Voice Communications Comparing Hosted VoIP Solutions vs. Premise VoIP Solutions
Jamie A. Buswell
CEO--North Atlantic Communications

In addition to the somewhat overwhelming myriad of decisions to make when reviewing telecommunications solutions, you may now be faced with choosing between a Hosted VoIP or Premise VoIP deployment. Hosted VoIP voice is becoming a more appealing option for businesses due to its array of attractive benefits that provide considerable value. Premise VoIP solutions have been a part of the business landscape since the beginning. In order to understand the differences between both solutions we need to fully understand what a Hosted VoIP offering specifically provides.

Understanding the Fair and Balanced Analysis of Cost

Before delving too deeply into this white paper please consider the following: If you are a midsize, large, or enterprise business, you will find after a fair and careful analysis that over a five-year depreciation schedule or operating expense analysis the costs of a Hosted VoIP and a Premise VoIP solution are basically the same. Hosted VoIP offerings are attractive from a financial perspective because of the low upfront investment, while Premise VoIP could present itself with a more expensive upfront cost, but also carry features that you may want down the line. At this point, if upfront cost is your only consideration you should not bother with the rest of this document. CFOs are usually targeted as Hosted VoIP sales prospects due to the typical attitude of "figures don't lie, but liars figure". The CFO will focus on the line item comparisons of the current cost as replaced by the new example. In order for the numbers to be right the base line assumptions must be correct and the CFO does not have the tools in his own domain to establish the right information to evaluate. Now the reason your organization may be looking at a Hosted VoIP offering is simply because your legacy solution--for whatever reason--is not working. Therefore by the explanation above, you can't use your current telecom system dynamics for base line assumptions. Thus, whether you're looking at the cost to make a call, or the feature set, etc., any comparison of a new solution with your current system will always seem in favor of the new solution. Instead, one needs to establish the required technologies as it applies to your current business processes. That discovery should focus on: managing change, improving productivity, minimizing risk, reducing TCO, and increasing revenue. By addressing these requirements and using present VoIP technology and both Hosted VoIP and Premise VoIP equipment, you can draw a true comparison. At that point your organization's CFO would have the correct base line assumptions regarding achieving those objectives for a true cost analysis.

These are important concepts to consider when analyzing the cost. Mistakes are brutally apparent only after the contracts are signed, and the solution is installed. Further understandings of the costing components and costing mistakes are amplified throughout the document. Understanding them will prepare you to have a complete and accurate accounting of the cost associated with a Hosted VoIP or Premise VoIP solution.

Going to the Cloud

Every so often the industry runs another ambiguous mantra up the flag pole for everyone to salute, and we in the industry are left in the position of explaining and overcoming the misnomers associated with new technologies. One of the biggest obstacles we had to overcome was the association of VoIP with the Internet. Although the acronym for VoIP stands for "voice over Internet protocol" it does not mean "voice over the public Internet". This distinction is important. Although you can deploy VoIP over the public Internet there are many ramifications to consider. At this point you may be wondering what this has to do with the topic. Please hold that thought, we will circle back.

The "cloud" is the current new mantra, with the consideration that it impacts the natural progression and expansion associated with the quickly moving transition of public voice switching network to pure VoIP. This is in conjunction with the growing power of smart wireless phone communications, and the demand for "Mobility".

Let's have a clear understanding of what "going to the cloud" means. It is not some magical place in the sky. In simple terms your organization is relocating your hardware and software to another location and abdicating your responsibility to someone else. By doing this you are relinquishing control of your voice communications to a tenant-shared environment. In other terms your organization would be operating on a "subscription-based service". With this scenario, you are eliminating the need for onsite centralized equipment and its associated maintenance, security, and software upgrades. Important to note, and most times over looked. This does not imply that no equipment is required at your office. More on that topic later in this document.

For our purposes "going to the cloud" is another way of referring to a Hosted VoIP solution. Hosted VoIP offerings use what we refer to as "top down" architecture. This means that all your voice communications intelligence is in the cloud. There is a connection from your site to the Hosted VoIP site. This connection is vital to keeping your business communication working. Lose this connection and you are out of service. You can add route "diversity", an alternate connection for failover, but that expense doubles your connection cost on a recurring basis. In terms of "top down" architecture if the head is cut off the body dies. You would lose all functionally. If business continuity is paramount this needs to be considered.

Note: Later on we will review Premise VoIP solutions, and explain the alternate architecture using a "Horizontal" deployment.

The standard cloud model is a basic package of features offered at an attractive monthly fee per users. Optional advanced features are often available on an ala carte menu with associated additional recurring fees.

Foundation Pricing Principals of a Hosted VoIP Solution

The hallmark of a Hosted VoIP offering is the inclusion of a "flat rate" or "unlimited", local, regional and long distance calling plan. One should be careful to understand and identify the difference between the two calling plan models. Flat rate includes free calling up to the cap of minutes as included in your monthly agreement. Once over the cap, you will pay a per minute rate, most times higher than the current street price. If you know clearly what your usage will be this may be a better plan.

"Unlimited" calling is very attractive considering you can make as many calls as you want at no charge. One fee per month making it real easy to stabilize cost. The consideration here is how much calling do you do? There are only so many calling minutes in a business day. When you consider inbound traffic and other responsibilities that window is greatly reduced. You must consider the bundled cost as compared to actual minutes needed. There is an important caveat to that calculation. Please read on to understand traffic considerations.

The next topic covers the difference between a Hosted VoIP calling plan that is "per user" subscription, or one that is "per call path" subscription. Both have disadvantages and advantages.

A "per user" subscription plan is a bundled price that includes the standard package of features offered with the calling plan whether it is a "flat rate" or "unlimited" offering. You can then take your total users and multiply the bundled prices to come up with your operating cost less any ancillary services and site options.

A "per call path" subscription plan is a "flat rate" or "unlimited" price that is a separate pricing component of your agreement. In this type of plan you have a price per user and a per call path price. You would take the price per user and multiply by the amount of users, and take the per path price and multiply by the amount of paths. Again, the total is your operating cost less any ancillary services and site options.

Okay so now let's look at the disadvantages and disadvantages of each calling plan. To understand both options we will need to understand "traffic" or "contention".

Let's consider that for the rest of this document we are talking about a business that requires a total count of fifty (50) phones counting all the people, break rooms, conference rooms, and courtesy phones. Fifty phones is also a good ruler, because you can easily move your numbers up or down and the example and considerations will hold true.

If you are an average business, meaning you're not an outbound call center or telemarketer, you can figure just about a fifty percent split between your inbound traffic and outbound. The natural flow of your business may move the balance a little either way but for the analysis the considerations will stay the same.

Under the "per user" call plan, each telephone has the capability to make or receive a call. When we consider "traffic" or "contention" (the inability to find a clear path for a call), we can say that there is no contention, or you are "non-blocking". Since Hosted VoIP offerings have call waiting features, all your people can be on phone talking and your customers can still call, be received and put in queue, an excellent feature. The trade-off is that you are paying a premium per user to ensure that calls are always available inbound and outbound. You are also paying a premium on phones that are seldom used.

Under the "per call path" plan you can economize your recurring expenditures by only agreeing to a total number of call paths that would be somewhat less than the total number of phones. You could reason that the office has medium or low traffic, meaning that maybe you see more people not using the phones than people on calls. So why bundle the call plan into the user plan? To save money that reasoning is correct. You might say, "I never see more than twenty people on the phones, let's save money and order only (20) call paths". The trade-off being that you could have "contention". If you receive, or try to make more calls than call paths, people will get a "busy signal". Why? because no resources (paths) are available. In order to make sure none of your clients get a busy signal you must over subscribe call paths. You need to understand your busy times, and make sure you have more available paths during those times. Generally, between 10:00, and 2:00 are the most busy times.

Since the sales person is focused on signing an order, he or she may not be too concerned if your assessment is correct. Mistakes are gifts to the sales person. If you are wrong it is at best too late and you may need to order additional call paths throwing off your cost analysis. Under the per user bundle you most likely will be spending more money for resources then are needed.

One note is that if you have a business with a substantial volume of calls such as an outbound call center or you use automatic dialers for marketing or customer service purposes, Hosted VoIP plans have an exclusion policy for using their offering for these types of unusual heavy volume. That being said, if you are the atypical business you have nothing about which to be concerned.

Quality of Service (QOS)

There are two ways to connect to your Hosted VoIP provider. We refer to this as "managed bandwidth", and "unmanaged bandwidth". Where by unmanaged bandwidth refers to the public Internet.

If you have not figured it out as of yet, Hosted VoIP solutions use VoIP to connect to an organization or business. There are inherent obstacles to using VoIP. The technical reasons are many, but we do not need to expand on them. Those obstacles can be overcome.

Instead, we can refer to all the obstacles for deploying a Hosted VoIP solution using VoIP under one acronym, "QOS" Quality-of-Service. By providing QOS as part of your Hosted VoIP deployment you can be ensured that your voice calls will be perfect.

It is important to understand that QOS can't be guaranteed when using the Internet to connect up to Hosted VoIP solution. This is a steadfast rule. The voice quality can be great one moment and not acceptable the next moment. It could work great for a long time, and then not work at all. Hosted VoIP contracts will always have a disclaimer holding them harmless in terms of consistent quality in the event you deploy using the Internet.

There are ways to minimize poor QOS using the Internet, and those best practices should always be in place prior to deployment. It is important to note that depending on your network, to achieve QOS additional equipment may need to be provided, and additional labor cost. Make sure the network assessment is done prior to deployment.

Best practices would dictate that one uses managed bandwidth to deploy a Hosted VoIP solution. The reason is that QOS is built into the design and call quality is inherently perfect. Managed bandwidth is commonly provided using a technology called "MPLS", "Multiprotocol Label Switching" although we prefer "Managed Private Line Service". There is a premium associated with using MPLS that adds a significant cost to the Hosted VoIP deployment. To understand this cost there are calculations that need to be determined associated with amount of phones and concurrent call paths. That calculation will determine the optimal size MPLS (pipe) needed to carry your voice traffic. and mitigate contention (busy signals). The correct size will determine the recurring price for the MPLS circuit generally priced in increments of 1.55 megabits. Step over that size and your recurring transport cost will double. If not sized correctly you will have contention. Additionally, if undersized, you may be paying for users, or call paths that are not fully available, resulting in over subscribing and over paying per month. This option also requires an installation cost and additional equipment. Guaranteeing QOS using MPLS adds a significant recurring cost to Hosted VoIP solutions. It is often overlooked or conveniently missing from of the majority of analysis documents we have reviewed.

Again we caution--since the sales person is focused on signing an order--he or she may not be too concerned if this calculation is correct. This is an area where costly mistakes could drastically change the cost analysis.

Mobility within the Hosted VoIP Solution

Mobility is one of the most important reasons to consider the new VoIP technology offered by both Hosted VoIP and Premise VoIP equipment. Mobility in simple terms is the ability to stay connected to your organization and extend your desk top communications beyond the four walls of your office. We like to refer to this as "Find-me, Follow-me, and "stay connected" features. Most times mobility is related to interoperability with your smart phone. Since both Hosted VoIP and Premise VoIP offerings include this feature the considerations are as follows: review in detail the capabilities of the offerings and products being considered. There is a great variation in what can or can't be done--you should assume nothing. Have both fully demonstrated to you. In most Hosted VoIP plans this is considered an ala carte feature and is priced as a per user option. In Premise VoIP equipment this should be a standard feature included in the base cost of deployment. This is another area often over looked when doing a price analysis.

In the area of mobility the top providers of Premise VoIP VoIP have the ability to automatically understand the location of an employee and route customer calls in the most effective manner. This is to say that if a mobile user is in a "hot zone", the Premise VoIP equipment will connect the call using free broadband, as opposed to making a wireless charged call. When considering Hosted VoIP vs. Premise VoIP, this is an important consideration if you have a large mobile force in the field.

Telecommuting, or working remotely from the office while being fully connected is another important consideration, and a compelling reason to consider VoIP Hosted VoIP, or Premise VoIP offerings. The simple analysis here is that a Hosted VoIP offering will have this as an a la carte feature with additional recurring fees per user as opposed to a one time inclusion found with a Premise VoIP offering.

Voice mail to E-mail is a standard feature in both Hosted VoIP and Premise VoIP solutions. This is the ability to have your voice messages available wherever you have access to your e-mail reader. Hosted VoIP offerings do this by sending an attached wave file to your e-mail. Premise VoIP solutions can do this as well. It should be noted that wave files have a significant impact on the information store on your e-mail server and your IT person or consultant should review this impact. Another area often overlooked. A better option is the ability to access your voice messages from e-mail by streaming the audio on demand from the phone system. It is important to consider if this option is available on either solution.

Unified Communications, or "Presents" is the ability of a desk top user to have a client program running that allows for real-time status and interaction with co- workers. All of these issues are critical considerations with Mobility as it pertains to a Hosted VoIP offering.

Equipment Considerations

Most often the biggest expense related to both a Hosted VoIP solution and Premise VoIP solution is the cost of the telephones. Hosted VoIP solutions come in two flavors: some plans allow you to purchase your own phones, and others allow you to include them as part of the unit user price per month. Premise VoIP based solutions are the same. You can purchase your phones or instruments outright, or have them included in a monthly fee.

From a cost analysis you should consider that there are no advantages for a Hosted VoIP or a Premise VoIP solution in determining the purchase of the phone instruments. The decision is how you want to expense them. Include them in a monthly fee as part of a Hosted VoIP offering, and you have created an operating expense. Purchase them outright, and you have a depreciating asset and a tax credit for capital investment.

You should consider two items related to the phone instruments:

First it you decide to go with a Hosted VoIP solution, and purchase your own phones, you are now responsible to manage, maintain and provide your own repair and provide replacements. Since the idea behind choosing a Hosted VoIP solution is to unburden yourself of responsibilities, you may want to keep them as part of the cost analysis as provided by the Hosted VoIP offering.

Second with a Premise VoIP solution you will be offered an outright purchase or a monthly fee to cover the equipment cost. Since equipment in either case would be covered under your care agreement, you have no responsibility to manage, maintain and/or provide your own repair and replacements. Since monthly fees can be constructed either as an operating expense or as an installment payment plan, you can still take advantages of a depreciating asset and tax credit.

One of the big misunderstandings when comparing Hosted VoIP and Premise VoIP solutions is related to equipment. In both cases you will still have equipment located at your office.

The equipment footprint for both have homogenized down to rack space in your computer room. This is important to consider. As we said earlier in this document Hosted VoIP uses "top down" architecture. You have a single point of failure at the Hosted VoIP site: the transport level and the onsite equipment level. As we said earlier you can minimize this by having redundancies across-the-board, except that it all comes back to a single point of failure at the Hosted VoIP level. This would result in a dual recurring cost.

Premise VoIP solutions allow for inexpensive redundancy at the local level allowing for hardware failover, route diversity, and alternate carriers. Resulting in a "horizontal" deployment whereby you have no single point of failure.

Network Considerations

There are also internal network considerations: when using a Hosted VoIP solution it is important to consider that the provider is not responsible for your local network and network security. The cost related to setting up, installing, and maintaining the system is your responsibility. Whether it is Hosted VoIP or Premise VoIP, one needs to figure out the professional services associated with vendor based management of your environment when considering deploying VoIP.. Businesses that do not have competent IT people on staff should consider the risk as well as the addition professional services necessary when deploying this technology.

Business Continuity Issues

Let's touch on business continuity "Survivability" and "Route Diversity in relationship to having more than one connection to the Hosted VoIP provider. If business continuity is an important part of your technology deployment there are issues to consider. One could debate the advantages of having a "cloud" or Hosted VoIP voice solution or a Premise VoIP solution. There is an equal amount of reasoning for both when considering business continuity. In the event of a complete business interruption such as a fire or event that destroys your facility, a Hosted VoIP solution offers a quick way to continue receiving calls. With a Premise VoIP solution this would only hold true if the organization had an enterprise deployment of more than a single location or a planned emergency offsite location.

The important thing to consider for business continuity is that Hosted VoIP solutions are single source--you have only one carrier. All your eggs are in one basket, so if you lose connectivity to the host, you will not even have internal communications. Premise VoIP equipment has advantages for business continuity. Multiple carriers can be employed for failover and route diversity. Redundancy in the design and deployment of equipment can be provided. And in the event there is more than one location interconnected via a wide-area-network one can have availability to lease-cost-route and failover to the other locations' carrier services.

Customization Aspects

What about customization and design considerations? When looking at a Hosted VoIP offering there are many features available for the desktop users. In addition the user has the ability to control and change setup options. This would hold true with a Premise VoIP offering as well. However, Hosted VoIP offerings tend to focus on the individual user capabilities and are weak in centralized or system-wide capabilities. We find this to be the single item that makes for an unhappy Hosted VoIP client. System wide features are important to consider. This encompasses call routing, call handling, call queuing and interactive users features. It is important to understand the limitations of a Hosted VoIP offering. Advanced features may or may not be available, and the ones that are available require additional recurring fees. The Hosted VoIP offering is a "one size fits all" approach. Take the time to see full demonstrations of both Hosted VoIP and Premise VoIP offerings to get the full scope of these features.

Peripheral Equipment Considerations

Peripheral equipment interoperability is also a consideration. When choosing between Hosted VoIP or Premise VoIP offerings, review the requirement for connections of peripheral equipment. Hosted VoIP offerings are limited in their abilities to connect peripheral equipment. The items they can connect with require additional equipment and additional recurring fees. This includes: analog devices, fax machines, e-copy machines, recording interfaces, and security devices, among others. The list is long and again, often overlooked and costly.

In terms of software interoperability, to the best of our knowledge as of this writing we know of no standard Hosted VoIP offerings that allow for integration of customer software… including main stream products like Salesforce.com. The requirements for interactive response systems that connect to your in-house CRM's are not available. Your needs for now and in the near future should be considered.

Support and Term Contracts

One difference with Hosted VoIP vs. Premise VoIP is related to support. In the event of an emergency or loss of service, the Hosted VoIP offering's responsibility ends at the entrance to the building or the demarcation point of your local network. The Premise VoIP solutions includes on site technicians when needed. As such, you should consider the importance of a single point of support, perhaps one of the most important attributes of a Premise VoIP based solution. Hosted VoIP solutions require at a minimum two or more points of support. You have the Hosted VoIP support team whom you call for problems, followed by the network support people, followed by the firewall and network security. When there is an emergency you are left in a role of orchestrating a coordinated effort. Conversely, in the event of a non-performing service provider for your Premise VoIP-based solution you always have the option to replace. The benefit of a Premise VoIP-based solution is single point of contact and support. Before entering a term contract for Hosted VoIP consider serviceability. When reviewing the cost analysis include the cost of not have a working phone for a day or longer.


Both Hosted VoIP and Premise VoIP offerings have their benefits and detractions. One offering may be better suited to your needs then the other. When considering a new voice communications system, a comprehensive needs assessment comprised of all of the aforementioned issues should be established first. A balanced approach to which offering is best for your organization can be achieved by weighing all variables as related to your business needs. Consider doing a full and complete demonstration of both Hosted VoIP and Premise VoIP offerings. Focus on ease of use, interoperability, unified communications, mobility, business continuity, and end-user management capabilities. The cost analysis should be the last step in any decision.

NacTelligence provides a consultative sells approach designing telecommunications solutions for over thirty years. Feel free to contact me at jab@nactelsystems.com to expand on any information included in this document. And be sure to review the comparative checklist that provides a step-by-step assessment of your needs…also available from NacTelligence.