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IP Telephony Costs Vary Widely Among Vendors; Several Factors to Consider Before Decisions

By Robin Gareiss Executive Vice President & Founder, Nemertes Research

Executive Summary IP telephony continues to be an area of growth for the majority of companies.

Though 96% of companies have IP telephony implemented to some extent (including pilots), only 28% have completed their implementations to all endpoints. As IT staffs evaluate their second and third upgrades for IP telephony, while expanding the technology to more endpoints, they also evaluate the overall landscape to determine whether it’s time to shift to a new provider. Part of that evaluation includes a full understanding of the costs associated with IP telephony. Though most vendors ultimately are competitive with capital costs, the actual implementation and operational costs vary widely by vendor. What’s more, virtualization, redundancy, and extension of IP telephony to Unified Communications (UC) features also add to the vendor and cost decisions.

This report details the costs of IP telephony and UC, based on research conducted with more than 200 companies. NEC provides the lowest first-‐year costs, and Microsoft the highest, when factoring capital, implementation, and operational costs.

The Methodology Nemertes has regularly benchmarked IP telephony and UC cost data for eight

years. In doing so, we interview and electronically survey IT decision makers or influencers responsible for these technologies. We gather detailed cost data on capital, implementation, and operational costs and correlate the data by vendor and by size of rollout to gain insight into the real-‐world costs of these (and other) technologies.

This year, we gathered enough IP telephony data on the following vendors to count them individually: Alcatel-‐Lucent, Avaya, Cisco, Microsoft, NEC, ShoreTel, and Siemens.

We gathered valid data from 211 companies. Nemertes senior analysts conducted detailed phone interviews with IT professionals representing 31 end-‐user organizations across a range of sizes and industries. (For a detailed methodology,


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please read the “Methodology” section at the end of this report.) We used that information to establish high and low parameters for each of the costs we analyzed. We then conducted online surveys of several hundred IT professionals and used stringent data validation and integrity checks, resulting in 180 valid survey responses.

We asked IT professionals numerous questions to ultimately arrive at the following data points—implementing the formulas noted to calculate a cost per endpoint (i.e., hardphone, conferencing bridge, softphone, etc.) The data includes the following:

• Capital: Includes PBX, endpoint devices and licenses, servers, other hardware required for IPT. For UC, it includes any hardware, servers, bridges, and licenses. In some cases, bundled licenses for IP telephony include certain UC apps, but we separated the two in most cases when there was a distinguishable charge for those additional, bundled apps.

o The formula we use is (total capital costs / number of endpoints) • Implementation: Includes staff time and third-‐party consultants and

integrators o The formula we use is (staff time * loaded hourly rate)+third-‐party

costs / number of endpoints • Operational: Includes staff time (full-‐time equivalents), equipment

maintenance, third-‐party managed services, training and certification o The formula we use is ((Number of FTEs * average annual loaded

salary) +(equipment maintenance + managed services + training/certification)) / number of endpoints

Nemertes evaluated both mean and median for all data, but because of the drastic variations in rollout sizes, we use median to provide a more accurate set of cost data for IP telephony. For UC, we used mean because there was not a large delta between mean and median, reflecting relatively consistent rollout sizes. By using mean for IPT, a few very large or very small rollouts affected the data as we further segmented it into smaller samples (either per vendor, or per vendor by size, etc.)

For IP telephony, we gathered data on rollouts ranging from four endpoints up to 175,000. For UC, the rollout sizes and data were more consistent, allowing us to use means vs. medians.

Moving forward, our research documents significant growth in all areas of endpoints: 78.9% of companies plan to increase their IP telephony endpoints moving into 2014 by a median of 25%, so the overall rollout sizes will grow as companies evaluate their options. (Please see Figure 1.) In fact, 71% of companies plan to increase their softphone deployments by a median of 100% in 2014, driven primarily for telework support (55.3%) and cost savings (28.9%). And, 80% of companies plan to increase their number of IPT mobile clients by a median of 130%, driven by telework support (42.9%) and user demand (21.9%).


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Figure 1: IP Telephony Endpoints on the Rise

Key Findings In reviewing overall cost data, all companies, all rollout sizes, NEC has the

lowest cost per-‐end unit, at $830. NEC is buoyed by the lowest initial capital costs of all vendors and relatively low ongoing operational costs (at about 62.3% of the median). Microsoft has the highest first-‐year costs, driven heavily by high operational costs (more than double the median) resulting from steep learning curves and integration issues. The data for Microsoft includes both Office Communications Server (OCS) and Lync implementations. What’s startling is the difference between the lowest and highest first-‐year costs: Microsoft costs three times NEC in the first year alone. (Please see Figure 2.)

For specific cost elements, notable findings include the following: ShoreTel posts the lowest implementation and operational costs, though overall first-‐year costs are second lowest behind NEC. Avaya, which lands squarely in the middle for cost per end unit, has the highest capital costs—though operational costs are the second lowest, which offsets the capital for the first-‐year (and more relevantly, the subsequent year) costs. Siemens has the highest implementation costs, and coupled with its high operational costs, posts the second-‐highest first-‐year costs. (The data for Siemens includes implementations of both the HiPath 3000, 4000 and OpenScape with large numbers of users. We believe this indicates that some enterprises invested in large scale TDM to IP migrations that may not yet be complete. Therefore, the cost per unit of the IP endpoints is inflated.) Both Cisco and Alcatel-‐Lucent’s costs are mid-‐range, with Cisco third from the lowest, and Alcatel-‐Lucent third from the highest costs.

Historically, NEC and ShoreTel have posted the lowest first-‐year costs, which their customers say is because of fair capital costs, easy-‐to-‐operate systems that are


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not over-‐complicated as some of their competitors are, and built-‐in integration. Not surprisingly, NEC’s first-‐year costs are lowest for the small and midsize market, as well.

Figure 2: Overall IP Telephony Costs

Analysis of Findings As stated, IP telephony capital costs have become fairly stable. Though there is

a wide swing between the lowest cost (NEC at $292) and the highest cost (Avaya at $727), most companies are around the $500 per-‐endpoint mark. Likewise, implementation costs have a wide swing ($54 for ShoreTel and $146 for Siemens), but the rest are about $70-‐$90. And both capital and implementation are one-‐time costs—important for that first year, but declining in relevance as companies enter full deployment.

Operational costs, however, stay with a deployment and can affect how affordable deployments are. The per-‐endpoint swing in opex is wide, from $305 for ShoreTel to $1,912 for Microsoft. Keep in mind, also, that the opex costs are per endpoint, so the total costs will be higher for larger rollouts.

As stated, operational costs include staff time, equipment maintenance costs, third-‐party managed services, training and certification costs. We gathered four types of operational data:

o Internal staff – Includes the total loaded cost of internal staff (measured as

full-‐time equivalents) divided by the number of endpoints o Annual equipment maintenance – Includes the amount the organization

pays to the vendor or VAR for annual maintenance of equipment o Third-‐party services – Includes any third-‐party partners, systems

integrators, or consultants who help with ongoing operations of the system o Training – Includes training costs for IT staff only (not end users)

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Figure 3: Operational Costs

Figure 3 shows the specific operational costs by vendor, and the overall medians. Again, this chart is cost per end unit, so large rollouts leverage economies of scale. Consequently, the cost per unit may be lower but the total costs higher.

For internal staff, Avaya has the lowest cost per end unit at $176.44, but it also has a lot of very large rollouts. Microsoft has the highest cost per end unit at $1,411.76 (more than three times the median), with many midsize rollouts, driven largely by Lync learning curve and integration challenges.

Annual equipment maintenance reflects how much companies are paying, typically to their VARs, for their maintenance program. These programs can vary based on the level of service required. We did not drill down into the type of service plan, but rather, wanted to research how much IT leaders felt they needed to spend to operate efficiently. Lower costs indicate the internal staff can operate the equipment without much VAR assistance required, the equipment is reliable so they do not need a four-‐hour resolution window, and the manufacturer is more reasonable with its software update costs. NEC customers have the lowest cost for annual maintenance at only $18.79 per end unit, and Alcatel-‐Lucent has the highest at $210.29.

Third-‐party costs include the use of partners to help with systems operation or integration. Not surprisingly, Microsoft posted the highest costs ($86.32) here because customers say they often have no choice but to turn to third-‐party experts to deal with integration issues. Avaya has the lowest costs ($25), though NEC customers in our study said they did not require any third-‐party assistance to operate their system.

Training costs tend to be the lowest of all operational costs. Again, Microsoft is the highest at $81.66 per IT staff member—not surprising given Lync’s newness in the market and the steep learning curve. NEC is the lowest, at only $4.36 per IT staff member. Overall, NEC customers tend to rely heavily on internal staff (internal staff costs are $434.26, slightly higher than median), but they make up for it in the three other areas of operational costs: maintenance, third parties, and training.

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Unified Communications Analysis Most IT leaders say they use UC, but their definition of UC varies considerably.

Some view UC as simply instant messaging and presence, while others see it as unified messaging. Nemertes has gathered data on individual applications (such as instant messaging, presence, and unified messaging), as well as “integrated” UC, which is defined as using a single vendor to provide multiple (but not necessarily all) UC applications through a common user interface. That definition presents a challenge for gathering cost data, though, because organizations use different combinations of UC applications. One may integrate IM, presence, and Web conferencing, while another may integrate unified messaging, IM and presence. Likewise, different vendors provide different combinations.

Nemertes was unable to gather extensive integrated UC cost data, segmented by the same vendors it did for IP telephony, which has been around longer and thus has more data points. Overall average per-‐endpoint costs for integrated UC are:

• Capital: $187.52 • Implementation: $127.48 • Operational: $206.85

UC costs are highly relevant to IP telephony costs because organizations often

view UC as an extension of IP telephony and use the same vendor for all or most apps. While evaluating IP telephony, it is crucial to also understand the vendors’ UC costs. Some of the vendors provide apps as part of the IP telephony license; others provide discounts to existing IP telephony customers. Until UC is more mature, the implementation and operational figures noted are good benchmarks to use when calculating total IP telephony and UC costs combined.

Another area of note is mobility, which continues to grow rapidly and become integrated into enterprise and communications applications. According to Nemertes 2013-‐14 Communications & Computing Benchmark, the percentage of workers using only wireless connectivity (meaning, they never plug into a wall jack) will double from 2013 to 2015. As a result, IP telephony and UC vendors must increasingly extend features and capabilities to a variety of mobile devices (smartphones, tablets, wearable devices, etc.).

Although there was variability in cost among the vendors in other areas of IP telephony and UC, there was very little difference in costs for mobile-‐enabled features. Vendors typically charge $10 for voice extension to mobile devices, and between $30 and $35 for other features including access to web conferencing and video. For those who desire a full suite of mobile-‐enabled features, vendors also offer bundled packages. (Please see Figure 4.)


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Figure 4: Mobile-‐Enabled Features

Additional Cost Considerations Other areas for IP telephony and UC cost considerations include the use of

virtual servers and the decision on whether to make all systems redundant. Nearly one-‐third of the organizations in this study use server virtualization for

their IPT and/or UC deployments. (Please see Figure 5.) There are several benefits: Reduced costs by decreasing the number of servers (instead of requiring one for each application); less rack space in the data center; lower energy costs, and the ability to better centralize UC applications for the entire enterprise. “We are currently planning to virtualize our UC servers to reduce costs, and increase efficiencies. All of our technology groups have been given an edict to try and virtualize as many applications as possible,” says the senior executive vice president of a large financial organization.

IT leaders exploring IP telephony and UC vendors should have a clear understanding of their ability to provide their products in a virtualized environment. Even if organizations don’t have immediate plans to virtualize IP telephony and UC, chances are they will at some point in the near future, so the vendors’ current strategy and roadmaps are important.

$10

$30

$33 $35

$0

$5

$10

$15

$20

$25

$30

$35

$40

Click-to-call Single number reach IM-presence Audio, video, Web

Mobile-Enabled Features, Average Licensing Costs


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Figure 5: Server Virtualization Adoption

Another factor for consideration in any IP telephony vendor decision is redundancy. The spectrum ranges from no redundancy at all to full redundancy, and most organizations fall somewhere in between—implementing redundancy in key locations, for key apps, or for key people. When organizations do implement redundant systems, they do not see a doubling of costs. But they do see some increase. Figure 6 shows the average percentage cost increase companies report when they add redundancy. Capital costs increase the most (24.1%) by doubling up on equipment. Implementation (22.7%) and operational costs (21.6%) increase at a slightly lower percentage, but the operational costs perpetuate each year.

Yes 30%

No 70%

Are You Using Virtual Servers for VOIP/UC?


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Figure 6: Cost Increases for Redundant IPT/UC

Conclusions and Recommendations

IP telephony continues to be a growth area for the vast majority of companies. As such, IT leaders are evaluating vendor options for what’s now their second or third round of IP telephony deployments—each with an increasing number of endpoints. Though technology, feature-‐functionality, customer service, and experience are all crucial decision points, real-‐world cost data is a paramount concern when determining which vendor to select.

Nemertes recommends organizations use the figures contained in this report as solid benchmarks for understanding what they will pay for an IP telephony or UC deployment. Capital costs are highly negotiable, and vendors or VARs often will reduce their prices to get the business. But operational and implementation costs are not as variable, so leveraging the power of real-‐world experience from other organizations is golden to understanding true costs.

We recommend the following: Build a business case – Use the data here to help fill in the gaps for any cost

model. The data is real, and compelling. Having a business case not only documents costs and savings, it hedges against losing funding for the project when money becomes tight.

Demand referrals, and call them – Once organizations have arrived at a short list of two to three vendors, require those vendors to provide references—and call them. Drill down into what they paid for the capital and implementation, but also the ongoing operational costs. Tap into peer networks and ask vendors for references.

Don’t underestimate – Most organizations underestimate how much time a rollout will take. In fact, they typically take two to three times longer than

24.10%

22.70%

21.60%

20.00%

20.50%

21.00%

21.50%

22.00%

22.50%

23.00%

23.50%

24.00%

24.50%

Capital Implementation Operational

Cost Increases for Redundant IPT/UC


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they estimated (and that translates into higher costs), depending on the vendor and the level of simplicity in the product and in integration with other products.

Evaluate operational costs – Operational costs vary widely from vendor to vendor. Consider the four cost areas evaluated here: internal staff, third-‐party management, system maintenance, and training/certification costs. Investigate vendors individually. For example, Microsoft’s cost of entry, as part of an existing enterprise license, may be low, but operational costs are higher than other vendors and can create an unexpectedly high total cost of ownership. Companies with existing staff expertise with a specific vendor should not underestimate the ongoing operational savings that can result. Vendors with a midrange to low median cost in the areas covered generally work out to the best three-‐ to five-‐year cost of ownership.


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UC Cost Study Methodology For this Nemertes UC Cost Study Research Project, analysts conducted in-‐depth

phone interviews, ranging in duration from 30 minutes to 1.25 hours, with 31 IT professionals. We also conducted several short follow-‐up calls or exchanged emails to clarify and augment data. During the interviews, each analyst asked a pre-‐planned list of questions to ensure we asked the questions consistently. Many questions are open-‐ended, providing an opportunity for our participants to provide their own unbiased insight and observations.

After completing the interviews, we established reasonable ranges for each category of costs. We then sent email invitations to a prequalified list of IT professionals. The email contained a link to an electronic survey with a subset of the cost data questions asked during the interviews. We analyzed the survey data, eliminating respondents whose cost entries fell outside a “reasonable” range established by the interviews. We received 180 valid responses. To ensure the report is relevant to the largest possible group of readers, we deliberately sought to reach the broadest possible range of industries and company sizes.

Do determine what participants were including in their UC initiatives, we asked open-‐ended questions about unified communications usage, plans and goals, and costs. The specific technologies included IP telephony, instant messaging, presence, desktop video conferencing, Web conferencing, room-‐based video conferencing, IP audio conferencing, and IP contact center. We also asked demographic questions, including number of employees, annual revenue, job titles, and IT budgets. As a result, individual interviews and surveys varied considerably in the number of questions answered and in the number of subject areas addressed, as well as in the degree of insight provided for each UC topic covered, based on the interest and expertise of the participants involved.

For the interviews and surveys, Nemertes drew participants from its database of IT professionals, its non-‐vendor client base, and to a lesser extent, from publicly available lists of IT executives and published case studies.

Nemertes guarantees confidentiality and anonymity for participants and their companies. Any reports or slides generated from this data include quotations from real individuals, identified only by title and/or industry affiliation. Please note these quotes are verbatim, with no changes in content or wording, except to correct grammar.

Timeframe We conducted interviews and surveys with UC Cost study participants from IT

organizations between July 2012 and September 2012. We asked participants to provide us with insight into ongoing unified communications initiatives and those planned for the next two years.


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Participants In selecting individual participants, we asked to speak with the individual or

individuals within IT most closely associated with decision-‐making, operations and overall knowledge in the area of VOIP/UC. For example, to discuss communications technologies we typically speak with VPs, directors, and managers in network management, telecom, enterprise architecture, systems integration, collaborative applications, and unified communications, as well as CIOs and CTOs.

By Title In this study, Nemertes secured interviews with a wide range of decision

makers/influencers and their corresponding viewpoints. Managers, directors (of IT, telecom, security and other areas), and architects/senior architects represent the bulk of research participants (53.8%) Board members and senior management (CIOs, CTOs, CFOs, CSO/CISOs, senior/executive VPs and managing directors) represent 40.2% of participants. The remaining 6.1% of participants are engineers (including system administrators), architects and consultants.

Figure 7: Participants by IT Executive Title (The figures add to 100.1% because we round to the tenth rather than the hundredth.)

By Industry As noted, we sought to include the broadest possible range of industries in our

research. Professional services (broadly covering all professional services sub-‐areas, including engineering, accounting, law firms, etc.), manufacturing, and healthcare top the list of industries represented, accounting for 24.6%, 22.3% and 8.5% of participants, respectively. We also spoke to relatively high percentages in financial services (8.1%), education (6.6%), and retail (6.2%).


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Figure 8: Participants by Industry

By Size: Number of Employees We seek insight from organizations large and small. For benchmark analysis,

we characterize companies as being small, midsize, and large by several measures, including employee size. Our size characterization cased on employee size is as follows:

• Small: 0-‐250 • Midsize: 251-‐2500 • Large: >2500 Slightly less than one-‐quarter (22.4%) of the participating companies are

small. The largest group represented is midsize companies, with 45.2% of respondents. Large companies make up almost one-‐third of respondents: 32.4% in total.

Although this differs from the “traditional” business demographics, in which small businesses make up the largest percentage of total businesses, we do talk to many innovative small and large organizations, so a solid coverage of all types of companies is imperative.


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Figure 9: Participant Company Size by Number of Employees

By Size: Locations Another metric we use for size is number of locations. We characterize the

number of locations as follows: • Small = 50 locations or less • Midsize = 51 to 250 locations • Large = >250 locations

UC Cost study data demonstrates that the largest grouping of companies based on number of locations is “small,” at 85.2%, followed by large at 9.0% and midsize at 5.7%.


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Figure 10: Participant Company Size by Locations

By IT Culture We asked interview participants to describe the IT culture, or how the

business views IT. Is IT a strategic differentiator, and how rapidly do they deploy new technologies? More than half (52.1%) say their IT culture is highly strategic (bleeding edge), 6.6% say aggressive, 24% say moderate, and 17.4% conservative.

Figure 11: IT Culture

For Further Information Nemertes has thousands of charts, correlation points and data analysis for this

and numerous other topics. Though Nemertes segments data using the cut points


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noted in this Methodology statement, we can cut and correlate data using any numbers (so, for example, we can segment or correlate data using only companies with fewer than 100 employees, or only in the financial-‐services industry).

Nemertes uses this research data in hundreds of more detailed papers, presentations, strategy sessions and Webcasts. We also rely on the findings to assist in consulting projects, as well as conversations with our clients about various technology and business initiatives.

If you have further questions about our methodology, please contact [email protected]. Clients, please contact client-‐[email protected] for any assistance. Those interested in engaging with Nemertes, please contact [email protected].

About Nemertes Research: Nemertes Research is a research-‐advisory and strategic-‐consulting firm that specializes in analyzing and quantifying the business value of emerging technologies. You can learn more about Nemertes Research at our Website, www.nemertes.com, or contact us directly at [email protected].

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