Dave Michels
Dave Michels is a Principal Analyst at TalkingPointz. His unique perspective on unified communications comes from a career involving telecommunications...
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Dave Michels | July 14, 2013 |


The Pitfalls of TCO

The Pitfalls of TCO The cloud isn't going away, nor is it for suckers either. The TCO issue is more complex than many calculations acknowledge.

The cloud isn't going away, nor is it for suckers either. The TCO issue is more complex than many calculations acknowledge.

No Jitter recently posted Total Cost of Ownership in 2013, which shares the results of a cloud and premises-based UC RFP. The study concluded that cloud-based communications have an overall higher total cost of ownership than that of premises-based options. The conclusion is dubious based on the rapid growth of cloud services.

I am sure Brent, Dave, and Marty followed a meticulous process, and their conclusions are no doubt accurate based on the question they attempted to answer. My position is that they answered the wrong question. TCO comparisons are inherently difficult because of the required underlying assumptions.

Normalizing assumptions between two competitive solutions is always difficult, but even more so among different deployment models. Not long ago, No Jitter found itself in a TCO debate over premises-based solutions from Lync and Cisco. The core problem was that the direct and indirect costs of Lync vary wildly based on a site's overall Microsoft commitment and investment, resulting in multiple (correct) TCO conclusions.

Consider the TCO question when it comes to something as simple as buying or leasing a car. The key assumption that drives TCO is the term of the lease. Other key assumptions that impact the outcome include estimated resale value, estimated mileage per year, depreciation rate, and so on. The buyer tailors these assumptions to determine the correct path for their particular situation. Two buyers looking at the same vehicles may come to perfectly sound different conclusions.

The authors of the TCO study made a number of assumptions about enterprise UC requirements, and then attempted to normalize the bids for fair comparison. They state, "The three RFP authors worked together to create a normalized and consistent TCO comparison for all 23 of these solutions." Direct comparisons are difficult without normalizing the level of functionality and services quoted.

Unified Communications deployments are typically highly customized, and organizations select exactly what they need, integrated into their specific framework, and aligned with their organizational objectives. For example, the authors stated that "if a solution did not include audio or web conferencing, we have added in reasonable costs for procuring these capabilities separately." Inherent in that statement is the assumption that the customer wants audio and web conferencing as part of their core UC solution--two services that many organizations use a la carte today.

It also assumes "reasonable costs for procuring these capabilities separately." How organizations conference varies significantly. Some are mostly internally focused, putting more emphasis on the equipment; others rely on more distributed uses, which puts additional emphasis on access; and some are video-centric. An organization that regularly uses video with external organizations may find itself a prime candidate for a cloud service like Vidtel or Blue Jeans--regardless of the UC model deployed.

"We have also included reasonable estimates for staffing costs." That's noble, but staffing costs are only a part of the human equation. There's a shortage of both Cisco and Microsoft UC engineers, so additional costs include position search, time to fill, turnover and retention costs, and ongoing certifications.

One of the big drivers of cloud adoption is to reduce the burden of UC on management. In addition to the obvious issues of delivering core services, management attention also goes toward staff management, resource management (cube/office, desk, phone, software licenses, computer, coffee, printers, mobile, etc.), succession planning, vacation/sick day coverage, politics, and so on.

With premises-based implementations also come issues like border security. To mobile-enable staff often requires specialized equipment, licenses, and additional bandwidth. Two colleagues communicating from remote locations over mobile clients requires two connection paths to the server--a duplication that is eliminated with UCaaS.

UCaaS may or may not make sense for a given organization, but looking at normalized TCO based on someone else's assumptions can be misleading. UC implementations should be tailored to specific requirements, and then compared. Cloud-based UC services may offer benefits in numerous situations including:

Financial: Most UCaaS solutions are financed as an operating expense. Many organizations prefer this over capital investments. Kevin Kennedy, CEO of Avaya, recently stated that many organizations are even willing to pay more for OpEx models.

Outsourcing: UCaaS is a form of outsourcing. Organizations often favor outsourcing services in areas that do not provide competitive differentiation. If UC is deemed as a cost of doing business, than outsourcing is a viable option.

Applications: In some cases, hosted UCaaS providers offer highly specialized applications more cost-effectively than can a premises solution. A common example is advanced real-time analytics, which can be cost prohibitive for a single department or call center.

Seasonality: Some business are seasonal, and most UCaaS providers allow an organization to expand and shrink capacity, rather than acquire dedicated capacity in their equipment and network access. This could also play into a firm that is very active with mergers and acquisitions.

DR: UCaaS providers often provide a reasonable level of disaster recovery and HA services built into their offer (though you should never assume this without it being confirmed).

Agility: UCaaS providers can often move faster than premises-based alternatives. This includes upgrades, system expansion, new applications, new interfaces, etc.

CEBP (Communications-Enabled Business Processes): UC systems are increasingly interconnected to other systems such as CRM, ERP, and email. Increasingly, these services are (also) moving to the cloud, and UCaaS may offer an interconnectivity advantage.

According to IDC, by the end of 2016, more than a quarter of all data center capacity will be owned by service providers. Synergy Research concluded UCaaS grew 29% in 2012, and that UCaaS and hosted business VoIP will continue eating into the installed base of corporate users. Cisco's Global Cloud Index predicts that by 2015 nearly two-thirds of all workloads will be processed in the cloud, and that cloud IP traffic will grow at a CAGR of 44% over 2011-2016. Is all this demand stemming from organizations wanting a higher TCO?

The cloud isn't going away, nor is it for suckers either. Over the past few years, the feature/functionality gap between premises and cloud based UC was effectively eliminated. The number of pure cloud implementations is generally increasing 20-30 percent each year. The premises-based leaders including Cisco, Microsoft, Avaya, NEC, Mitel, Interactive Intelligence, ShoreTel, Siemens Enterprise, Digium, and Alcatel-Lucent are all investing heavily in cloud-based solutions.

Clearly there is more to the story than this specific RFP suggests.

Dave Michels is a Contributing Editor and analyst at TalkingPointz

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