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IP telephony companies ask Corporate America the inevitable question: Can you hear me now?
Anne Stuart, CFO IT
September 15, 2003
About four years ago, Dave Thompson was looking for ways to cut his then-employer's telecom bills. There was some buzz around a new technology called Voice over Internet Protocol, or VoIP, a method of using the Internet, private data networks, or both in lieu of conventional telephone networks. In theory, VoIP calls were free, so Thompson gave it a try. He wasn't impressed.
"There was so much jitter you'd sound like you were in a helicopter," he says, launching into an imitation of a typical chopped-up conversation: "...-lo? Do...hear me?...Is any-...there?" So he abandoned the idea of replacing or supplementing the company's traditional phone service with VoIP.
But Thompson has since changed his tune. Now director of IT at Muzak LLC, the (in)famous purveyor of background music, he realized last year that the company's existing public branch exchange (PBX) system couldn't support its fast-growing workforce much longer. So he faced a tough call: should he upgrade to a new PBX or look for a different approach?
He decided to try Internet-based calling again. This time, thanks to vast technological improvements, the calls sounded just fine.
So in August 2002, he began switching the company's 2,000 workers to a VoIP system from Shoreline Communications Inc., in Sunnyvale, California. Now employees at Muzak's Fort Mill, South Carolina, headquarters and about half of its 40 U.S. branch offices can call one another online by dialing four digits. They run up no toll charges, nor do they need any special equipment. "You can use an $8 phone from Wal-Mart," Thompson says. And they usually notice no difference in audio quality.
So far, the system isn't saving that much money on long-distance calls—only about 5 percent on the usual bills in each office where it's been deployed, says Mark Williams, Muzak's chief controller. That's primarily because people with VoIP can only call other people with VoIP. If they call anyone else, they're switched to a standard phone line that takes advantage of least-cost routing.
But Muzak executives say lower phone bills aren't the only benefit of the Internet-based system. When it finishes switching the remaining offices, the company will be on a single platform for all data and telecommunications, instead of the previous mixture of different PBXs in different offices. "Doing that saves money right off the top," says Thompson. Adding, dropping, or moving a phone anywhere in the VoIP network is a snap. Previously, individual offices had to contact local phone vendors to make such changes, usually paying a service charge each time. Now, says Thompson, "if someone in California wants to switch desks, we can change their phone from here in about 35 seconds" at no cost. Finally, because the VoIP system uses standard phones and a computer network that requires no special training, Thompson can upgrade each office himself rather than paying a phone or VoIP vendor to do the work. He estimates that this saves the company an average of $11,000 per site.
Down to Business
Nearly 84 percent of businesses surveyed earlier this year by Nemertes Research said they're using or testing VoIP technology at an average cost of $636,000. "If IP telephony...isn't high on your priority list, it should be," the firm's principal research officer, Robin Gareiss, concluded in a report based on a survey of 42 companies, 70 percent of which have annual revenues of $1 billion or more. "The technology is approaching critical mass.... We see IP telephony as an inevitable change in corporate networks."
The Yankee Group says manufacturers will ship 7.6 million IP-based phones annually by 2004, up from 490,000 in 2000. And worldwide revenues for Internet voice technologies—$13 billion last year—should reach $197 million by 2007, according to Insight Research Corp. Traditional services still hold the lion's share of the market, but they're growing more slowly—from $820 billion in annual revenues today to an estimated $915 billion in 2007.
Vendors and analysts say the trend appears to be taking off first in banks, insurance companies, local governments, and colleges and school systems, and, increasingly, in health-care organizations. Even companies with just a few long-distance locations can cut costs significantly. For example, Bay Federal Credit Union in Santa Cruz, California, began saving $1,500 a month on calls between its seven sites after switching to a VoIP system from Shoreline Communications in 2002. The organization also eliminated about $25,000 annually in vendor service charges.
VoIP systems can also cut maintenance costs because the same IT staff can handle a single system for telecom and data. There's far less wiring: remote locations need access just to the main network rather than their own voice systems. And thanks to the highly competitive marketplace, VoIP vendors offer a smorgasbord of features, such as voice mail, call forwarding, conferencing, and integration with common workplace software such as Microsoft Outlook. In some cases, companies can use their Web browsers to manage voice mail or make phone calls by clicking on their electronic phonebooks. However, says Gareiss, the features still lag behind those of traditional PBXs, and that's a problem for many IT executives who want all of the features they're used to in a traditional voice system.
Low cost and higher reliability are even prompting many companies to trust VoIP systems with their most trafficked—and most critical—function: their customer call centers. After Muzak connects all of its branch offices via VoIP later this year, the company expects to expand the service to its 13 regional call centers. Currently, each center supports a different Muzak product and has its own phone numbers. With VoIP, the company can centralize customer service at its headquarters, providing more-efficient service while cutting costs, Thompson says. "We would give our clients one 800 number and, through that one connection, reroute their calls to whomever can best serve them," he says.
Aviva Life Insurance Co., a subsidiary of global U.K.-based insurance giant Aviva LLC, switched to a VoIP system from 3Com last year. More than 300 employees at the company's Quincy, Massachusetts, headquarters and a branch in Buffalo use the system to support the company's 10,000 sales agents throughout North America. Each site can back up the other in an emergency or handle one another's overflow calls.
In March, Attachmate Corp. in Bellevue, Washington, an enterprise software developer, began pilot-testing a VoIP system from Nuasis Corp. for incoming customer calls. At first, the 12 testers occasionally complained about audio problems, such as echoes or low volume. When that happened, Attachmate simply reverted to its regular phone system. Having smoothed out those glitches, Attachmate expects to expand the VoIP system to 50 salespeople and service reps at its headquarters and in Shannon, Ireland, by year's end.
Aviva, which saved $300,000 in its first year with VoIP, expects the system to pay for itself within 30 months. Muzak is on track for an even quicker payback on its initial $300,000 investment: 23 months. Attachmate can't yet provide a payback date for its investment, but controller John Burdick expects to cut telecom-related capital costs by 20 percent and operating costs by 40 percent.
Like the Internet, VoIP has provided a relatively cheap way to link disparate locations. "We're a community bank that's growing into a national presence," says Jim Barry, CIO of OneUnited Bank, which bills itself as the nation's first interstate African-American-owned financial institution. Through a series of acquisitions, OneUnited has grown rapidly from two Boston offices to 10 locations in California, Massachusetts, and Florida. Each office came with a different phone system and, of course, phone number. The master phone list "became the most important document in the entire institution," Barry says wryly. "We realized that scenario wouldn't scale as we bought more banks."
In October 2002, OneUnited finished converting all branches to a VoIP system with a single user directory. Now employees nationwide can dial one another by name as well as by four-digit extension. They can also customize their service—for instance, forwarding calls to another bank location, or to a cell phone (where cell phone rates will apply). The system also centralized the company's switchboard, eliminating the need for separate receptionists in each branch. As a result, OneUnited is saving $10,000 every month on long-distance charges and has reassigned four full-time employees who previously handled incoming calls.
For all its benefits, VoIP has shortcomings. As Muzak's story illustrates, it currently works only if both parties have the same technology. A power outage or computer-system failure can knock out VoIP phones as well. For that reason, companies should choose products with battery backup or have redundant network connectivity.
In fact, VoIP systems currently log a bit more downtime than their traditional counterparts. That may not affect consumers all that much, but many businesses would consider Muzak's average of 95 to 97 percent uptime unacceptable, even though calls automatically switch to the regular phone network if the VoIP system is down. And nobody claims 100 percent toll-quality calls. Even enthusiasts like Barry say they get occasional cell-phone-like static or annoying echoes. There are also regulatory questions that need to be answered, with the Federal Trade Commission expected to decide whether or not to regulate IP telephony later this year.
Finally, not every business needs to make phone calls over the Internet. Companies with all employees in a single location won't benefit from the per-call savings, and those with state-of-the-art PBX systems may find the switch isn't worth the cost. But those who have already made the move tend to agree with analysts and vendors who insist that VoIP has finally matured into a viable business-telecom option.
A VoIP Directory
The blossoming VoIP industry includes dozens of upstarts whose names aren't yet household words, such as Shoreline Communications Inc., ITXC Corp., and Mitel Networks Corp. Increasingly, though, the playing field includes such telecom giants as 3Com, Nortel Networks, and Cisco Systems, which has already shipped more than 2 million VoIP phones. And many vendors are staking out specialty turf: Nuasis focuses on equipping customer call centers, while SpectraLink has integrated its NetLink wireless phones with a Nortel VoIP system, allowing users to make wireless calls over the Internet. Jon Arnold, VoIP program leader at Frost & Sullivan, says that companies can "IP-enable" conventional PBX systems as an interim step to full VoIP implementation. He believes most companies will wait until their current PBX systems reach the end of their life cycle (typically 8 to 10 years) before seriously considering VoIP.