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UCaaS Providers Move Upmarket – Check Your TCO

Many industry watchers, including myself, have seen UC-as-a-Service (UCaaS) providers primarily as serving small businesses. The UCaaS providers' own data have proven that out. For example, 8x8, which is growing revenues at over 25% per year, earned $48 million in revenues this most recent quarter from 40,000 customers, according to quarterly and annual reports. This is $1,200 per customer per quarter, or $400 per customer per month. Assuming some discounts, the average 8x8 customer has around 20 users.


But, and here's the big surprise, almost all of the Leaders and some of the Challengers and Visionaries in the August 2014 Gartner Magic Quadrant for UCaaS are moving upmarket. The Magic Quadrant Leaders include 8x8, ThinkingPhones Networks, Orange Business Services, West, and HP. Seven other UCaaS providers are poised on the border of the Leaders quadrant, including RingCentral, Mitel, Microsoft, Google, Avanade, Verizon, and ShoreTel.

In addition, other companies are entering the UCaaS market, including some major resellers that see that value-added opportunities exist almost as much with a cloud IP PBX as with an on-premises system.

Some have asked, "Why are these companies going upmarket?" First, of course, the upmarket opportunity is seen as a strategy to accelerate growth and to leverage their investments, as explained below. Second is the same classic answer Sir Edmund Hillary gave to the New York Times in 1924 when asked why he climbed Mount Everest: "Because it's there." For whatever reason, the trek is on to scale the market upward.

The foundations for these moves are pretty clear. In the past five years, UCaaS providers have been:

Based on all of this, it sure seems that it's time for an upmarket surge in UCaaS. A lot of attention and energy will be added to this surge by Microsoft's Skype for Business Preview program and pending general availability of Skype for Business Voice services from the Office 365 cloud, including telephony and, likely, a network of local implementation partners (see #3 above).

What should mid-market and larger enterprises be doing about this? First, check your total cost of ownership (TCO) for your on-premises solutions. If you are careful to include all of your costs for equipment and license maintenance, operational staff, help desk staff, field installation costs, voice and network carrier charges, and vendor billing management, you may be surprised at the TCO amount. You may even find that the UCaaS per-user pricing is lower than the sustaining costs alone, justifying a move to the cloud immediately rather than waiting for the normal system replacement cycle.

This will be especially true if your organization is highly dispersed -- i.e., with many local offices, stores, schools, service centers, or similar sites at the edge of your business. For years, UCaaS providers have been growing by serving these small locations, one at a time. Now, there's every reason to believe they can serve dozens or hundreds of the small sites that many organizations struggle to support with traditional on-premises small IP PBX or key telephone systems.

Remember that this need not be an all-or-nothing choice. Perhaps UCaaS is best for the edge of your operations, while traditional on-premises systems are still best for functions such as contact centers.

And, yes, there may be many other benefits, such as getting some UC features that aren't already included in your current on-premises systems, without a major upgrade.

Based on these trends, it's a good time to do this review. The timing may be just right as the UCaaS providers move upmarket.