Hosted IP PBX Services An Effective and Economical Business Decision

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1 S T R A T E G I C W H I T E P A P E R Hosted IP PBX Services An Effective and Economical Business Decision The migration of voice communications to IP technology is fundamentally changing enterprise customers' options for effective solutions by offering: new alternatives to proprietary systems and dedicated voice services, as well as great improvements in productivity and business operations through new IP-based capabilities. This white paper provides business leaders with the functional and financial benefits of alternative architectures such as hosted IP PBX services versus the traditional purchase of a premises-based IP PBX. Both solutions offer a similar set of features and applications, yet there are many compelling financial and technical reasons for pursuing a hosted IP PBX for your business.

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3 Table of Contents 1 Introduction 1 Important Considerations 4 Resource Differences Between CPE and Hosted 7 Configuration One 8 Configuration Two 10 Configuration Three 11 Configuration Four 12 Summary 13 About the Authors 14 Appendix

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5 Introduction Important Considerations The migration of voice communications to IP technology is fundamentally changing enterprise customers options for effective solutions by offering: New alternatives to proprietary systems and dedicated voice services Great improvements in productivity and business operations through new IP-based capabilities and the ease with which they can be integrated with business processes and formerly separate data networks and systems. Business leaders across companies of all sizes are basing their business communications strategies and considering the functional and financial impacts of alternative architectures such as Hosted IP PBX service versus the traditional purchase of a premises-based IP PBX. While both solutions offer similar sets of features and applications, there are many other issues such as management, support, robustness, continuity, flexibility and lifecycles in addition to total cost of ownership that buyers must carefully include in their decision process. Simply comparing the cost of purchasing equipment vs. a monthly charge per seat can be very misleading. The following is a discussion of those issues and examples of the financials involved for several scenarios. IMPLEMENTATION Hosted services are less likely to have post-installation problems. Hosted solutions are more readily scalable so there is no penalty for unplanned growth and changes can be made easily. Hosted providers also are expected to have experts readily available at their centralized sites if there is a problem immediately following cutover. Installation of telephony equipment in a hosted environment will normally be less complicated, which should lead to better first-time accuracy. FLEXIBILITY Hosted solutions can be implemented on a line-by-line basis and can co-exist with CPE supporting other users. Cutover can be department by department across multiple locations and is much more flexible at meeting user schedules without having to disrupt other corporate functions. In a merger/acquisition scenario this would greatly facilitate the rate and ease of integration (it also helps avoid the overhead project management effort needed to create a template so that all locations can be implemented the same way). GROWTH MANAGEMENT Managing growth in a hosted environment is easier than with a premises system. There is no need to track line cards and trunk cards and maintain cushion capacity. Traffic analysis in a hosted environment is performed by the service provider s OSS (operational support systems) and there is no need to worry about switch, gateway and trunk capacity, performance, and configuration. Inventory tracking and management overall is less extensive in a hosted environment. Another important advantage of hosted services is that, unlike premises systems, their costs can decrease if the user population declines.

6 MAINTENANCE Customers with CPE systems have several ways to pay for support. They can purchase maintenance contracts, pay on a time and materials basis (some vendors charge a minimum of $1,000 for a visit) or utilize internal resources. Hosted services bundle maintenance as part of their offer eliminating the need for customers to plan, manage, and budget for this support. When critical CPE problems occur that cannot be cleared remotely, CPE customers have to wait for a truck roll and could easily have a total time to repair of 4+ hours (many maintenance plans objective is to arrive on premises within 4 hours to start the repair process). The repair on the hosted system with a similar trouble may be completed almost immediately by on-site techs at the provider location. Hosted solutions have 24x7 management and monitoring. In order to receive similar 24x7 support for a CPE system (which may still mean a 2 to 4-hour wait for a tech to arrive on premises) customers usually have to pay an uplift charge and an additional fee for remote monitoring and management. Another key maintenance benefit from hosted solutions is that the provider is responsible for dealing with network/cpe interface finger-pointing problems and customers do not need to get involved themselves or purchase agency support services to handle these issues. APPLICATIONS As customers take advantage of IP architectures to implement additional applications such as unified messaging, find-me/follow-me, presence-based clients, conferencing, collaboration, and unified communications, they often need to add primary (and sometimes backup) servers in a CPE environment. This increases their need to manage (e.g., patches, UPS support, etc.), maintain, and administer additional hardware and software. Similar applications in a hosted environment do not require this level of support. ACCESS AND TOLL COSTS Carriers providing hosted services generally bundle these costs (along with Internet access) into their monthly fee for much less than customers would pay in a CPE environment and there is no need to purchase access or trunk lines in addition to the service.. COMMON USER INTERFACES Hosted services can provide immediate centralization of voice applications and commonality of user interfaces for all locations and lines deployed at any site, whether the main site is converted to IP or not. While premises solutions offer centralized applications such as voice messaging (if the main location is migrated to an IP solution), achieving common telephony user interfaces across main and remote locations still requires installation of new equipment and software at each location. CHOICE OF TERMINALS Hosted services generally offer customers more terminal choices than CPE solutions, despite all the talk about open architectures and standards. Independent vendors offer multiple families of IP terminals, giving customers a wider range of choices and more price options than offered by individual CPE providers.

7 SECURITY In a hosted service, voice firewalls and intrusion detection are all managed by the carrier with carrier grade security management, enabling customers to avoid the need to employ expensive technical talent or pay for it on an outsourced basis. Software patches are becoming a time-consuming management nightmare in the IP-telephony environment. Hosted service customers do not have to manage server security patches and fixes and associated issues of version control, regression testing, and compatibility of OS versions with applications. Hosted equipment can also be expected to have very good physical security in a datacenter. It is typically well-guarded, has well-defined security practices, and is usually superior to that provided by most end users for their CPE. RELIABILITY AND CONTINUITY Carrier-grade reliability is provided for hosted services, with element redundancy usually exceeding that of premises solutions (or at least, customer willingness to purchase the same level of CPE redundancy). Operation centers are hardened and usually better protected against natural disasters than CPE sites. Business continuity/disaster recovery capabilities are one of the most important benefits of hosted services. Hosted solutions are always backed up with the most current configuration. CPE solutions can be backed up for extra costs in terms of either internal resources (and storage) or external resources (managed service). If a CPE customer were to lose their system due to fire, flood, tornado, etc. they would have to pay to replace it (or pay for the insurance against such a loss). In a hosted service environment, it is less likely that these events would disrupt service and even if there were a disaster, customers would not be liable for the replacement costs. Single site businesses with CPE have relatively few options for seamless disaster backup if the CPE at their site is inoperative. In a hosted environment, users can take their IP terminals home, connect to any broadband access, and have the terminals operate as if they were at their place of work. E-911 The capability to have 911 calls traced to individual jacks/offices in a building is built into the hosted offer. CPE capabilities in this area vary, but in order to obtain comparable functionality, customers often have to purchase additional servers and application software. In a hosted environment there is also no need to set up, update or manage any associated E- 911 directories. It also eliminates the need to manage the additional servers running the E- 911 application. VIRTUAL OFFICE The same hosted terminal broadband plug-in functionality mentioned above facilitates regular virtual office work without the overhead cost of softphones for users who only work either at home or at a company site (i.e., not road warriors).

8 SOFTWARE UPGRADES Unlike CPE solutions, application and OS software upgrades are bundled in with the cost of the hosted service. There is no need for customers to manage or be involved in this process, as the hosted provider will handle the implementation details, including regression testing. In addition, customer telecom managers don t have to make a business case to migrate to the next version of software, which is especially difficult when the benefits are soft productivity improvements. When this is bundled into a hosted service, there is no need to obtain business approval to proceed. Moreover, this avoids the issues that sometimes arise when customers feel they are being forced to migrate just to maintain currency. OBSOLESCENCE A hosted solution eliminates the issue of purchased systems (and/or sub-elements) becoming obsolete. Obsolescence is often accompanied by higher maintenance costs and/or difficulty getting spare parts and ultimately results in a major RFP-based effort to evaluate new offers and replace the system. Resource Differences Between CPE and Hosted RESOURCES In order to develop a fair and deep analysis, decision makers must also consider the internal resources required to plan, administer, technically support and manage, IP voice communications. Most businesses fail to account for the internal resources required to assure highly reliable voice communications and support services to internal customers (users). These resources encompass multiple skill sets and their costs. They include not only competitive salary and overhead (benefits, taxes) packages, but also on-going training and certifications and, all-too frequently, the overhead of searching for replacements for recently certified technicians. The following charts compare the resource requirements involved with the initial decision and on-going management of a purchased IP PBX versus a Hosted IP PBX service. Resource Requirements Initial Purchased Solution Hosted Solution Technical Planning Resources required for site requirements, power, equipment sizing and configuration, WAN planning (QoS), applications, station planning and reviews, selection and placement, E-911 planning, security and contingency planning. Business/financial Planning Resources required for capital expenditure business cases and management, maintenance contract negotiation, network services negotiations and procurement, call accounting system procurement (if necessary) spare inventory planning and other budget and financial planning. Project Planning Resources required to coordinate all aspects of customer planning including installation (possibly across multiple locations), and interaction with the vendor project manager. Table 1 - Resources Required to Select and Implement a Voice Solution Buyer resources or Vendor (some elements of this work may be bundled into the vendor offer and other elements such as station and contingency planning will be a separate charge, but the total cost will be passed to the buyer). Buyer resources are required. Buyer resources and/or Vendor or third party (fee based option for any support beyond very basic project management which is often remote). Service Provider (costs will be bundled into the monthly charge but significantly less resource is required on a per user basis than in a CPE-based scenario). Buyer resource costs are minimal as there are no capital requirements, no maintenance contract, no separate network procurement, no call accounting procurement (included with hosted services) and minimal spare inventory. Service Provider handles all project management as part of the offer. Buyer involvement is minimal and consists mainly of interface with the service provider manager.

9 Resource Requirements Ongoing Purchased Solution Hosted Solution Changes and Improvements to CPE System Resources required for planning, project management and design work for upgrades to faster servers, higher bandwidth access, server consolidation, new software release of existing applications (such as IP Telephony and messaging), additional applications, etc. Also includes business cases, ROI analyses, financial record keeping and planning for budgets, depreciation, etc. Buyer is responsible for all aspects of upgrades, including evaluation of cost vs. benefit, business case development and presentations, negotiation and management of provider warranties and support services including testing to avoid negative feature interactions. Buyer handles all budgeting and ongoing cost tracking. This work requires significant multi-disciplinary subject matter expertise. Service Provider provides all upgrades of basic applications such as IP Telephony and messaging. Service provider upgrades network and systems transparently to buyers at no additional charge while taking responsibility for seamless service. System and Network Management and Administration Resources required to manage contracts, inventory (including ports), moves/ adds/changes/deletes, E911 updates, review traffic studies and bandwidth needs assessment, implement area code changes, management of applications, servers and ancillary equipment such as UPS and backup systems. Technical Support Resources required to perform basic maintenance including checking alarms, first investigation of troubles, interface with maintenance providers, download/test/install software patches, perform on-site preventative maintenance functions such a battery checks, filter replacements and testing of backup drives, provide internal user helpdesk support. Security Management Resources required for management of firewalls, security policy development and updates, investigations and resolution of security breaches and constant education and monitoring for new security threats. Contingency Management Resources required to test and update contingency plans, educate employees, perform system backups, etc. Buyer handles all requests for changes, updates, routing patterns, area code changes, etc. or outsources to system or third party provider. Buyer manages all inventory, updates user databases, manages contracts for maintenance, reviews traffic studies, manages user help desk operation and ensures adequate administrator and user training. Buyer performs basic maintenance oversight including checking alarms, first investigation of troubles, downloading/installing software patches, interaction with the maintenance provider to resolve troubles and general technical planning. Buyer performs internal help desk functions. Buyer is responsible for understanding the system and applications - typically through an internal subject matter expert. Buyer is responsible for their own security planning and management and may elect to outsource this function. Buyer is responsible for their own contingency management and disaster recovery planning and may elect to outsource this function. Service Provider handles all requests for changes, updates, routing patterns, area code changes and updates E911 data. Level of expertise required on part of buyer is significantly less than with a purchased solution. Service provider delivers user training materials and on-line help. Service Provider provides all monitoring and maintenance services and server management functions as part of service contract. Service Provider provides technical resources, as required (through a cost effective shared resource pool) and buyer s requirement for technical expertise is significantly less than with a purchased solution. Service Provider is responsible for telephony and applications security planning and management. Service Provider will provide contingency management via automatic re-routing of inbound calls, as required. Table 2 - Resources Required to Operate and Optimize a Voice Solution As illustrated, the difference in resource requirements is not trivial and is included in the quantitative analyses of the two solutions shown below. The estimated percent reduction in resources needed in a hosted environment is shown in the following table. These values are based on ongoing market analysis.

10 Percent of Premises-Based System Resources Needed for Comparable Planning Work on Hosted Service Work Functions (Initial Planning) Percent of Premises-based Resource Needed in Hosted Environment Initial technical planning 25% Initial business and financial planning 20% Initial project planning 25% Percent of Premises-Based System Resources Needed for Comparable Ongoing Work on Hosted Service Work Functions (Ongoing Management) Percent of Premises-based Resource Needed in Hosted Environment Planning, project management and design work 15% Telephony application upgrade 0 Voice messaging application upgrade 0 System/network administration 25% Technical support 5% Security management 15% Contingency management 5% Table 3 Comparison of Resources Needed in Premises vs. Hosted Environments Most resource functions do not require full-time support, and as a result, some buyers tend to feel that they are not true savings because they are not going to fire a fraction of a worker. Other buyers tend to treat all human resource savings as soft costs because it is hard to see them achieved in practice (or experience tells them they are rarely achieved). However, while the actual results may vary dependent upon the configuration, there are true reductions in resources needed in hosted environments and the savings can appear as a headcount reduction or people performing other/new functions that they may not have had time to handle in a premises based environment. Some of the new functions may be more related to improving the company s business processes than simply telephony functions. In either case, these savings must be recognized in a diligent financial analysis. The Alcatel-Lucent Hosted versus Premises-Based IP Telephony Total Cost of Ownership Tool was used to estimate the differences between hosted and CPE solutions in four scenarios. 1 The resources and associated costs required by customers for both one-time planning and ongoing management for both the hosted and the purchased system scenarios were obtained from research conducted with enterprise telecom consultants who work with customers to plan and implement IP Telephony across a wide range of system sizes. Solution purchase cost, human resource requirements and costs, hosted service subscription costs, maintenance costs, software upgrade costs and public network access and toll cost impacts have all been accounted for in the following financial analyses.

11 Configuration One This white paper examines the financial impact of both solutions in four common configurations; 10 users 8 at the main location and 2 at a single remote location 100 users 90 at the main location and 10 at a single remote location 300 users 250 at the main location and 25 each at 2 remote locations 800 users 575 at the main location and 75 each at 3 remote locations The costs used in each analysis reflect industry average prices and salaries. VERY SMALL BUSINESS 10 USERS, 8 AT THE MAIN LOCATION AND 2 AT A SINGLE REMOTE LOCATION This scenario has an ROI of 205% and a net present value cash flow advantage of $63,500 in favor of the hosted service over 5 years. In this small business configuration, the major cost savings are due to the elimination/reduction of access charges as these can be disproportionately high in small locations, compared to other costs such as human resources which are relatively low in very small organizations. In this scenario access and toll costs represent virtually two thirds of all savings. The access and toll savings is realized through the Hosted IP PBX offer which charges per user and includes public network access and all local tolls as part of this pricing structure. In addition to a flat rate long distance calling plan, both physical locations are part of the same telephony service, and incur no toll costs for interoffice calling. The major human resource savings is in the initial planning stage since many of the planning functions need to be handled regardless of the size of the company. Even though highly technical resources may not currently exist in very small businesses, those that are considering an IP PBX should apply due diligence to technical resource requirements. For most companies, these resources come off the bottom line and are a pure cost item (although they may not be very visible). In order to maximize competitive advantage through IP PBX/Unified Communication and converged applications, all system buyers will face a requirement to add these resources at some point over the system s usable life. Our research on very small businesses considering a hosted voice solution indicates that prospective buyers are first motivated by an ability to offload the administration, management security, monitoring and maintenance of their voice solutions. This segment is also attracted by lower cost of ownership and a reduced data center requirement. In addition, this business size segment prefers to migrate to voice over IP and convergence at their own pace, deploying applications and capabilities based on the needs of their business. Further, this segment prefers to manage to a predictable monthly cost for voice communications, rather than cope with variable cost factors. (See Table 4, below) 1 The Alcatel-Lucent Hosted vs. Premises-Based IP Telephony Total Cost of Ownership tool uses industry standard costs, charges and pricing methodologies as determined by InfoTech in its InfoTrack for Enterprise Services ( ) program. The savings shown are not intended to represent the actual savings that may be experienced by any individual company as there are many variables which can change in a given situation.

12 Major Cost Savings With Hosted Service Configuration 1 Total Savings Over 5 Years Percent $15,000 Human Resources $21, % $10,000 $5,000 $0 Initial Year 1 Year 2 Year 3 Year 4 Year 5 Access and Toll Costs $65, % Maintenance/MAC $9, % Software Upgrades $1, % Human Resources Maintenance/MAC Access and Toll Costs Software Upgrades Total Savings $97, % Resource Differences Between CPE-Based and Hosted Service Configuration 1 Resource Cost Savings Over 5 Years Man-Years Initial Year 1 Year 2 Year 3 Year 4 Year 5 Planning (CPE) $16,381 Planning (Hosted) $3,088 Planning Savings $13,294 Admin and Management (CPE) $6,474 Admin and Management (Hosted) $832 Planning (CPE) Admin and Management (CPE) Technical Support (CPE) Planning (Hosted) Admin and Management (Hosted) Technical Support (Hosted) Admin and Management Savings $5,642 Technical Support (CPE) $2,892 Technical Support (Hosted) $145 Technical SupportSavings $2,748 Configuration Two Total Savings $21,683 SMALL BUSINESS 100 USERS, 90 AT THE MAIN LOCATION AND 10 AT A SINGLE REMOTE LOCATION This scenario has an ROI of 90% and a net present value cash flow advantage of $266,500 in favor of the hosted service. The major cost savings in this scenario are due to human resources as the need for more dedicated (and experienced) resources in the CPE-based alternative is increased substantially over the first scenario. Over the five year period, these savings are mainly in the areas of planning (including initial planning) and administration/management. Similar to the resource considerations pointed out for very small businesses, small businesses that are considering an IP PBX should also apply due diligence to technical resource requirements and look at hidden resource costs. Access and toll costs are the second largest area of savings and proportionately are only half of the savings seen in the first scenario.

13 Our research on small businesses considering a hosted voice solution indicates that prospective buyers are first motivated by a reduced data center requirement to some degree, a cost avoidance preference. In addition, this business size segment prefers predictable monthly costs, minimal capital outlay and lower total cost of ownership. This segment has minimal appetite for adding and maintaining skilled headcount required to support an IP PBX. Similar to larger businesses, this market segment wants to implement corporate-wide collaboration without replacing all voice systems in the network. (See Table 4, below) Major Cost Savings With Hosted Service Configuration 2 Total Savings Over 5 Years Percent $80,000 $60,000 $40,000 $20,000 $0 Initial Year 1 Year 2 Year 3 Year 4 Year 5 Human Resources $307, % Access and Toll Costs $171, % Maintenance/MAC $49, % Software Upgrades $5, % Human Resources Maintenance/MAC Access and Toll Costs Software Upgrades Total Savings $534, % Resource Differences Between CPE-Based and Hosted Service Configuration 2 Resource Cost Savings Over 5 Years Man-Years Initial Year 1 Year 2 Year 3 Year 4 Year 5 Planning (CPE) $139,999 Planning (Hosted) $27,540 Planning Savings 112,459 Admin and Management (CPE) $129,488 Admin and Management (Hosted) $16,648 Planning (CPE) Admin and Management (CPE) Technical Support (CPE) Planning (Hosted) Admin and Management (Hosted) Technical Support (Hosted) Admin and Management Savings $112,840 Technical Support (CPE) $86,771 Technical Support (Hosted) $4,339 Technical SupportSavings $82,432 Total Savings $307,731

14 Configuration Three MEDIUM BUSINESS 300 USERS, 250 AT THE MAIN LOCATION AND 25 AT EACH OF TWO REMOTE LOCATIONS This scenario has an ROI of 46% and a net present value cash flow advantage of $377,600 in favor of the hosted service. In this scenario access and toll costs are again the largest area of cost savings as the volume of traffic/user remains constant while the human resource requirement levels reflect economies of scale. Maintenance contract costs as a percent of total savings is higher than in previous scenarios, mainly because of the improved economies of scale in both access and human resources. Our research on medium sized businesses considering a hosted voice solution indicates that prospective buyers are motivated primarily by lower total cost of ownership, and also by offloading the administration, management, security, monitoring and maintenance of their voice environment. Additionally, the prospect of installing corporate-wide collaboration applications is of very strong interest but correspondingly this industry size segment is concerned about increased data center requirements. (See Table 4, below) Major Cost Savings With Hosted Service Configuration 3 Total Savings Over 5 Years Percent $120,000 $100,000 $80,000 $60,000 $40,000 $20,000 $0 Initial Year 1 Year 2 Year 3 Year 4 Year 5 Human Resources $394, % Access and Toll Costs $489, % Maintenance/MAC $137,854 %13.2 Software Upgrades $19, Human Resources Maintenance/MAC Access and Toll Costs Software Upgrades Total Savings $1,041, % 1 Resource Differences Between CPE-Based and Hosted Service Configuration 3 Resource Cost Savings Over 5 Years Planning (CPE) $180,013 Man-Years Initial Year 1 Year 2 Year 3 Year 4 Year 5 Planning (Hosted) $36,093 Planning Savings $143,920 Admin and Management (CPE) $161,860 Admin and Management (Hosted) $20,810 Planning (CPE) Admin and Management (CPE) Technical Support (CPE) Planning (Hosted) Admin and Management (Hosted) Technical Support (Hosted) Admin and Management Savings $141,050 Technical Support (CPE) $115,694 Technical Support (Hosted) $5,785 Technical SupportSavings $109,910 Total Savings $394,880

15 Configuration Four LARGE BUSINESS 800 USERS, 575 AT THE MAIN LOCATION AND 75 AT EACH OF THREE REMOTE LOCATIONS This scenario has an ROI of 27% and a net present value cash flow advantage of $563,800 in favor of the hosted service. In this scenario (and as would be the case in models of larger environments) access and toll cost savings have increased in terms of the percentage of total savings. This is due to the fact that the volume of traffic/user generates savings in a straight line fashion while savings from human resources continue to reflect ever improving economies of scale (less man-years of resources needed per user). Our research on large businesses considering a hosted voice solution indicates that prospective buyers are not only motivated by lower total cost of ownership, but also by the prospect of installing corporate-wide applications that will impact business processes, and ultimately, competitive differentiation. (See Table 4, below) Over the four scenarios, as the number of users increased, the ROI of the hosted service decreased. This is generally due to two factors: Savings from human resources and access costs in the hosted alternative decreased as a percent of total savings due to economies of scale The costs of the system and gateway equipment decreased per user as system purchases became larger. These two CPE-based cost reductions increasingly offset the savings from the hosted service in the ROI calculation which are based on the net present value of future monthly payments. Priorities by Business Name Top Reasons for Considering Hosted Service Solution Very Small Small Medium Large Service provider responsible for: Administration/Management Security Software upgrades Maintenance/monitoring Lower total cost of ownership Reduced data center requirements Little or no capital expense Self-paced enterprise migration to VoIP Predictable monthly cost Enterprise-wide collaboration application Reduced headcount or avoidance of new Single point of contact and accountability Integration of wireless devices Table 4 - Top Reasons Businesses Consider Hosted Voice Solutions

16 Major Cost Savings With Hosted Service Configuration 4 Total Savings Over 5 Years Percent $300,000 $250,000 $200,000 $150,000 $100,000 $50,000 $0 Initial Year 1 Year 2 Year 3 Year 4 Year 5 Human Resources $629, % Access and Toll Costs $1,188, % Maintenance/MAC $346, % Software Upgrades $47, % Human Resources Maintenance/MAC Access and Toll Costs Software Upgrades Total Savings $2,211, % Resource Differences Between CPE-Based and Hosted Service Configuration 4 Resource Cost Savings Over 5 Years Man-Years Initial Year 1 Year 2 Year 3 Year 4 Year 5 Planning (CPE) $271,157 Planning (Hosted) $54,382 Planning Savings $216,775 Admin and Management (CPE) $283,233 Admin and Management (Hosted) $35,811 Planning (CPE) Admin and Management (CPE) Technical Support (CPE) Planning (Hosted) Admin and Management (Hosted) Technical Support (Hosted) Admin and Management Savings $247,422 Technical Support (CPE) $173,541 Technical Support (Hosted) $8,677 Technical SupportSavings $164,864 Summary Total Savings $629,062 In each configuration tested, the hosted voice solution proved to be a better financial decision than the CPE solution. When combined with the non-financial benefits, the analyses presented in this paper provide compelling testimony to the attractiveness of a hosted voice solution. Telephony solution buyers whose objective is to help their companies grow and compete through new IP-based applications in a reliable and cost effective vehicle must consider hosted solutions.

17 About the Authors Kenneth C. Dolsky Ken Dolsky, Director Professional Services at InfoTech, has 29 years of experience across a wide spectrum of disciplines in the telecommunications industry. These include new product and market development, program and customer contract management, customer care and customer satisfaction measurement. During his nine years with InfoTech, Ken has led projects involving development of financial support sales tools for our clients, research based reshaping of client product and service market strategies and financial and functional analyses of services offerings. Ken is also Program Director for InfoTrack for Converged Applications, a global program that tracks shipments and revenues for applications such as messaging and contact center. Prior to joining InfoTech, Ken held a number of management positions with AT&T. Most recently, he was a manager in the Customer Care Operations for AT&T s Consumer and Business IP based services, where he specialized in performance management and quality improvement. Ken has a B.S. from Rutgers College in Physics and a Masters in Management Science and Operations Research from Steven s Institute of Technology. Warren H. Williams Warren Williams is Vice President, InfoTech and Senior Program Director, Services. Mr. Williams has over thirty years of experience in the telecommunications industry. He is responsible for the InfoTrack for Enterprise Services (IES) program, project management, and select custom consulting engagements. The IES Program provides in-depth information and analysis on the communications maintenance, managed and professional services market segments. Mr. Williams has extensive knowledge and experience in many segments of the Telecommunications industry. He specializes in enterprise services, enterprise systems and networks, convergence applications, carrier infrastructure, and Operations Support Systems. He has conducted over 250 consulting engagements spanning virtually all of the cutting edge issues over the past 18 years, providing expert analysis and recommendations to network service providers, manufacturers, distributors, and end-user clients. Prior to joining Access Intelligence-Infotech, Mr. Williams was Vice President at The Eastern Management Group where he was responsible for strategic, technical and management consulting engagements. Prior to The Eastern Management Group, Mr. Williams held strategic and tactical management positions at AT&T-Information Systems, AT&T and New Jersey Bell. During his tenure at these companies, he was responsible for strategic planning, integrated communications systems, industry marketing, market management, training and sales. In 1984, Mr. Williams led the AT&T-IS team providing an integrated voice, data and video information system to the top 40 executives at AT&T Corporation. Mr. Williams is often quoted in trade magazines and news media, and he has most recently published articles in Telephony Magazine ( What s it Cost?-When it comes to OSS total cost of ownership, carriers must weigh initial capital expenditures against life cycle payoffs, July, 1999), the International Engineering Consortium s Operations Support Systems (September, 2000) and in BCR s PBX 2000 ( The State of VoIP, January, 2000). Mr. Williams has also delivered many presentations to industry groups, including NCUG 2002 (National Centrex Users Group), INWorld Forum 2000, VoiceCon, IEC, and several manufacturer end user organization events.

18 Appendix The tables below show the assumptions used in the Hosted versus Premises-Based IP Telephony Total Cost of Ownership Tool which produced the results in the sections above. The assumptions are based on Configuration Two 100 total users, 90 at the main location and 10 at one remote site. Key values that have significant affect on the ROI are highlighted in green. IP Telephony Sizing Detail Number of users at main location 90 Number of remote locations 1 Average users per remote location (max. 250) 10 Total number of users (all locations) 100 Total number of voice mailboxes (all locations) 105 Percent of all users with basic IP phones 25% Percent of all users with high-end IP phones 50% Percent of all users with digital phones 25% Percent of all users with soft terminals 10% User growth rate per year 5% MAC per user per year 0.20 Number of administrators to train 1 Number of users to train 99 Financial Parameters Cost of capital 12.0% Will terminals be leased or purchased with Hosted Service? Leased Purchased Will maintenance charges on the purchased system and terminals be covered by a first year warranty? Yes No Hosted IP Telephony Service Offer Details Annual term agreement discount 3.00% IP Telephony service account set-up charge $300 IP Telephony service charge per month per user $32.00 Voice mail service charge per mailbox per month $5.00 Voice mail service installation charge/mailbox $10.00 Basic IP phone charge per month $3.00 Basic IP phone installation charge $40.00 High-end IP phone charge per month $5.50 High-end IP phone installation charge $40.00 Digital phone charge per month $1.50 Digital phone installation charge $40.00 Soft phone terminal charge per month $1.50 Soft phone terminal installation charge $5.00 Soft phone discount per year 2.0% Hard phone discount per year 3.00% Remote location service charge per month (gateway) $114 Remote location installation charge (per location) $50 MAC charge per occurrence $5.00 Training charge per administrator $50 Training charge per user $25

19 Other one time (initial) charges $0 Other annual charges $0 Premises (Purchased) System Model Details Percent spare port capacity 15% Charge per user/station for system equipment (list purchase price) (does not include terminals) $196 Charge per mailbox for voice mail system (list purchase price) $55 Charge per remote gateway (list purchase price) $2,212 Training charge per administrator $2,500 Training charge per user $20 Installation charge for all system equipment as a percent of purchase price 12% Installation charge for all terminal equipment as a percent of purchase price 12% Charge for IP Telephony software upgrade $2,074 Installation charge for IP Telephony software upgrade as a percent of purchase price 10% Charge for voice mail software upgrade $585 Installation charge for voice mail software upgrade as a percent of purchase price 10% Cost of space per square foot or meter (annual) $15 Square feet or meters required for system 50 System HVAC, power and insurance cost per month $25 Cost per MAC $13 IP Telephony system maintenance charge per port per month $1.65 Annual maintenance charge for IP Telephony system (initial user population) $2,488 Voice mail maintenance charge per voice mailbox per month $1.46 Annual maintenance charge for voice mail system (initial user population) $1,833 Annual maintenance charge per remote gateway (including monitoring) $1,048 Annual charge per user for remote monitoring of IP Telephony system $23.28 Annual charge per mailbox for remote monitoring of voice mail system $10.48 Other one time (initial) charges $0 Other annual charges $0 Costs Common to Both Models Basic IP phone purchase price $216 High-end IP phone purchase price $324 Digital phone purchase price $156 Soft phone purchase charge $150 Annual maintenance charge per hard terminal when purchased $8.00 Annual maintenance charge per softphone when purchased $5.00 IP Telephony Network Access Details Hosted Model Inputs Number of circuits required for voice toll traffic at each remote location 2 Number of T1 access trunks required at each remote location 1 Total number of T1 access trunks required for all remote locations 1 Number of circuits required for voice toll traffic at main location 18 Number of T1 access trunks required at main location 1 Total number of T1 access trunks used in network 2 Charge per T1 per month $0 Installation charge (per T1) $0

20 Monthly charge for Internet service $0 Purchased Model Inputs Number of circuits required for voice toll traffic at each remote location 3 Number of T1 access trunks required at each remote location 1 Total number of T1 access trunks required for all remote locations 1 Number of circuits required for voice toll traffic at main location 19 Number of T1 access trunks required at main location 1 Total number of T1 access trunks used in network 2 Charge per T1 per month $450 T1 installation charge (per T1) $400 Monthly charge for Internet service $0 IP Telephony Usage Details (Applies to Both Hosted and Premises Models) Minutes of domestic LD toll use per user per month 315 Total minutes of domestic LD toll use per month 31,500 Minutes of local toll use per user per month 315 Total minutes of local toll use per month 31,500 Minutes of international toll use per user per month 0 Total minutes of international toll use per month 0 Minutes of other (e.g., mobile/fax) toll use per user per month 0 Total minutes of other (e.g., mobile/fax) toll use per month 0 IP Telephony Toll Usage Cost Details Hosted Model Inputs Percent of domestic LD toll traffic bundled into charge for hosted service 0% Remaining minutes of domestic LD toll use charged per month 31,500 Cost per minute of domestic LD toll use $0.032 Percent of domestic local toll traffic bundled into charge for hosted service 100% Remaining minutes of domestic local toll use charged per month 0 Cost per minute of domestic local toll use $0.035 Percent of international toll traffic bundled into charge for hosted service 0% Remaining minutes of international toll use charged per month 0 Cost per minute of international toll use $0.060 Percent of other (e.g., mobile/fax) toll traffic bundled into charge for hosted service 25% Remaining minutes of other (e.g., mobile/fax) toll use charged per month 0 Cost per minute of other (e.g., mobile/fax) toll use $0.050 Purchased Model Inputs Percent of domestic LD toll traffic bundled into charge for purchased system 0% Remaining minutes of domestic LD toll use charged per month 31,500 Cost per minute of domestic LD toll use $0.042 Percent of domestic local toll traffic bundled into charge for purchased system 0% Remaining minutes of domestic local toll use charged per month 31,500 Cost per minute of domestic local toll use $0.045 Percent of international toll traffic bundled into charge for purchased system 0% Remaining minutes of international toll use charged per month 0 Cost per minute of international toll use $0.070 Percent of other (e.g., mobile) toll traffic bundled into charge for purchased system 0%

21 Remaining minutes of other (e.g., mobile) toll use charged per month 0 Cost per minute of other (e.g., mobile) toll use $0.060 Customer Internal Resource Costs Technical resource loaded salary $106,802 Business/financial planning resource loaded salary $94,262 Project management resource loaded salary $124,953 System administrator resource loaded salary $74,750 Office manager loaded salary $42,900 Security management technical manager loaded salary $120,202 Contingency planning technical manager loaded salary $129,654 Annual salary increase rate 4.0% Purchased System Planning Resources Required (One-time) Customer technical planning man-years Customer business/financial planning man-years Customer project planning man-years Hosted Service Planning Resources Required (One-time) Customer technical planning man-years Customer business/financial planning man-years Customer project planning man-years Purchased System Ongoing Resource Needs Customer planning, project management and design work for changes and improvements to CPE system - man-years each year Customer planning, financial analysis, project management resources (man-years) for 1 major IP Telephony application upgrade for CPE system (assumes vendor installed) Customer planning, financial analysis, project management resources (man-years) for 1 major voice mail application upgrade for CPE system (assumes vendor installed) Customer system administrator - man-years each year Customer technical resource - man-years each year Customer security management resource - man-years each year Customer contingency management resource - man-years each year Hosted Service Ongoing Resource Needs Customer planning, project management and design work for changes and improvements to Hosted Service - man-years each year Customer planning, project management resources (man-years) for 1 major IP Telephony application upgrade for Hosted Service Customer planning, project management resources (man-years) for 1 major voice mail application upgrade for Hosted Service Customer system/network administrator/office manager man-years each year Customer technical resource for Hosted Service - man-years each year Customer voice network security management resource for Hosted Service Customer voice system contingency management resource for Hosted Service

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