VoIP: Build or buy?

Sometimes it’s best to cede some control. At least that’s what early adopters of hosted VoIP services say.

Sometimes called IP Centrex, the hosted services are winning converts, especially as VoIP becomes the option of choice for today’s businesses. Proponents say the managed options — offered by incumbent carriers such as Verizon Communications Inc. and SBC Ameritech, and hosted service providers such as M5 Networks Inc. and GoBeam — provide all the pluses of VoIP without the hassles and costs associated with buying, installing and managing in-house IP PBXs.

Large organizations that have built their own VoIP networks say hosted services might be fine for smaller companies with generic voice applications, but they’re too ordinary to support the custom, converged applications large businesses require. Plus, many companies are leery of offloading the security and control of something as critical as their voice network to a service provider that doesn’t know their business.

But even these buyers admit there might be a role for a hybrid approach. The arrival of IP Centrex at least makes the hosted approach more viable, and everyone is in favor of having options.

Coldwell Banker Hunt Kennedy, a 300-person real estate brokerage with four offices in Manhattan, has turned to the hosted model. The company signed on for hosted VoIP services from IP Centrex provider M5. Coldwell found that not only was it less expensive to buy than build, but also the service provided a competitive advantage.

“It’s given us a huge advantage in the area of customer service,” says David Michonski, chairman and CEO. He cites several new VoIP calling features, including a “follow me” feature that forwards office calls to agents’ cell phones. “Our more technologically advanced competitors will certainly consider moving to a similar service — I can’t imagine them not doing it — but for now, we have the advantage. We’re eager to have our competitors stay in the Dark Ages.”

Michonski says he got that advantage on the cheap because M5 not only provides cutting-edge VoIP features, but it also delivers those services at a cost of about 23 per cent less than what Coldwell Banker could have done on its own.

“M5 takes a state-of-the-art phone system and then spreads the costs over the whole customer base. So overall, it’s better and cheaper than if we bought it and ran it ourselves. There’s no upfront investment in a PBX,” Michonski says. “Plus, whenever you buy something, you know it will be outdated in two years. But with the hosted service, it’s up to M5 to keep it upgraded and we don’t have to worry about it.”

Fewer headaches

Iain Grant, managing director for the Montreal, Que-based SeaBoard Group agrees hosted VoIP solutions help reduce costs by moving the maintenance and upkeep fees from the customer to the provider, thereby making VoIP more attractive to a wider range of users.

“By letting someone else do it, you don’t have to have your own staff on-site 24/7, you don’t have to put out the capital costs to get the service,” he adds. “By contrast, the advantage of havnig a PBX is that you get to do it all yourself. If you want to put additional services or give higher levels of services to your users, there is no additional monthly cost.”

Coldwell also doesn’t worry about managing or maintaining the system. “We have programmers here, so we could probably handle it,” he says. “But we’ve found M5 to be very responsive, and it’s better to let our staff focus more on enhancing our business capabilities rather than running the phone system.”

That’s the sweet spot for IP Centrex services, analysts say: mid-level organizations that want to take advantage of VoIP but might not have the cash, expertise or time to roll it out internally.

“For small and medium businesses, IP Centrex is the way to go,” says Robert Rosenberg, president of Insight Research, a communications consultancy. He says that unlike traditional Centrex, which was bounded by RBOC regions in the U.S. and characterized by the offloading of phone management and maintenance within single buildings, IP Centrex is available nationally and even internationally.

“It provides all kinds of economies of scale and new capabilities,” Rosenberg says. “As a managed service, they’ll take away your headaches and give you state-of-the-art software.”

Says M5 CEO Dan Hoffman: “In New York, we’ve lived through Sept. 11, and there was a huge blackout here a summer ago. But our customers were up because we have two weeks of back-up power and multiple networks in case one fails. That’s not something most companies can do or afford. So that’s driven many firms here to look to us for business continuity.”

The young IP Centrex market is small but expected to grow. Insight estimates the installed base of IP Centrex lines will grow from 1.3 million lines this year to 3.1 million lines in 2009, with the installed base of IP Centrex lines overtaking the installed base of legacy Centrex lines by year-end. Of course, that is a drop in the bucket compared with IP PBX systems, which are expected to grow from an installed base of 19.4 million lines this year to a whopping 56.2 million lines in 2009.

Not so fast

Still, many firms are reluctant to move to a hosted VoIP service, primarily because they can’t live with the security implications and want to control their own applications. Rosenberg says financial firms, the military and public safety organizations will continue to roll out their own VoIP networks. “Those types of organizations need more control and accountability than they can get with a service provider,” he says. This is especially true for converged networks, where virus-prone data is integrated with business-critical voice.

Service providers argue that security concerns are only a perceived negative, and that hosted services offer better security than roll-your-own networks. “Security is a major selling point because a service provider that is doing this across hundreds of enterprise customers can spend more on making sure they have a secure environment than a company who is doing it themselves,” says Denzil Samuels, vice-president and general manager of Avaya Inc.’s Service Provider Division, which provides VoIP equipment to several IP Centrex service providers. “These providers tend to have some of the best security software out there.”

Grant says security concerns around VoIP will come down to how concerned a company is with security overall. Banks and government departments will likely want to keep things in-house. But since many VoIP providers have built-in security features, the concern around security will probably not be too much of an issue for many.

Security struggle

Some companies that have built their own systems admit that security concerns are enough to make them consider the hosted option.

“Security is a constant battle for us,” says Al Losada, director of enterprise technology support services at Florida International University (FIU). Since 1999, FIU has maintained an in-house VoIP network based on Cisco switches, and today has more than 4,500 IP phones. When FIU embarked on its VoIP project, there were no alternatives.

To safeguard the installation, FIU has implemented a combination of virtual LANs and strictly adheres to Cisco’s security guidelines. Even when the school’s data network was brought to its knees by the Slammer worm, the VoIP network kept running. “We put a lot of resources into security and constantly manage that,” Losada says. “If a service provider could alleviate that headache, it would be a huge benefit.”

But he’s leery of completely trusting the network to an outside firm. “Evaluating the details in how they manage all that would be very important to us,” he adds.

Hosted providers also boast that their services are easy to adopt because up-front costs are lower than with IP PBXs. While that might be true, some users can simply tie the VoIP upgrade to other projects, lessening the financial hit.

Consider FIU. Losada says the school was upgrading its network to accommodate new PeopleSoft applications and built VoIP in as part of that larger project. Although the voice side required a US$2.2 million investment, shoring up the data side of the infrastructure for the ERP applications required a US$6 million upgrade. “So the driving factor for upgrading the network was because of the requirements of the ERP implementation,” he says. “And we’ve been able to leverage that across all of our apps,” including voice. He says the VoIP network saves the university US$1.6 million per year.

Application control might be the single best argument for building vs. buying, Losada says. “We need to be in control of our own destiny and where we’re going. When you go with an outsourced model, you give up some control. We want flexibility in terms of where we deploy VoIP and the types of applications we want to have. We’re a research institution with unique requirements that a service provider may not be able to give us.”

Because hosted service providers have to support a range of companies, their applications menu tends to be plain vanilla.

M5’s Hoffman agrees that the more customization and control an organization requires of its VoIP implementation, the less hosted services fit. “If you require a very high level of integration with your specific systems or a lot of customization, then it’s much more sensible to keep it yourself,” he says. Avaya’s Samuels concedes that some service providers might not be up to the task of handling complex VoIP applications, but says his firm is working to change that. “Today, the service providers are all offering similar apps,” he says. “But we believe the true value starts to come when you offer differentiated applications, so we’re helping service providers develop apps for given verticals (such as insurance and the hospitality industry).”

— with files from Tom Venetis

Cummings is a freelancer in North Andover, Mass. She can be reached at [email protected].

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