For service providers, the objectives of IP Centrex and hosted Unified Communications services are similar: Give business customers another way to access IP communications technologies without having to invest in customer-premises systems. There's certainly opportunity in the market. Some 84 percent of small and medium-sized businesses today still had some kind of on-premises voice solution in 2007 - key telephone systems or TDM PBX systems - according to IntelliCom Analytics.
Both IP Centrex and hosted Unified Communications emphasize another model: services delivered from the "cloud," so service providers can offer IP services whose costs and technologies can be shared across multiple tenants. Industry analysts even lump the two solutions together under the catch-all category of "hosted IP PBX."
But how similar really are IP Centrex and hosted Unified Communications? Do they both offer the same kind of feature sets, the same technology advantages and product roadmaps, the same opportunities for profitable revenue and monetization?
Service providers that may be considering investing in hosted IP PBX solutions - or expanding what they already offer - would benefit from comparing the two hosted approaches on several key business and technology dimensions. Five questions should help facilitate a useful comparison:
1. Does the hosted solution allow for service-provider differentiation in the marketplace?
2. How does the hosted solution meet technology requirements like scalability, quality of service (QoS), integration into the LAN environment, and manageability?
3. Is the hosted solution suitable for a range of addressable markets, from small businesses to enterprise customers?
4. What are the roadmap and vendor risks associated with each solution?
5. Does the hosted solution allow service providers to monetize their "cloud" investments?
Before we explore these questions, let's look at the business and technology trends that have led to the development of hosted IP PBX services.
The Roots of IP Centrex
IP Centrex is an updated take on business model that was born in North America in the 1960s, when the monopoly Bell companies began offering the provisioning of PBX voice capabilities from the telephone central office. For a per-seat fee, smaller businesses could receive a set of basic telephony services without having to manage equipment onsite.
As IP communications spread from the data world to voice services in the late 1990s - bringing with it the efficiency and cost benefits of packet-switched communications - service providers seized the opportunity to recharge what was by then a declining Centrex market.
Today, IP Centrex is delivered over one of two architectures. One architecture uses an existing Class 5 switch adapted to work with IP by using network and customer gateways. The other replaces the Class 5 switch with a softswitch - telephony applications running on an industrial-grade server in the network. The softswitch and the customer gateways and IP phones signal one another over a packet network using an IP telephony protocol such as Session Internet Protocol (SIP).
Depending on the solution vendor, IP Centrex typically delivers a core group of 30 or so basic telephony features, including call-control features like call forward, call transfer, call waiting, last-number redial, and three-way calling; dialing features like extension dialing and speed dial; and other features like voicemail.
The basic feature set and scalability considerations of IP Centrex have generally limited it to the smallest companies that want IP telephony simple and cheap.
The Demand for Richer Features and the Rise of Hosted Unified Communications
As customer-premises IP PBXs began being deployed across medium-sized and large enterprises in the last few years, companies and government agencies recognized the value of integrated IP solutions that combine telephony with a range of collaboration tools, customer-care systems, and mobility features. In fact, a 2009 Forrester Research study found that customers were willing to pay more for add-on services, and that mobility, web conferencing, and collaboration integration with IP telephony were at the top of their lists.
While they say they want the latest Unified Communications features, some of these organizations don't want to make the significant capital investments or deal with the ongoing maintenance issues associated with customer-premises solutions. Service providers are able to satisfy this demand by marketing hosted Unified Communications solutions that offer most of the 500-plus features of onsite IP PBXs - but are delivered from the cloud.
A 2010 Forrester study commissioned by Cisco predicts that business-customer demand for hosted Unified Communications services will be expanding significantly across customer segments. Hosted Unified Communications is expected to grow from US$1.8 billion in 2009 to over $4 billion in 2014. By then, about 30 percent of the Unified Communications market will consist of hosted, rather than on-premises, solutions.
Still, few analysts make clear distinctions between hosted Unified Communications and IP Centrex, and service providers are left to wonder if there really is a difference. Let's look now at the five key business and technology questions that service providers should ask when comparing hosted IP communications solutions.
Question 1: Does the hosted solution allow for service-provider differentiation in the marketplace?
IP Centrex - offered by solution vendors like Broadsoft - was not designed from the start to be a feature-rich solution, but rather a basic set of telephony services. For the most part, basic IP Centrex has become a commodity service, with tight margins and very little differentiation in the marketplace. For small businesses (companies with fewer than 100 employees) that have limited technology needs and are looking for affordable hosted telephony, IP Centrex fills a logical market niche.
Hosted Unified Communications had a much different genesis. On-premises IP PBX solutions from vendors like Cisco were designed to provide flexible scalability and feature sets for organizations of all sizes, up to the largest enterprise customers. Hosted Unified Communications provides these same capabilities - using the same kind of equipment and software - from the cloud rather than the customer premises. The baseline architecture of the Cisco® Hosted Unified Communications solution, for example, integrates the call-control capabilities of Cisco Unified Communications Manager with the routing and services function of the Cisco PGW softswitch.
When it comes to the number of available features, advanced forms of hosted Unified Communications solutions outpace basic IP Centrex by up to 20-fold. Figure 1 shows a sample of nearly 600 features available in Cisco's advanced hosted Unified Communications solution. A subset of these features is also offered in IP Centrex as the table illustrates:
In addition to all the traditional telephony features like call waiting, forwarding, and abbreviated dialing, hosted Unified Communications offers integrated messaging with visual voicemail; customer-care tools such as automatic call distribution, integrated voice response (IVR), and self-service speech recognition; collaboration tools such as instant messaging, presence, and web-based audio and video conferencing; and mobility features such as single-number reach and single-number voicemail.
To be fair, some IP Centrex vendors have expanded their feature set beyond the basic 30 features by partnering with other software vendors. But these solutions were still not designed from the start for enterprise applications.
Feature-set flexibility is a key for service providers to differentiate themselves in the market - affording them the pricing power that lets them move beyond commoditization.
Question 2: How does the hosted solution meet technology requirements like scalability, QoS, integration into the LAN environment, and manageability?
Because IP Centrex and hosted Unified Communications have different technology roots and architectures, they perform differently as the number of customer endpoints grows.
Scalability: Some IP Centrex vendors claim that their solutions can scale up to 400,000 endpoints. What they don't say is that this is possible only with the vast majority of the features turned off. Unless service providers want to invest in a large number of additional gateways, databases, switches, and servers, most IP Centrex cloud solutions are designed to serve only customers with 100 or fewer endpoints.
Hosted Unified Communications, on the other hand, has it roots in the enterprise - and can be configured to serve end customers ranging from small businesses to global enterprises.
Quality of service: How do IP voice applications perform as the number of endpoints increases? The answer to this question can mean the difference between meeting or violating service-level agreement (SLA) requirements.
As some IP Centrex solutions are scaled to support a larger number of endpoints, end customers have commonly reported QoS issues such as jitter, echo, and even failed calls. While problems like these can occur on any system, hosted Unified Communications solutions are built to scale without voice degradation.
Integration into the customer's LAN environment: Everyday business applications from software vendors like Microsoft usually reside inside the customer's LAN environment. However, telephony and collaboration services are hosted in the service provider's cloud, with firewalls in between. When the LAN and cloud applications have trouble communicating because of firewall or other integration issues, who will the customer blame? In all likelihood, the service provider will be held responsible.
Hosted Unified Communications solutions, such as those offered by Cisco, started off as on-premises IP PBX solutions that were designed from the start to work within the LAN environment. The firewalls that can cause trouble in IP Centrex environments are, in many cases, delivered using Cisco hardware and software, so integration is not a problem.
Manageability: Both IP Centrex and hosted Unified Communications offer customer portals for administration of moves, adds, and changes. In an IP Centrex environment, customers can make changes to their IP phones, but most other administrative issues have to be managed by the service provider. With hosted Unified Communications, devolved administration can be assigned to customer departments and branches to help customers manage a wide range of moves, adds, and changes themselves.
Another manageability dimension for service providers to consider is that their IT staff is probably already familiar with IP PBX technologies - and therefore more likely to understand basic troubleshooting steps. Because IP Centrex technology is mostly proprietary, many service-provider administrators don't have the same level of expertise.
Question 3: Is the hosted solution suitable for a range of addressable markets, from small businesses to enterprise customers?
The math isn't difficult: The more addressable markets (customer segments) to which service providers can sell their hosted solutions, the more potential revenue to be gained.
IP Centrex once touted itself as an ideal hosted telephony solution for organizations of all sizes. However, today most IP Centrex services are still delivered to the smallest, sub-100-employee organizations that have limited needs and are price-conscious. About half of small businesses fit this category, so IP Centrex is a good solution for that market niche. But these are not the technology spenders, so the revenue opportunities are limited.
Because of its scalable foundation, hosted Unified Communications can be marketed to a wide range of potential organizations. What's more, Unified Communications doesn't have to be "one-size-fits-all." Packages can be tailored to the customer segment, with the smallest companies perhaps opting for "Foundation Unified Communications" with basic features like call control and single-number reach; bigger companies choosing "Full Support Unified Communications" with features including call control, automatic call distribution, single-number reach, voicemail and audio/web conferencing; and enterprise customers opting for "Advanced Unified Communications" with all the features mentioned plus mobility and customer contact-center tools.
Of course, graduated pricing can be designed around these customized packages, with more advanced packages commanding the greatest revenue per endpoint.
Question 4: What are the roadmap and vendor risks associated with each hosted solution?
An important consideration when comparing hosted solutions is not just today's offerings but the future of the vendor platform. There are two main areas of risks for service providers to consider: technology-roadmap risks and vendor risks.
One thing remains true in technology: Customers always want access to new features and capabilities as they become available. However, service providers that offer IP Centrex have discovered that the upgrade path to expanded services is not always a smooth one. As IP Centrex vendors partner with other software providers to add collaboration and mobility features to the basic telephony set, service providers have to buy more than just new software licenses. Often, they have to purchase new servers, new databases, and new gateways - essentially forklift upgrades - straining an already low-margin business model. What's more, expanded IP Centrex solutions typically involve multiple vendors, complicating the process of identifying root causes and managing vendors.
Vendors like Cisco have built their customer-premises solutions around investment protection and long-term product roadmaps. The same is true for hosted services: Service providers don't have to abandon old equipment to get new features.
Then there are the vendor risks. IP Centrex vendors - many of them smaller companies serving niche markets - don't always have the money to plow into research and development, so new features and capabilities emerge slowly, if at all, over time. These vendors also don't always have the resources and staff to invest in thoroughly testing new features. And there's no guarantee the vendor will even be around in five or ten years.
What's more, since the latest, more feature-rich IP Centrex solutions are the results of partnerships among multiple vendors, these partnerships can cause complications if not managed with care. For example, the proprietary SIP interfaces in IP Centrex solutions can cause integration problems within the multi-vendor solution. Also, if there are problems with things like maintenance or warranties, it can be harder for service providers to hold a single vendor accountable.
Hosted Unified Communications vendors like Cisco are stable, well financed, and invest significant resources in feature development and testing. In cases where Cisco uses third-party features as part of its hosted Unified Communications solution, Cisco remains the single point of contact for trouble tickets, maintenance, warranty, and other issues.
Question 5: Does the hosted solution allow service providers to monetize their "cloud" investments?
No matter how many features or competitive advantages a hosted solution might offer, for service providers, it all comes down to business. Does the hosted solution enable the service provider to monetize its investments in cloud services?
Revenue per endpoint is one measure. IP Centrex solutions typically command US$8 to $12 per endpoint. Hosted Unified Communications solutions can charge between $18 and $40 per endpoint, depending on feature set and negotiated discounts and nonrecurring fees.
But are these revenues profitable?
The commoditization of basic IP Centrex, as mentioned earlier, has led to slim margins in the market space. With hosted Unified Communications, margins can be higher. Cisco recently calculated a five-year business case for a hypothetical service provider offering a medium-featured hosted Unified Communications solution and charging recurring fees of US$33 per endpoint. Over five years, as Figure 2 shows, the hosted Unified Communications brought in $61 million in revenues and margins that ranged from 20.4 percent the first year to 48.5 percent the fifth year.
(The business case makes several assumptions regarding number of end customers, retention rate, average headcount per customer, feature-set attach rate, and nonrecurring fees. Of course, revenue and profitability will vary with each real-world situation.)
Figure 1. McMillan's Key Assumptions and Business Case
For More Information
In this paper, we've addressed five questions to help service providers compare IP Centrex and hosted Unified Communications. To explore other questions regarding hosted IP solutions, contact an account representative at Cisco.
We'll be glad to highlight the differences between IP Centrex and hosted Unified Communications - and what these differences mean for you and your customers.