Premises vs. Cloud: Does It Matter?Premises vs. Cloud: Does It Matter?

Enterprises are looking for broad services, features, ability to customize and integrate, and reliability at the lowest cost. Where should they look?

Car buyers do their research carefully on various models--reliability, performance, depreciation, and safety. Then they check reviews, perform a test drive, and do other forms of research. The issue of buy or lease comes last; that's just a financial question.

But in telecom, UC, and collaboration, it is more likely a decision up-front. There are big financial ramifications (expense vs. capital), but there are--or were--even bigger technical differentiators between UCaaS and a premises solution--starting with the fact that the two options often involve different vendors. If you're leaning toward a premises based solution, check out that group of vendors. If leaning toward hosted services, check the other vendors. However, separation by business model is beginning to fade.

No Jitter and Enterprise Connect have traditionally been more heavy on the premises side, but last year's conference was used for some big hosted announcements including news from Verizon and XO expanding their offerings. This year at Enterprise Connect, exhibitors include 8x8, Broadvox, M5, and Thinking Phones, to name a few. Increasingly, buyers are considering either/or and hybrid models.

Should cloud and premises vendors be grouped together into a single pool of UC alternatives and solutions, or is it best to keep them separate? More and more, customers are now comparing and deciding between these two models. Gartner, for example, publishes separate Magic Quadrant reports for UC premises vendors and UCaaS providers. Perhaps a hosted Cisco solution versus a Cisco premises solution is primarily a financial question, but in most cases, hosted versus premises involves different underlying technologies. Broadsoft is a major vendor/supplier to hosted providers, and doesn’t sell to end users directly (although large organizations can obtain the platform from Aastra).

As hosted services grow and expand, the collisions with premises vendors are increasing, requiring adjustments on both sides.

Many of the hosted voice providers (not all) are turning their services into commodities as they are unable to differentiate on SLAs, reliability, endpoints, or features. When I speak to hosted voice vendors and ask about their customers and their data centers. I'm generally assured they are targeting larger enterprises and that they utilize robust data centers--but it is rare to get specifics; SLAs are very rare, the names of large customers are even rarer. Few hosted providers stress their underlying software. A large number use software from Broadsoft, but don’t play it up as they wish to differentiate their services from one another's. Many make their own software, or base it on Asterisk. A growing number are using major brands of premises equipment.

As quickly as hosted services have grown, overall penetration is quite small, which indicates a huge growth opportunity. Some suggest the market penetration is only around 5 percent--yet there is rapid growth by numerous providers. 8x8 just announced record growth (again); its revenue grew 21% year over year.

What's a bit ironic is that both premises vendors and hosted service providers agree on a similar vision of off-site solutions. The premises vendors are largely embracing virtualization and centralization--both of which are often accomplished with off-site data centers. Though it may be extreme to expect you'll have no on-site equipment. Premises vendors offer various forms of survivable gateways. Most hosted providers offer to fail-over to mobile phones, but some, such as Fonality, offer a hybrid approach using a managed branded gateway.

Premises vendors are beginning to move into hosted services. Mitel, Interactive Intelligence, and Siemens Enterprise are using their own solutions to move into hosted--reportedly with better than expected results. Microsoft is moving rapidly into hosted services. Some hosted providers integrate with premises solutions--such as Broadsoft and IBM Sametime.

An additional alternative, managed services, are also growing, typically associated with owned premises equipment. Aastra is experimenting with managed services in Denmark that allow customers to purchase a managed, dedicated system per line. Martello Communications targets Mitel dealers with enhanced managed service offerings.

But there are also some stark differences between the two worlds. The premises vendors have been focusing on UC and collaboration and rely heavily on channels. The hosted providers are struggling more with operations (to manage their growth) and, although this is shifting, have relied more on direct sales. One provider revealed that about 80% of their sales are direct--of which 40% close on the first call.

One big area of difference is that the majority of hosted providers require access over the public Internet, leaving them unable to manage or guarantee overall quality of service. But this too is changing. Thinking Phone Networks for example, advocates private networking as their default delivery for hosted services--using the Internet only for teleworkers and ad hoc mobile workers.

Both camps are working hard to integrate their solutions with mobile devices. ShoreTel is using its mobility products to penetrate competitor accounts. FMC solutions typically involve an additional server, but that's all built into most mobile offerings. Rich UC clients for Android and iOS are rapidly becoming standard issue.

Managing growth has not been a big problem for premises vendors over the past few years. Conversely, it's a major problem for hosted providers. Any business growing at 15-30% annually requires heavy investment. The ongoing conflict is balancing that investment between infrastructure and marketing. Hosted providers monitor key metrics such as customer churn, months to new customer profitability, and system availability. The vast majority of hosted providers are private companies.

Over the next few years, the hosted, premises, and carrier sectors will continue to converge and merge. Many carriers have acquired VoIP providers, software vendors are expanding into services (Microsoft/Skype), and premises vendors are getting into hosted services. But it is the customers that are really going to drive consolidation--they are looking for broad services, features, ability to customize and integrate, and reliability at the lowest cost--and less and less important is where the technology lives and who manages it.

Dave Michels is a contributing editor and independent analyst at TalkingPointz.com