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Total Cost of Ownership (TCO) in 2013

Almost every enterprise needs to be up to date on the trends in vendor offers, vendor pricing, and total cost of ownership. Even if your enterprise is not planning on buying a new system this year, the facts and the trends are important for budgetary and strategic planning and to provide a reasonability check on vendor recommendations. Having accurate and current information can help keep plans on track and can save a lot of time.

To meet this need, Enterprise Connect 2013 again offered an in-depth look at the five-year total cost of ownership for 14 leading vendors' solutions. In three parallel mock RFPs, these vendors provided 23 complete RFP responses for three different IP-PBX and UC implementations: Premise-based, Cloud-based, and Overlay (see sidebar, next page).

To make this comparison possible, each vendor committed significant resources to provide responses to the mock RFPs created by David Stein of Stein Technology Consulting Group (Premises-Based), Brent Kelly of Constellation Research (Cloud-Based), and Marty Parker of UniComm Consulting and UC Strategies (Overlay). The RFPs were all based on the same hypothetical enterprise with 2,000 UC seats deployed across a headquarters location and two branch offices. A 75-person call center was also included in the Premises-Based and Cloud-Based IP-PBX RFPs.

The responding vendors, by option, are shown in the table below: 

Table 1. Vendor companies responding to one or more of the three RFP options.

As illustrated in the table above, each vendor could respond to more than one deployment option if it had a commercially available solution for that option. For example, Avaya, NEC, and Siemens responded to all three RFPs (Cisco was represented in all three but Verizon submitted the cloud-based solution response utilizing Cisco gear). Alcatel-Lucent responded to the on-premises and overlay RFPs while ShoreTel responded to the on-premises and the cloud RFPs.

Enterprise organizations often face challenges in trying to make apples-to-apples comparisons between vendors' solutions. With the advent of cloud and overlay communications offerings, the complexity only increases when trying to make fair comparisons between vendors and deployment options. Under Brent Kelly's leadership, the three RFP authors worked together to create a normalized and consistent TCO comparison for all 23 of these solutions.

For example, if a solution did not include audio or web conferencing, we have added in reasonable costs for procuring these capabilities separately. Many of the hosted options include unlimited long distance as part of the offering, so we added reasonable SIP trunking and toll charges to each solution that did not include them. Power and rack space costs were added to the Premise-Based and Overlay options, since those are included in the cost of the Cloud-based options.

We have also included reasonable estimates for staffing costs given that there is a clear difference between the human resources required in the organization's IT team to operate and maintain on-premises solutions versus hosted offerings. Finally, we have added PBX phase-out costs if the PBX is to be completely replaced as in the cloud and on-premises options; likewise we took into account existing PBX support costs for ongoing PBX operations in parallel with the overlay UC solution.

The following figure shows the average costs for the nine on-premises offerings, the seven hosted solutions, and the seven overlay systems. Actual costs ranged from $1.85 million for the lowest TCO offering (an Overlay case) to $6.62 million for the most expensive solution (a Cloud-based case) over the five-year period covered in the RFP.

Figure 1. A plot showing the average cost for each of the three solution types.

As illustrated above, there are three distinct cost zones. The average cost for the Cloud-based option is always the highest on a year-by-year basis. The average cost for the Overlay option is always the lowest of the three options, while costs for the Premise-based offering track somewhat above the Overlay solutions.

The higher costs of the Cloud-based offerings likely reflect a number of factors. Of course, there is the value of the trade-off for the enterprise customer--between the capital investment and the costs and risks of owning and operating the platform, versus the predictable, lower-risk operating costs of a Cloud-based offer. This is similar to the trade-offs of buying vs. leasing a car.

Another factor is probably the market adoption cycle for these Cloud-based offers; providers of the Cloud-based offers of enterprise IP-PBX and UC platforms face significant start-up costs for technology, facilities, marketing and services, which are likely included in their current offer pricing.

A third factor may just be market timing, since the early entrants in an emerging market always seek a high return for their early initiative and risk. Our expectation is that the 5-year TCO difference between Cloud-based and Premises-based offers must narrow rapidly over the next few years if cloud communications offerings are to become broadly competitive with on-premises offerings.

Also, while the overlay options are less expensive over the TCO period, we do note the potential concern as to whether an Overlay solution will meet an organization's long term needs, or if it will evolve into a complete IP PBX and UC solution with adjusted TCO at some future date. However, even if future adjustments are required, the ability to make a major upgrade decision at a later date rather than in the current year may be of value to some organizations.

This same pattern of the relative TCO for the 3 different options was visible when comparing responses based on the same vendor platform for two or more of the options, as shown in the illustration below.

Figure 2. Comparing the "same vendor" costs for multiple solution responses.

It is also informative to compare how the different vendor offerings stack up one against another in terms of capabilities. We used a capability matrix based on the three RFPs, to compare the vendor capability responses in each of the three options. The capabilities matrix for the Cloud-based offering is shown below:

Table 2. Functionality comparison for vendors responding to the cloud-based UC services RFP.

An overview of the report containing the executive summary and the table of contents is available online (click here). Alternatively, any of the authors may be contacted at their e-mail address below to obtain this overview version or to discuss the content of the report. The complete report is available for purchase; please contact the authors for more information. We know of no other document with such comprehensive TCO data available in our market.

In addition, anyone wishing to obtain a copy of the original RFP used for this study may contact any of the authors.

Authors' Acknowledgement to Participating Vendors
The authors express their sincere appreciation to the 14 vendors who invested time and energy into preparing the RFP responses which serve as the foundation for this report. Without their efforts, this report would have been impossible to prepare. We applaud their vision and their willingness to explore multiple options versus promoting and protecting one traditional approach. Universally, these vendors have expressed that this multi-option RFP exercise has been valuable to them both as feedback on the positioning of their offerings and to present their capabilities to the large and important Enterprise Connect and NoJitter audience.

David Stein is Principal, Stein Technology Consulting Group. He can be reached at [email protected], Brent Kelly, Ph.D. is President and Principal Analyst, KelCor, Inc. He can be reached at [email protected]. Marty Parker is Principal, Unicom Consulting, LLC. He can be reached at [email protected].

14 Vendors, 23 Solutions

Option 1--Premises-Based (Private Cloud). Install a new IP-PBX, including UC functions, on the enterprise premises.

Option 2--Cloud-Based or Fully Hosted. License and deploy PBX and UC functionality via a "Cloud" or hosted option, that is, any system servers and software will be hosted and run at the provider's site with only user devices and necessary gateways and similar equipment on the enterprise premises.

Option 3--Overlay or Side-by-Side. Install only the new UC functionality so that it will co-exist Side-by-Side with the enterprise's existing TDM-based or IP-based PBX(s). Although overlay deployments can be implemented either on-premises or in the cloud, this report covers only the on-premises option.