an outsourced solution, since a service provider is motivated to more rapidly upgrade and enhance the service offering.

TCO Analysis: The most compelling factor in choosing hosted or premises-based communications is the total cost of ownership (TCO) for the two scenarios. Of course, TCO varies widely, depending on a company’s existing infrastructure, number of sites, number of users (total and per site), specific application requirements, and available telecom staff.

For enterprises with a few larger sites, a premises-based solution typically offers a better TCO over a longer period of time. To a large degree, that’s because businesses often extend the life of their communications solutions well beyond the amortization period, at which point the asset has no book value – and therefore, no associated cost. Furthermore, with only a break-fix maintenance contract in place, support costs can also be reduced. Of course, this approach involves a significant amount of risk and can prove quite costly if an outdated solution begins to malfunction on a regular or system-wide basis.

Alternatively, Centrex and hosted IP telephony have been adopted by businesses that choose not to maintain in-house support staff and instead outsource their communications. Staff reductions, therefore, result in immediate and ongoing cost savings for these customers. It should be noted that TDM Centrex scenarios may involve some additional costs if a technician needs to be dispatched to the site on occasion; however, hosted IP telephony eliminates this cost burden as well due to more flexible network monitoring and management solutions.

Further, hosted services, and especially hosted IP telephony, provide significant TCO benefits to small branches and small sites within large organizations. Businesses choose hosted services for their remote locations in order to lower the costs of adding incremental capacity and to deliver uniform capabilities across geographically dispersed users.

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3 responses to “Communications on the Premises or in the Cloud: How do you Make the Choice?”

  1. Neal Gilbert says :

    It is also very important to know about the VoIP Provider you are choosing.

    It was not that long ago that a fairly decent size company suddenly went out of business and left thousands of individuals and businesses without phone service (Sun Rocket). It can and will happen again. As we have seen, there is no company that is too big to fail.

    There is no single company in the VoIP space that is not susceptible to failure or downsizing and a corresponding decline in customer service.

    This is just the reality of the times we live.

    I would judge companies by the quality of their website, customer referrals and the general chatter on the internet about the company.

    In the hosted VoIP market, bigger is not necessarily better. Company’s need quality support from their provider and their is only one true way to find that out.

  2. Bob says :

    You are right on. Quality should be the number one focus of a VoIP company, as well as speed and reliability. In response to the article: great job summarizing both the problems and the positive aspects of cloud vs. hosting. There is a sentence that confused me though: ‘In reality, the increasing complexity of communications architectures favors an outsourced solution, since a service provider is motivated to more rapidly upgrade and enhance the service offering’. Why do you say that? Are you saying that service providers are motivated to favor long distance calls instead of local calls because of price? If so, that’s not the case here in Canada where service providers dislike long-distance (to the US or elsewhere) calls as they don’t make as much profit when compared to local calls or calls within Canada (I mean, when people have international vs. local plans). That all depends on how much you talk internationally vs. locally of course, but both services are pretty good, and I would argue that long distance is even worse in terms of quality and speed.

    • elka says :

      Hi Bob,

      Thanks for your feedback to my article. I am sorry I never replied, but was SWAMPED over the past couple of months. You mentioned one of the statements in the article was confusing, namely: “In reality, the increasing complexity of communications architectures favors an outsourced solution, since a service provider is motivated to more rapidly upgrade and enhance the service offering”. What I meant was, we no longer sell, buy, install and manage “boxes”. Communications systems have become far more complex and upgrading or enhancing them is no trivial matter. For a customer trying to focus on its core business (e.g. legal services, retail, etc.), it is overwhelming to try and put together complex UC environments. On the other hand, service providers delivering hosted IP telephony or cloud-based UC, have a vested interest in always offering a competitive solution that differentiates them from other service providers and keeps customers happy. For example, they are more likely to seek to bundle voice with IM/presence and pitch it as a new, value-added capability to end users, whereas the latter are likley to take much longer before they invest in a premises-based integration. I hope this makes sense.

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