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Communications on the Premises or in the Cloud: How do you Make the Choice?

As promised, I continue to share my thoughts on the dichotomy of hosted/cloud communications and premises-based infrastructure. Eventually, I will have to deal with the differentiation (if any) between cloud and hosted, but for now, I am not yet sure where to draw the line.  Although some tend to believe that these are two completely different animals, I believe the two have one major element in common: businesses adopting hosted or cloud communications should be willing to outsource all or most of their communications infrastructure and infrastructure management from a third party. Therefore, in discussing the potential for cloud communications, it seems imperative that we look at how the market has evolved over the past decade and what have been some of the factors determining customers’ choice for hosted or premises-based communications.

Historically, businesses around the world have favored premises-based implementations. The U.S. and Canada boast some of the highest adoption rates for hosted telephony, and yet the segment represents around 15 percent of installed business lines in those markets. Several factors have contributed to this uneven distribution and will continue to play a role in the future; the move to IP telephony and UC will, however, change the nature of these factors and their impact on communications investment decisions.

a) Supply-Side Factors

Functionality: Historically, hosted services have offered more limited functionality compared with premises-based solutions. Although TDM Centrex supports most key PBX features, such as abbreviated dialing, call forward, call park, call transfer, DID, DOD and music-on-hold, businesses are frequently drawn to PBXs for their superior functionality. With the advent of hosted IP telephony, however, more comprehensive service bundles (including messaging, presence, conferencing and other applications) are making the hosted offerings more appealing than alternative premises-based solutions.

Contract Terms: Centrex and other hosted services deliver greater flexibility, especially in terms of capacity adjustments at times of downsizing or rapid growth. Centrex contracts typically last two years, allowing customers to more frequently change solutions or providers based on new requirements.

Marketing and Awareness: The advent of IP telephony has further boosted PBX penetration as PBX vendors have been faster to market with advanced IP telephony platforms and have marketed them more aggressively than hosted services providers. Incumbent service providers have been slow to upgrade their communications infrastructure to VoIP and have only cautiously pursued IP communications offerings for fear of cannibalizing their existing Centrex and other legacy services. Service providers are, however, becoming more confident in marketing their next-generation services as they ramp up their cloud architectures and IP communications capabilities.

b) Demand-Side Factors

Security: Historically, telecom managers have considered multi-tenant, outsourced platforms to be less secure than premises-based systems, and IP telephony has raised even more concerns in that area. As security technologies rapidly improve for hosted solutions, we expect this concern to dissipate.

Control: Similarly, concerns about control continue to favor PBX implementations, in spite of the fact that advanced, hosted IP telephony offerings provide in-house staff with greater control than traditional Centrex services. For example, graphical management interfaces allow IT/telecom managers to perform moves, adds, and changes (MACs) quickly and conveniently without having to contact the service provider or pay for a technician to visit the site. These interfaces also allow managers to configure some features and settings on the go, based on user needs.

Businesses also tend to believe that they have greater flexibility and control over features and capabilities with a premises-based solution, since they can purchase or develop those internally as the need arises. In reality, the increasing complexity of communications architectures favors an outsourced solution, since a service provider is motivated to more rapidly upgrade and enhance the service offering.

TCO Analysis: The most compelling factor in choosing hosted or premises-based communications is the total cost of ownership (TCO) for the two scenarios. Of course, TCO varies widely, depending on a company’s existing infrastructure, number of sites, number of users (total and per site), specific application requirements, and available telecom staff.

For enterprises with a few larger sites, a premises-based solution typically offers a better TCO over a longer period of time. To a large degree, that’s because businesses often extend the life of their communications solutions well beyond the amortization period, at which point the asset has no book value – and therefore, no associated cost. Furthermore, with only a break-fix maintenance contract in place, support costs can also be reduced. Of course, this approach involves a significant amount of risk and can prove quite costly if an outdated solution begins to malfunction on a regular or system-wide basis.

Alternatively, Centrex and hosted IP telephony have been adopted by businesses that choose not to maintain in-house support staff and instead outsource their communications. Staff reductions, therefore, result in immediate and ongoing cost savings for these customers. It should be noted that TDM Centrex scenarios may involve some additional costs if a technician needs to be dispatched to the site on occasion; however, hosted IP telephony eliminates this cost burden as well due to more flexible network monitoring and management solutions.

Further, hosted services, and especially hosted IP telephony, provide significant TCO benefits to small branches and small sites within large organizations. Businesses choose hosted services for their remote locations in order to lower the costs of adding incremental capacity and to deliver uniform capabilities across geographically dispersed users.

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Google to Drive Business Migration into the Cloud

Google has become a powerful force in the lives of many people. It certainly is my window to the World today as I land on the Google search page as soon as I open my eyes in the morning and before I go to bed at night.  It has become a symbol and an icon, our “virtual home”, almost synonymous with the Internet, Internet browsing, and … the Cloud! With its presence already established in the consumer world, Google is also making an aggressive foray into the business market with a set of cloud applications.

source: Frost & Sullivan

Since I promised to post several articles on the raging battle between premises-based and hosted/cloud communications, I will dedicate this one to Google. So much has been written about it, that it seems there is nothing left to say. However, two of my colleagues – Subha Rama and Alaa Saayed – put together two very different pieces on Google that provide some unique value. Subha chose to look deeply into Google’s corporate culture and identified several major factors that have driven and will likely continue to drive Google’s success going forward. Alaa, on the other hand, managed to get a hold of Rajen Sheth, Senior Product Manager for Google Apps, and received some first-hand insight into Google’s vision for the enterprise market.

My key takeaway from the two articles is that Google’s success is largely due to the fact that it’s built on the tenets of the Internet and the Internet age. Its product portfolio benefits from the advantages of the web and the cloud; its culture and internal organization also derive their efficiency from applying the innovative spirit and democratic principles of the new age in IT and communications technologies.

Here I provide excerpts from both articles, as well as links to the complete versions on our website.

Subha Rama’s piece is titled: “Google: the IT Iconoclast ”, and it can be found here. According to Subha, Google’s success story is based on two simple tenets: “question established ways and have a healthy disregard for the impossible”. She writes: “As Google grandly outlined in its first SEC filing, its mission was “to organize the world’s information …. and make it universally accessible and useful”. Google believed that the most effective, and ultimately the most profitable, way to accomplish this mission was to put the needs of their users first. This has become more or less the governing principle behind almost all its product innovations.”

Then Subha goes on to ask “What makes Google, well… Google?” She believes that, at Google, “crazy definitely triumphs comfy”. She points to the fact that Google strives to hire only the best talent out there, people who are academically exceptional and are capable of thinking out of the box. You can find neurosurgeons and rocket scientists, in addition to nerdy computer engineers, among Google’s employees. Also, it continues to adhere to its Stanford culture, allowing employees to dedicate 20 percent of their time to work on their pet ideas. This is how products such as Google News, Orkut and Google Images came into being. Subha recognizes that Google employees are constantly challenged to think in new directions and come out with defining ideas. She further notes, however, that Google also focuses on productivity and enforcing deadlines so that it is not drowned in chaos, which can be so typical of highly creative environments.

Further, Subha discusses “the long-tail model”, which forms the foundation of Google’s strategy: “Google strongly believes in the long-tail model, that as the costs of online production and distribution fall, niche products and services can become as economic as mainstream ones. This theory forms the core of a cloud-based service delivery model, which while accommodating a wide variety of applications is not subject to the lowest-common-denominator principle that we apply in a physical environment.” According to Subha, this business model focuses on a large number of products, each targeted at a relatively small audience, thus addressing niche segments, and building customer communities in the process. Further she concludes that the Google business model is in fact based on openness, interoperability, decentralization and accessibility, the pivots around which cloud-based services are built.

Alaa Saayed tackled similar issues of corporate culture and success factors in his recent interview with Rajen Sheth, Senior Product Manager, Google Apps, posted unabridged here. In this interview, Rajen Sheth identified some of Google’s strategic directions as well as some of the key factors impacting Google’s success.

When Alaa asked Sheth if they were finding it difficult to migrate customers to Google Apps, Rajen admitted that it used to be very difficult, but things are rapidly changing. He stated: “Almost every CIO that I talk to is planning a cloud strategy and the value proposition of the cloud is very widely known at this point. For most corporations, now, it seems, it’s a matter of WHEN rather than IF they are going to move to the cloud for a lot of their core services…We are a serious player in most of the conversations we are having about messaging out there.”

Then Alaa asked Rajen about innovation at Google: “Google is well-known for its unwavering commitment to innovation…How is the process of innovation managed at Google”?

Sheth responded as follows: “Having worked in different companies, I could say that Google really operates in a very different way than a lot of organizations out there. It really operates in a way that spurs this innovation. I think there are a few elements to it. The first thing is that we are not afraid to look beyond what an existing space is all about right now, and so if you think about it, in many of the cases where Google has been successful, we’ve reinvented existing spaces … We take an existing space, not thinking about it in terms of how it is today, but what it should be, and how do we make it a brand-new experience”.

“Another big element to it is the notion of cloud computing, and that is actually one of the things that spur innovation. In many cases where you have to build packaged software, you are forced into a stream where you are releasing major updates every two, three or four years. The problem with that is that you have to think three, four-plus years in advance what is going to be the innovation that you want to push, whereas in reality, innovation happens all the time. With the cloud computing paradigm, we have it such that all our applications are centralized and we can update them incrementally, and that actually increases our innovation rate quite dramatically.

Finally, the Google culture definitely spurs innovation. The structure is very, very flat and people are encouraged to think, and to take risks, and think in brand-new areas. In fact, we have this philosophy that we call 70-20-10 and basically what it means, we put 70 percent of our effort in the core of our business, but we put 20 percent of our effort in new areas that are beyond the core business that we think might be fruitful. So we think beyond what is making money right now. Then we put 10 percent of our effort in completely off-the-wall things that may or may not see the light of day, may or may not be a great technology. There are definitely some great examples of technologies that have started out in that bucket and that have become some major areas for Google”.

I believe the discussion above clearly highlights the factors that will make cloud computing and cloud communications successful and will drive continued growth for Google itself. I will still caution, though, that the cloud is not for everyone – both on the supply and the demand side, but that is the topic of another post.

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Communications on the Premises or in the Cloud: How do You Make the Choice?

This is the first post in a series of commentaries on the dichotomy of premises-based versus hosted/cloud communications.

Economic Realities Mandate a New Approach to Communications Investments

The global recession caused a lot of fear and uncertainty in all business sectors worldwide. As revenues declined, business customers had to curtail their spending, including communications and IT investments, in order to limit their losses. As a result of these actions, such businesses have not been able to benefit from recent advancements in UC, mobility, videoconferencing, and other next-generation communications technologies. Many customers are still holding onto outdated communications platforms that may still meet basic needs but can offer little in terms of productivity enhancement, greater customer satisfaction or competitive differentiation.

In the meantime, the competitive landscape in all industry sectors is constantly changing. The financially strong market participants are able to move ahead by re-enforcing their competitive advantage through technology investments and more aggressive marketing. The others should not wait until the economy reaches its peak again since, by then, it will be even more difficult to catch up with the market leaders. In fact, turbulent waters create favorable conditions for the more nimble and resourceful participants to advance more rapidly. As communications vendors and service providers struggle with the consequences of the recession, businesses can use their temporary weakness to negotiate better deals on pricing, features, and services.

Overall, the recent recession brought forward the need for a new approach to communications investments, also mandated by other economic realities such as the rapid technological evolution and the acceleration of business processes. It demonstrated that business customers should seek to deploy their next-generation communications infrastructure with the following factors in mind:

Flexibility: At times of crises, businesses recognize the value of greater flexibility in terms of access to resources, including communications capabilities. One of the biggest challenges during a recession is the need to downsize, which results in a lot of unused communications capacity in the case of premises-based implementations. Hosted services, on the other hand, offer businesses the possibility to discontinue lines and services as capacity needs change. Further, workforce reduction frequently impacts IT and telecom personnel as well, rendering the business unable to properly manage its infrastructure and avoid downtime, proactively update and upgrade capabilities, and so on. Alternatively, in a managed or hosted services scenario, a third party is compelled to provide adequate capabilities as part of its contractual obligation regardless of economic circumstances.

Speed to Market: As tough economic conditions force businesses to tighten their purses, they find themselves unable to quickly react to market opportunities. R&D activities slow down, marketing and sales staff shortages leave the door open for competitors to steal customers away, and communications infrastructure inefficiencies prevent overwhelmed employees from effectively collaborating internally and communicating with customers and partners. However, businesses that chose to leverage advanced communications to compensate for workforce reduction and macro-economic challenges are better able to maintain internal productivity and customer satisfaction levels. Outsourced communications and IT resources are more effective in providing access to required capabilities faster, with minimal or no initial cash outlay, and with the ability to adjust capacity on demand.

Risk Mitigation/ Risk Sharing: Businesses tend to become particularly risk-averse during an economic downturn. While suspending or postponing new communications investments help conserve cash, this is not a viable long-term strategy as obsolete technology cannot support evolving businesses processes and needs. A more sustainable approach would involve sharing the risk with a trusted partner. In a premises-based implementation, more flexible leasing and managed services offerings could help alleviate some concerns over excessive financial exposure. A hosted offering can, however, completely transfer the risk to a third party by eliminating most CAPEX and delivering capacity based on actual company performance and needs.

Risk mitigation is key in favorable economic conditions as well. In a booming economy, growing R&D investments drive even more accelerated technology advancements requiring more frequent upgrades and staff re-training in the case of premises-based implementations. Alternatively, the risks of technology obsolescence could be absorbed by a hosted provider in an outsourced communications scenario.

Focus on Core Competencies: Businesses and individuals are equally overwhelmed with the amount of information and expertise required to remain competitive today. Businesses are, therefore, finding they can grow more rapidly and improve their bottom line by focusing on their core competencies. As the complexity of communications technologies increases, it becomes even more compelling to partner with a trusted communications expert to ensure that the company’s infrastructure is properly deployed and efficiently managed without wasting valuable internal resources. A managed or hosted communication solution can enable customers to leverage advanced communications for a competitive advantage while focusing entirely on their core business.

Economies of Scale: As businesses grow and expand virtually through multiple remote sites and users, their communications infrastructure needs to evolve as well. Hardware-centric premises-based communications platforms are typically not very cost-effective for multiple small sites of less than 50 users. During periods of rapid growth, such solutions do not scale economically as they require new servers to be purchased, integrated and managed for additional capacity. A hosted service, on the other hand, allows a more gradual addition of incremental capacity based on the actual number of users. Also, it typically provides a uniform set of features, a common dial plan, a consistent customer interface (through a network-based auto attendant or IVR) and some other benefits to geographically dispersed organizations. Further, as businesses increasingly seek to connect with their customers, suppliers and partners, a hosted service can more effectively provide federation across disparate organizations.

Future-proofing Investments: The recession along with the accelerating pace of technology evolution are driving the need to future-proof investments in communications and IT infrastructure. Businesses need to ensure that their services and solutions are flexible and based on open standards so they can be integrated with other applications and platforms at deployment or in the future. Since SIP is becoming the de-facto industry standard, SIP-based, SOA platforms and SIP-based services offer a significant amount of flexibility and investment protection. Such solutions integrate with a wide range of endpoints and other SIP-based applications. Another important factor in future-proofing the communications infrastructure is to ensure greater redundancy and disaster recovery capabilities. Frequently, a hosted, SIP-based service can provide all these capabilities more economically than a premises-based platform.

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Communications on the Premises or in the Cloud: How do you Make the Choice?

In my 10 years as a Frost & Sullivan analyst, hosted IP telephony has always been one of my most favorite coverage areas. I believe in the value of outsourcing core communications capabilities for certain types of organizations and users. I also believe that IP technologies have dramatically changed the value proposition of hosted voice as new hosted IP telephony offerings deliver a number of additional features and capabilities compared with TDM Centrex.

I have to admit, however, that, although I am gaining some insight into how cloud technologies can further elevate the value of outsourced, multi-tenant communications infrastructures, I have not yet reached an epiphany on that matter. In fact, I find the hype around “cloud”, particularly as it relates to real-time communications, somewhat exaggerated. Most people seem to think of the cloud as being synonymous with Skype and Google TO THE EXCLUSION of various other multi-tenant, IP-based architectures. They may be right, but in that case, I find the definition AND potential for business-grade cloud communications rather limited.

I am not currently equipped to provide a final distinction between cloud communications and hosted IP telephony, but I am working on a couple of studies with Vanessa Alvarez (check her out on Twitter) that aim to offer some good insights on specific advantages and disadvantages of both approaches as well as some perspective on the different market participants. In the process, I plan to post a series of blog articles on hosted and cloud communications drivers, challenges and trends.

I will follow up this post with a discussion of some economic realities that require a new approach to communications investments. In the meantime, I would greatly appreciate any thoughts on hosted versus premises-based as well as hosted versus cloud.

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