Most IT leaders have already or are contemplating a shift to cloud Unified Communications and Collaboration, whether shared-tenant UC as a Service (UCaaS), dedicated-server hosted, or hybrid cloud/on-premises. The reasons for the shift are plentiful, but one that is becoming less and less relevant for many companies is cost savings.
For small and midsize organizations with fewer than 500 employees, the move to UCaaS typically results in cost savings. However, those with 500 or more employees spend more money on operational costs, including cloud subscriptions and IT staffing. Indeed, the staff reductions many thought would follow a move to cloud UC has not materialized. Organizations are adding, on average, 6% more IT staff to handle functions such as UCC partner management, user awareness and adoption, and business unit interactions.
In this report, we examine what’s driving companies toward and away from cloud UC—and how costs change in the cloud based on our real-world research data.
For years, IT leaders contemplated or moved to cloud-based Unified Communications and Collaboration (UCC) services, with the assumption that they would reduce operational costs by leveraging economies of scale from cloud providers and reducing their own staffs. However, Nemertes’ UC Total Cost of Operations research has consistently documented the opposite—cost increases for most companies that moved to the cloud, particularly single-server hosted environments.
That doesn’t mean cloud UC services don't have value. The agility cloud services provide can help IT staffs roll out services more quickly, upgrade features as demand arises, and allow IT staff to focus their efforts in other important areas. For example, IT leaders frequently offload their UCC services to trusted partners—despite the typical cost increase—because it lets them focus on more strategic digital transformation initiatives, according to Nemertes’ 2017-18 Digital Transformation research study.
As the research validates, cloud typically does not support cost-reduction goals, so IT leaders should take the leap to the cloud with realistic expectations. This report examines the following:
- Cloud UCC adoption – To what extent are companies adopting cloud UCC? What’s driving them and inhibiting them?
- Cloud UCC costs – What are the real-world cost differences between cloud and on-premises solutions?
To the Cloud—Or Not
What do today’s architectures look like? In our UCC TCO study, nearly half (47%) are still fully on-premises, and most of those companies were larger, defined as 2,500 or more UC endpoints, defined as a handset, softphone, or audio bridge. The rest had deployed some combination of UCaaS/shared tenant services (all sizes of companies), hosted/single server services (large companies), or hybrid architectures (midsize and large companies), incorporating a mix of on-premises and cloud platforms.
We also asked about specific cloud apps in our 2017-18 Digital Transformation research project. (Please see Figure 1.) The adoption plans vary based on the type of cloud service under consideration. More than two-thirds of companies are doing something with cloud UCaaS today—either using, planning, or evaluating the services. Only 14.9% already have adopted UCaaS in the Digital Transformation study, and only about 19% have evaluated and fully rejected cloud UC; the rest have not yet begun evaluations. And among the cloud apps evaluated, UCaaS has the highest percentage of those who have not yet considered the services (15.4%).
Cloud email and document sharing are the most popular cloud communications apps, with the highest percentages already using them, 28.2% and 35.4%, respectively. Cloud contact center services have the highest percentage evaluating and planning to use in 2018.
What’s driving IT decision-makers to consider cloud UCC? The top reason continues to be perceived cost reduction, according to the UC TCO research. However, the percentage of research participants who cite cost as a driver has dropped substantially in the past year, from 49% to 33%. At the same time, 15% say they are not considering cloud services at all—up from 9% last year. (Please see Figure 2.) Why? IT leaders have evaluated UC cost analysis from Nemertes, seen presentations at conferences, spoken with peers, and have run their business case—and they see what happens with costs.
The majority (58%) of those who perceived a cost decrease were small organizations with fewer than 500 employees. For most of those organizations, a move to a UCaaS offering from providers such as RingCentral, 8x8, ShoreTel, and Vonage, typically results in cost savings.
Moving forward, and based in part on the response from this year’s drivers, we expect the following reasons to drive cloud UCC adoption:
- Agility (29%) and speed of feature rollout (18%) – By using cloud services, IT staffs can shift gears more quickly and easily. They can add new licenses as the company grows, and do so more quickly than it would take to internally add capacity. They also can roll out new features more quickly, since the cloud providers have significantly more technical staffs upgrading servers, testing new apps, and adding them to the service portfolio. Most UCaaS use DevOps and Agile development methodologies enabling new feature rollout daily or weekly. It’s their only job, vs. the internal IT staff, which has competing priorities. Basically, IT can leverage the cloud providers’ economies of scale. At the same time, the services offer more features, a driver for 18% of the research participants.
- Security concerns addressed (21%) – Although many IT leaders have cited and continue to cite security as a concern with moving to the cloud, that sentiment is shifting. Now, they increasingly believe the cloud providers address security more effectively and stringently than they do internally (even though many still cite security as an inhibitor to cloud. See the next section).
- Free IT staff for strategic initiatives (16%) – As organizations continue to focus on digital transformation strategies, IT must focus less on day-to-day technical functions and more on strategy. By essentially outsourcing UCC to a cloud provider, IT leaders can reassign some of the headcount previously managing day-to-day UCC responsibilities to digital transformation initiatives.
Two factors that drive some organizations toward cloud UCC inhibit others: 42% cite security concerns as their primary cloud UCC inhibitor, while 41% cite cost uncertainty. (Please see Figure 4.) Again, the cost response underscores how cost is fading as a reason to move to the cloud. In fact, cost uncertainty has nearly doubled as an inhibitor from last year, when 21% cited it. We expect those who must cut IT costs to shy away from cloud services (other than small businesses).
Though security is the top concern, it has drastically faded from just one year ago, when 61% of research participants cited it as an inhibitor. Those in critical vertical industries, such as financial services, defense, utilities, etc., will continue to cite security as a concern. But we expect security to fade as an inhibitor moving forward
Other inhibitors include the desire to control capabilities available and upgrade schedules, cited by 18% of the participants. Cloud UCC providers can address this concern by enabling customers with more control to accept and push updates and new features when they want.
Another 17% say network constraints are inhibiting their move to the cloud. Those with high-bandwidth, real-time apps (say, heavy video users) would see their on-campus traffic leave their LAN and go across the WAN to the cloud provider. That additional network cost is a non-starter for some organizations. Overall, 38.2% of organizations in our research say their network costs increased by an average of 23.5% when they moved to the cloud, vs. 27.5% whose decreased by an average of 18.3%. Figure 3 shows that nearly 63% of companies are using, planning to use, or evaluating SD-WAN as one way to reduce WAN costs and enable more flexibility as they move more applications to the cloud.
Some point to fewer features (7%) and slower rollouts in cloud services (6%). In talking to some of these companies, they are typically are very large organizations with sophisticated IT staffs. One downside to selecting a cloud UCC service is that you’re limited to that providers’ features set. Those with more sophisticated IT staffs integrate multiple providers in order to get features that the primary provider may not offer.
In our UCC TCO research, we gather information on capital, implementation, and operational costs from more than 700 organizations using the following metrics and calculations:
- Capital cost per endpoint: Includes PBX, endpoint devices and licenses, servers, other hardware. In some cases, bundled licenses include certain UC apps
- = Capital costs / number of endpoints (handsets, softphones, etc.)
- Implementation cost per endpoint: Includes staff time and third-party consultants and integrators
- = ((Staff time * loaded hourly rate)+third-party costs)/ number of endpoints
- Operational cost per endpoint: Includes staff time, equipment maintenance, third-party managed services, training and certification
- = ((Number of FTEs * average annual loaded salary) + equipment maintenance + managed services + training/certification) / number of endpoints
Cloud UCC is not the cost-cutting move many have anticipated it would be. For the past three years, Nemertes has documented a cost increase for all but small companies, when organizations move to the cloud.
In calculating first-year costs, we factor initial, one-time capital and implementation costs, as well as the first year of operational costs. For rollouts with fewer than 500 employees, the median cost is lowest with hybrid rollouts, followed by UCaaS services, on-premises rollouts, and hosted single server services. After the first year, all costs drop from the first year (regardless of architecture), typically, because capital and implementation are one-time costs.
Small companies can save about 5% on UCaaS, compared to on-premises. We sometimes see these organizations using a mixture of UCaaS and on-premises services—which for larger companies is one of the more expensive models. For small companies, though, the $1,662 first-year cost per endpoint is the lowest. This is because when small companies shift from on-premises to UCaaS, they move fairly swiftly and do not add staff to accommodate the move. At the same time, they do not have a full year of subscription licenses for each user.
Midsize and large companies spend more when the use cloud services, whether UCaaS or hosted single server. The cost increase for hosted services makes sense because the cloud provider is not leveraging economies of scale with a shared service. The reasons for cost increases for UCaaS may not be so obvious.
The primary reasons for cost increases in UCaaS are the new monthly subscriptions and increased staffing, despite the fact that some enter cloud services thinking they will reduce their IT staffs. It simply is not happening at most organizations. Typically, managed services and maintenance costs drop after moving to the cloud.
The IT staff looks different in on-premises vs. cloud architectures. Overall, organizations increase their IT staffs by 6% when they move to the cloud.
Specifically, Figure 6 examines the change from on-premises rollouts to UCaaS. Technical, day-to-day functions are the only function that decreases. Though it’s only a 3% decrease, this area contains the largest number of IT staff members (18.65 to 18.09). All of the other functions have between two and three full-time equivalents when on-premises, vs. three to four with UCaaS (explaining the larger percentage increases).
We measured staff changes in four core areas:
- Technical – As stated, the number of full-time equivalents required for technical, day-to-day functions decreases with a move to the cloud. We expect this percentage to decline further over time, as IT staffs slowly release control to their providers and complete integration between the cloud UCC apps and other cloud apps or on-premises enterprise apps (say, CRM or document sharing). Small companies may fully relinquish all technical oversight to the provider, but midsize and large companies will continue to have some technical staff overseeing tier 1 technical support, application performance, internal installations of handsets, audio bridges, or other devices, integration issues between apps or the network itself, among other areas.
- Relationship management – As organizations outsource to cloud providers, they often overlook the effort required to manage the relationship. Those who think UCaaS translates to “out of sight, out of mind” should think again. In fact, IT leaders actually increase staff, by 35% on average, in this area to effectively manage the relationship. They view this relationship management as a “lobbying” function to help align the provider with the organization’s goals. So as the provider is prioritizing new features to release, the goal is to align those decisions to the company’s direction.
- User Awareness and Adoption (UAA) Program – The largest area of growth, at 63%, is UAA programs. This is a significant trend for larger companies. They hire experts within IT to oversee marketing and communications to employees about what UCC services are available. More importantly, they market why they should use them vs. how to use them. Once they understand the value the services can bring (i.e., shave time off a particular function, help to speed decision-making, etc.) they train employees on how to use them. Not only do these programs help improve productivity, they also help IT job security. In the past, IT staffs conducted typically rudimentary cost analyses, requested budget for on-premises deployments, got approval, and rolled out the technology. When they were done, they sent out an email with a few instructions on how to use it—and moved onto the next item on a long list of priorities. No one ever went back to check if the business case was accurate, or to assess who used the service and for what purposes. In a cloud world, executives scrutinize budgets each year. If employees are using only 20% of the licenses available, that budget will no longer exist, potentially eliminating the IT positions behind it.
- Business Liaisons – Some organizations (29%) see a move to the cloud as an opportunity to increase the number of people who are working directly with the business units to promote IT services, or work together to determine how technology can solve problems or create opportunities. These organizations typically move to the cloud for a variety of apps and infrastructure requirements, with the goal of shifting IT’s purpose from tactical to strategic.
IT leaders considering cloud UCC must conduct a solid assessment of their drivers for making the transition. Those who think they will save money likely will not like the results. Nemertes recommends the following:
- Evaluate the move to cloud UCC with a broad perspective. Do not just evaluate single apps, such as voice or instant messaging. Consider the entire UCC portfolio of apps, including but not limited to, voice, video, web/audio conferencing, instant messaging/presence, document sharing, email, team collaboration, and contact center.
- You may find that moving all UCC apps to the cloud aligns with your organizational strategy, or you may find only certain apps make sense (perhaps based on their criticality to the organization). Either way is fine, but conduct a realistic evaluation of costs prior to making decisions.
- Evaluate ongoing operational costs realistically. Though some costs, such as technical staffing, will decrease, others will increase. For most companies, cloud UCC will result in a cost increase, but for that increased cost comes many benefits that may (or may not be) worth the additional spend.
- Successful companies focus on UAA programs, partner management, and business liaison functions to improve the success of their cloud decision.
Nemertes conducted its 12th annual Unified Communications and Collaboration Total Cost of Operations from January through March 2017. We interviewed 14 IT leaders and received responses in electronic survey format from an additional 709 individuals, who come from Nemertes internally managed database and a research partner’s.
We asked research participants numerous questions about their UCC providers and associated costs. In order to be counted individually, each provider needed a minimum of approximately 10 responses or 5% of the total (whichever was less) in each size band measured. Therefore, some had enough among midmarket organizations but not in enterprise organizations, or vice versa.
The research participants span a range of industries and organization sizes. About 43.7% of organizations are small, 22.5% are midsize, and 33.7% are large. Nemertes segments the data by company size and / or rollout size to normalize data or to illustrate differences between company sizes. Figure 8 shows the breakdown of the size of organizations that participated in the research.
This report focuses on those with UCC rollouts of 2,500 endpoints, which may broadly align with employees, though some organizations have more UCC endpoints than they do employees, while others have significantly fewer endpoints than they do employees.
The research also includes representation from several industries, as shown in Figure 9. Nemertes has more detailed breakdowns of larger industries. For example, in financial services, we have data from banking, investment firms, and insurance companies. Professional services breaks down into several sub-industries, such as accounting, legal, consulting, real estate, etc.