Premise and Cloud - Business Case

The idea of presenting a business case (BC) or ROI comparison is supposed to prove “by the numbers” that one method is superior to another or others. The challenges as I eluded to above, is exactly those numbers…who’s numbers and what numbers? The goal of the author is to make them believable so that the exactness of math is enlisted to make the case. However, the reality is that the case is driven by the core assumptions used, and those details that have been glossed over or purposely avoided; in order to arrive at that one method or desired outcome which was inevitably predetermined.

Examine the case, “do the math” and presto, the answer is Cloud PBX is better, if indeed Cloud PBX is all you have in the toolbox. My goal here, is to examine a typical BC/ROI analysis and poke at it a bit to see if it holds together.
A typical Cloud PBX business case will stack up like this:

• Start with a given number of users (choose one that places your solution in the best light)
• Compare the cost of implementation and the cost of operation of the solution (CAPEX & OPEX)
• Compare the annual cost of service and maintenance
• Define the timeframe for comparison to get a Total Cost of Ownership (TCO) view
• Summarize the findings around the desired comparative categories; cost, features, reliability, mobility, security, customer service.

Case Study with typical assumptions

So, if we construct the case it may look like this: (Assume 30 users, 3-years)
NOTE: This is clearly a one-sided view, but it is one that many of the Cloud crowd would have you believe.

Category	Premise PBX	Cloud PBX	Comments
1. Purchase cost	$25,000.00	$0	The case assumes you already have SIP phones, cables, network & PoE
2. Installation services	$1,500.00	$0	The case assumes you install and program the phones on your own
3. Monthly hosting fees	$0	$750	$25/phone per month
4. Service provider contract	$500.00/month	Included	Case assumes you are still using PRI and haven’t deployed SIP trunks or switched to a bundled IP offering
5. Long-distance charges	$450.00/month	Included	Case assumes you are still paying LD charges and haven’t changed to a plan
6. Annual cost of maintenance/support	$3000.00	Included	Case assumes that over the life of the contract you will have zero phone maintenance or support charges
TOTAL 3-YEAR COST	$69,700.00	$27,000	This is not a balanced comparison
Monthly Cost Comparison	$1,930.00	$750.00	It’s a no-brainer

Digging a little deeper we can evaluate the core assumptions which have tilted the case, namely:

1. The purchase cost comparison:

1. If you already have new SIP phones that will not need replacing in the next 3 years then those phones can be reused on the Premise PBX also, so you either need to remove $5,000 from Premise or reconsider the $0 in the Cloud column.
2. If you don’t have new phones, then you will have to add $5,000 to the Cloud column AND address any network requirements such as: IP network cable runs (at approximately $150 to $200 per run), Power-over Ethernet for every phone (approximately $50 per port), VoIP quality settings for your network (may require new network equipment, IT services, constructing a VLAN, etc.) which may range from $250 to $7,000).
3. If you have other phones (analog, digital or IP) that are re-usable with a new Premise PBX then the purchase cost shift is doubled i.e. $5,000 less on the Premise side, and $5,000 more on the Cloud side.
4. Worst Case on the Cloud side is you need all new phones, all new wiring, PoE and new network switches. This could narrow the gap from a $25,000 difference down to $20,000 – sum($5,000 + $150*30 + $50*30 + $7,000) = $20,000 - $18,000 = $2, 000.

2. Installation services.

1. You can pay to have a professional to do it, or you can do it yourself. It is quite likely to take longer and may be a bigger challenge than anticipated, especially if you run into problems that may require advanced troubleshooting. Setting up the auto attendants voice menus, the greeting and after hours call flows can be time consuming.
2. Telephone and/or web-based help is not always the best and most responsive. Some VoIP issues require call traces and packet captures to determine corrective actions.
3. Be prepared to provide continuing support and maintenance for your Cloud PBX, it’s not that it can’t be done, it’s just another task to take up your time.

3. PSTN Service provider fees and long distance charges.

1. Suffice to say that any Premise PBX today can support SIP trunks. Some providers may charge a license fee for activating the capability but when added it can save a lot on the monthly amount. For example, a 30-user system with 30 published telephone numbers (DID’s) would cost $180.00 per month with unlimited dialing to North American numbers. This alone would bring the 3-year total of the Premise PBX ($69,700) down to $32,980, a 3-year savings of $36,720.
2. Many SIP trunk services offer more than the typical 1000 minutes per user that many Cloud PBX providers allot. Over usage will incur higher than the $25.00 per user price.

4. Annual cost of maintenance and support

1. A $3,000 per year cost for annual maintenance and support needs to be considered against the cost which may arise on the Cloud PBX side, namely: the cost of replacement phones, the loss of use of the system in the event of network outage.
2. The PBX database needs to be updated as changes in your headcount and employee moves, adds or changes take place. Software bugfix updates, software upgrades, database backups are all part of the routine maintenance tasks.
3. At a loaded labor rate of $50.00 per hour, $3,000 per year represents 60 hours of cost to your business. Assuming your employees drive 4x the loaded labor rate in revenue, any amount of time beyond 15 hours spent on administering, troubleshooting or maintaining the Cloud PBX will impact the top line of your business.
4. Should a significant outage occur, you may need to contract a local technician to resolve the problem. The impact to your business may be significant…not that an event like this can just as likely occur with a Premise PBX system; just that the familiarity with your system and the provisioning gives the technician a marked head start in the race to service restoration.

Case Study with modified assumptions

So, let us reconstruct the case for 30 users, 3-years;

Category	Premise PBX	Cloud PBX	Comments
1. Purchase cost	$22,000	$5,000	Reuse 50% of your phones for Premise PBX
2. Installation services	$1,500	$2,500 plus $500	Cloud PBX PoE switches, 10 cable drops, 10 hours of your time at $50.00 loaded labor rate
3. Monthly hosting fees	$0	$750	$25/phone per month
4. Service provider contract	$180/month	Included	Premise PBX – deploy SIP Trunks
5. Long-distance charges	Included	Included	Premise PBX – deploy SIP Trunks
6. Annual cost of maintenance/support	$3000	$1,750	20 hours of your time at $50.00 loaded labor rate, 3 phones
TOTAL 3-YEAR COST	$32,980	$36,750	A more balanced perspective
Monthly Cost Comparison	$916	$1,021	It is now a CAPEX/OPEX decision

As you can see, the comparison is much closer when “doing the math” includes all those underlying assumptions and devilish details. This becomes much more of a CAPEX/OPEX discussion which appeals for the need to look at the Total Cost of Ownership (TCO) over the period of expected use.

Further cost analysis

So, as a fan of math, you can go a few steps further:

1. What if the Premise PBX has a life expectancy of 5 years?
2. What does a Monthly cash flow, break-even analysis look like?
3. What is the Present Value (PV) comparison for 3-years? For 5 years?–

1. PV presents a single total based on the future value of money.( i.e. if I were to invest X dollars at an annual return of 3%, how much would I pay today to cover the full cost over the duration of the term). ?

Here are the answers:

1. 5-year TCO comparison:

1. Premise PBX = Total 5-year cost of ownership = $46,300
2. Cloud PBX = Total 5-year cost of ownership = $54,750
3. Premise PBX = 5-year monthly cost comparison = $771.67
4. Cloud PBX = 5-year monthly cost comparison = $912.50

2. Break-even analysis summary – The Premise PBX begins a positive break-even projection is Month 34. By Month 60 the Cloud PBX represents an $8450 higher cost to own.

3. Present Value comparison: slightly favors the Premise PBX.

1. 3-year, 3% interest rate PV:          Premise PBX = $37,798.03             Cloud PBX = $37,821.90
2. 5-year, 3% interest rate PV:          Premise PBX = $38,724.12             Cloud PBX = $41,163.99

All of this to prove what? That the winner is YOU, providing you consider all factors, cost is just one and it is typically used to persuade you to “go Cloud”. Your time to manage and maintain your own system needs to be factored into your decision – something most Cloud PBX providers ignore or completely gloss over. Feature functionality and mobility/access can be achieved on either side. If you are leaning towards Cloud, remember that Security and Reliability all depend on the strength and stability of your network and your network provider’s service record. I believe Customer service is better when you have a direct relationship with a real technician - not a call center person reading through a scripted problem isolation/resolution algorithm. If you choose Cloud you need to realize that every phone call is traversing the IP network to your Cloud system – even for extension to extension dialing. Consider this; paging a floor in your office will result in numerous calls over your network – all at once. It is well understood that 90% of voice over IP call issues are network issues. Many VoIP problems are of the annoying variety and go unreported (like a bad cell phone connection); but still they can have an adverse effect on your business, or even the Customer perception of your business.

Beyond the hard dollar comparison

Of course, this comparison has focused almost exclusively on the hard dollar aspects. Businesses should also be looking at other important considerations including productivity, growth and Customer satisfaction – considering these three as important Customer considerations in choosing a solution and a vendor should necessarily weigh in the decision; however, bringing those factors into the light is not part of a business case discussion. Typically, financial people are looking for hard dollar rationale and the soft dollar gains (like worker productivity) are acknowledged, but not included in their calculations.

Remember telephones provide human to human connections, they support and cultivate relationships. Don’t get caught up in a decision that may cause unforeseen difficulties down the road only to find that going down a different path is akin to starting over - potentially with the added pain of paying to exit a no-longer-desired contract.

The freedom to choose either and more importantly, the flexibility to deploy a blended option incorporating the best of both models. Premise with a fail-over to Cloud, a Cloud PBX supporting circuit-switched analog and/or digital phones on the premise (try finding that option in the Cloud space). Digital phones that support all the functionality of IP phones (presence, mobile twinning, web-based softphone shared extensions and more). These are choices worth having available to you, don’t get distracted by all that turbulence generated by the Cloud Crowd.