How to reduce hidden costs and find secret savings in a VoIP rollout

One of the key issues in implementing VoIP is cost. Savings exist, but so do additional costs, effectively negating any net savings for the first 12 to 18 months.

In Nemertes' benchmark research, 55% of the 120 IT executives who participated said they started their VoIP implementations within the past two years. Still, only about 18% of companies surveyed have completed their VoIP rollouts, and those are primarily small and midsize businesses (SMB).

As these IT staffs assess VoIP, they want to evaluate the cost components -- and how key vendors compare. During that time, Nemertes has been tracking VoIP costs for four years and has interviewed nearly 400 organizations.

What companies spend on VoIP depends largely on a few factors: how large their deployments are, which vendors they use and how they design networks. The trouble is that most IT executives cannot calculate accurate costs until they are well involved with their rollouts, particularly with respect to start-up and ongoing operational costs.

It's vital to understand the cost components of VoIP. For example, it's great to find very low-cost VoIP deployments, for instance, with an open source solution. But if that solution requires significant training and programming and support is mediocre, it may be worth spending the extra money to go with a solution that is not open source.

The true costs of VoIP
Size of deploymentStart-up cost per userIP switch/phone per userMaintenance per unit
Fewer than 300 units$587.62$1,156.86$1,152.41
300 to 999 units$128.91$531.00$133.44
1,000 to 4,999 units$227.37$727.76$156.56
5,000 units or more$131.84$503.69$37.21

VoIP cost metrics

Nemertes tracks VoIP costs in the following categories:

* Operational start-up: These costs include planning, installation and troubleshooting. They cover the amount of hours staff spends on each function multiplied by the average hourly rate of the staff involved. They include the outside consulting costs companies incur.

* Capital: These costs include IP switches and phones. Although Nemertes gathers the average costs of gateways, network upgrades related to the VoIP implementation, IP video and audio bridges, management tools, unified messaging, and traditional voice mail, the comparisons presented here do not include these additional figures.

* Ongoing operational: These costs cover the time and money companies spend managing and maintaining their VoIP systems.

Operational start-up costs

On average, organizations spend $355 per IP-telephony user for operational start-up. The per-user costs vary, based on the size of the rollout. Companies with smaller rollouts, or those with fewer than 300 end stations, spend an average of $588 per unit on operational start-up, while those with more than 5,000 end stations spend $132 per unit.

Costs keep rising

IT and telecom staffs distribute their initial planning time, as well as the time spent installing the IP PBX, among more users as the rollouts get larger. So it makes sense the per-unit cost decreases as the rollout size increases. With smaller rollouts, those costs don't get divided by as large a group, so the per-user cost is higher.

Most IP telephony vendors, including Avaya, Cisco and Nortel, offer branch-office products that aim to simplify operational start-up costs. Others, such as Mitel, NEC, ShoreTel and 3Com, focus on the SMB market, or companies with fewer than 1,000 end stations. Although they do serve larger rollouts, their products are aimed at simplifying the initial IP-telephony deployment.

Nemertes research has found that year over year, per-user operational costs have increased among all vendors for three reasons:

* Many organizations are hiring third-party providers to help with engineering or installation, which increases the operational costs.

* The average size of the smaller rollouts for at least two of the vendors (Nortel and ShoreTel) has decreased, resulting in a higher per-user cost.

* Many larger enterprises have started their VoIP projects within the past two years, and they are spending significant time upfront to launch large projects, but they cannot divide that time among the potential user base -- again resulting in larger per-user costs. This affected most vendors, but Cisco and Nortel significantly.

Organizations spend a median of $29,000 on consulting costs related to their VoIP implementation, an increase from last year's figure of $23,125. The range, however, is $500 to $2 million.

Capital start-up costs

Overall, capital costs hovered close to the same figures as last year. Organizations spend $843 per user, on average, which includes the IP phones and an IP PBX. Like the operational start-up cost, the per-unit capital cost is higher for small rollouts ($1,157) and lower for large rollouts ($504).

Companies spend an average of $309 on each IP phone. The range is $204 for Avaya to $392 for Nortel. The $416 figure for the "other" category in the graphic below is a compilation of figures from numerous IP-telephony vendors that didn't have enough statistical response to be counted individually. They include Alcatel, Siemens, NEC and 3Com.

Average handset costs by vendor

Why such a disparity among vendors' handset costs? It depends on customers' requirements. Most IP telephony vendors offer handsets that span quite a price range ($100 to $450), depending on the features customers want, which is using the handset and the expected life span of the device.

Avaya customers, for example, frequently use handsets for contact centers. Agents may share them and are rough on them. So customers opt for less-expensive phones, knowing they will replace them frequently.

Cisco and Nortel customers tend to lean toward feature-rich handsets for their knowledge workers and executives, because the IT department has "sold" the system internally on the multifunctional devices that will improve productivity.

Handset costs often are the most expensive part of an IP-telephony implementation. Several IT executives said the high costs slowed their adoption and they are looking toward lower-cost Session Initiation Protocol-based handsets or soft clients to reduce overall end-station costs. In some cases, companies will wait to deploy IP handsets until they are satisfied with the costs of PBX-vendor devices or the quality or interoperability of SIP phones. In other cases, they are looking to use more open source devices when it's time to upgrade or replace existing IP handsets.

Ongoing operational costs

Ongoing operational costs also varied by vendor and rollout size. Perhaps the most interesting general finding is that operational costs scale quite well. The more users on the system, the more users each IT staff member handles. In other words, the per-user cost generally drops drastically when the rollout size increases.

On average, companies spend $473 per unit, per year to operate their IP-telephony system. This figure takes into account the number of staff hours companies spend per year maintaining and managing the system internally, multiplied by the average hourly rate of the staff involved. Additionally, it includes the cost of third-party management services. Those costs combined, divided by the number of end units in the system, provides the per-unit cost.

For small rollouts with fewer than 300 users in the system, the per-unit cost is $1,152. It drops drastically for rollouts with more than 5,000 units online. Those organizations spend only $37 per unit. The ratio of IT/telecom staff to end unit increases. Most of the work required is at the switch or the management or monitoring system. So there is not a proportional IT-to-employee correlation as the number of employees on the system increases.

Savings estimates

It's clear how organizations are spending money when it comes to VoIP, but how are they saving money?

Despite published reports to the contrary, companies are saving money with VoIP, but those savings may not show up immediately. We still find companies saving money in WAN costs, cabling, ongoing operational costs and administrative duties.

Companies also are spending more money in other areas, including operational start-up, repair and handsets.

Organizations save 15% to 40% on their WAN costs when they move to VoIP, and the average is 23%. The savings result from three primary areas:

* Migration to MPLS, typically from frame relay, ATM or leased-line networks. VoIP is the driver to switch to MPLS, but the overall costs for the same-speed circuits are less.

* Integrated access, whereby companies combine voice and data over the same access lines, thus eliminating underused pipes.

* Integrated core circuits. Organizations combine their voice and data networks with an average use of 60% and peak use reaching 75% to 85% (on extremely well-managed networks). They eliminate the need for idle, higher-speed circuits in the core.

Cabling a new building for an all-IP network continues to save organizations about 40% compared with wiring for TDM and IP. In some cases, companies even consider using all-wireless networks that eliminate the need for many desktop drops. But for now, the majority are using Category 5 or Category 6 cable with one or two drops per desktop, rather than the TDM world's three or four drops.

MAC continues to be a big cost-saver when a company switches from TDM to VoIP. The trouble with large enterprises is that they don't see all the savings at once, because their rollouts evolve. Companies are spending $124 per MAC, on average, with a range of $65 to $400, depending on the city where the MAC takes place and whether a third party is handling it. By switching to VoIP, those per-MAC costs drop to less than $10.

Bottom line

Overall, when we factor these savings combined with the additional training -- and often, staff -- required in the early days of VoIP, the net savings is 20% to 30% compared with TDM. This includes overall monitoring, maintenance and updates on the VoIP system, but it does not include problem isolation and resolution. These savings also reflect the first two years of operation. After that, we expect the savings to increase because internal expertise improves.

On the administrative side, we still find many organizations taking advantage of an automated attendant. This allows a single receptionist to handle multiple offices by transferring calls over the IP network at very low costs.

Per-user permutations

We see consistently increased costs with VoIP in three key areas:

* Most straightforward are the handset costs. Companies typically spend $50 to $100 for digital handsets, but they spend $300 to $400 for IP handsets.

* The operational start-up time for the first two years of a large VoIP rollout increases by 20% with VoIP compared to TDM. Anecdotal evidence suggests this cost increase virtually goes away after two years, because, by then, IT staff members are well-versed in VoIP implementations.

* There is an increase in the amount of time it takes to isolate and repair an outage or performance degradation in the IP world. There are many more moving parts, and it is difficult to determine whether the problem is the result of another application contending for bandwidth, issues, the IP PBX, a handset, or a switch or router.

Consequently, IT managers are reporting that it takes as much as four times longer to isolate and resolve VoIP problems as TDM problems. What that equates to is difficult to quantify in a statistically meaningful way, because there are so many variables within each company. For example, the time it takes to resolve a TDM problem varies widely depending on the nature of the problem, and the cost to resolve that problem also varies widely depending on whether a company's internal telecom staff or external vendor resolves the problem.

One of the biggest mistakes we see IT staffs make is in the area of management and monitoring. They generally believe their existing network- and systems-management tools, coupled with the standard VoIP-management and -monitoring tools that come with their IP PBX, are sufficient for operating their VoIP network.

After 12 to 24 months of operation, as the network expands and becomes more complex, these companies realize they need specialty VoIP-management tools or services from managed-service providers.

At that point, they have to get further budget approval for VoIP-management tools. Costs range from $25,000 for small companies, to $50,000 for midsize companies, to several hundred thousand dollars for large companies and as much as $2 million for global enterprises. It's imperative to get this line item into the RFP right away -- and to use these tools during the configuration and implementation.

IT training costs have decreased during the past two years. This is a negotiable item on anyone's contract. It works to the benefit of vendors and resellers to provide IT training on the equipment, because happier customers translate into more business and higher ratings. Those who do pay for training generally pay $1,500 to $2,000 per IT staff member.

User training generally works best when the internal IT staff is at the front of the classroom. Employees usually respond more favorably to training sessions from their peers who understand unique company processes. We recommend that IT staffs conduct 30-minute training sessions with 15 to 30 people in a classroom.

These sessions cover the basics of the system. Save the advanced features for later, and select a tech-savvy group of people from different business units to test these features. As their peers see them using the more advanced features, a grass-roots interest will emerge and employees will be more accepting of learning how to use them, too.

Although cost savings is no longer the most significant driver for VoIP adoption, it's still important to develop a compelling business case for the technology. In doing so, IT staffs will determine which vendor is the most cost-effective and provides the best value.

It's imperative, however, to make sure vendor pricing is all-encompassing. Often, IT executives find hidden costs, such as additional network upgrades required or power-over-Ethernet issues. Remember to consider the operational start-up and ongoing operational costs. These are figures the vendors do not have, so be sure to add them to your cost analysis.

Gareiss is executive vice president at Nemertes Research. She can be reached at

Copyright © 2007 IDG Communications, Inc.

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