The Economics of a Hosted Solution
Part II of a four part series...

by Scott Kinka, Sr. VP – Network Services, Evolve IP
Technology Times, December 2008

In our last installment, we focused on defining hosted solutions and detailing the potential benefits to your business.  This issue’s installment focuses on the economics of a hosted solution. More specifically, how to evaluate a hosted solution against your current expenses in order to determine the affordability of purchasing IT or Infrastructure services in a hosted or managed format. 

A funny thing happened on the way to the next issue. . . our economy took a major downward turn. 
How will the economy affect IT spending in upcoming months or years?

I was recently asked this very question by Peter Key of the Philadelphia Business Journal.   While several of my peers in the IT industry who “sell” equipment or software answered that they are looking conservatively or cautiously towards 2009, I answered that the economy has actually INCREASED the desire for Hosted services.

How is this possible?  Its simple.   In a bad economy, companies do one of two things (or both): increase efficiency or cut costs.   A hosted solution can uniquely provide both.   First, hosted technologies, by nature, are at the cutting edge from a capabilities perspective.  New technology means new opportunities for efficiency.   Second, when fully analyzed, companies will see real cost benefits in moving to a hosted solution.   In order to find these cost savings, businesses must evaluate hosted technology offerings in light of TOTAL COST OF OWNERSHIP (TCO).
TCO is an often overused and misunderstood concept. Many financial decision makers consider TCO as a soft or sunk cost argument towards making an expensive technology decision. And while a poorly formed argument can surely seem that way, Hosted services can offer a truly quantifiable TCO that is generally equal to or lower than the traditional alternatives. TCO calculations can vary greatly based on the type of implementation or the specific product that is “hosted”, but almost all hosted solutions can utilize a similar model.

The general TCO of an onsite (non-hosted) solution includes the following components:

• Purchase price of the systems and hardware (lease or buy)
• Installation cost of the system
• Maintenance / Licensing Costs (generally an annual contract of approximately 15‐20% of the purchase price)
• MACs (Moves, Adds and Changes) – the process of adding or deleting a line, setting up a new user or feature, moving someone, etc. (Generally charged hourly in rates ranging from $125-$250/hour)
• Monthly infrastructure / utility costs – connectivity, voice, data, Internet access, power, space
• Internal costs – staff time managing the solution, waiting for MACs, training, etc.
• Productivity Increases

When comparing a hosted solution to an on-site, purchased, or premise-based solution, its important that businesses understand the cost components in each solution.   While installation costs are similar, there are several key areas where hosted solutions will provide a better TCO than legacy solutions:

The first area of cost savings in the hosted model is related to the purchase of equipment.  Most hosted solutions include any necessary on-site equipment as a “rental” imbedded in the service.   In addition, since the software and hardware resides with the provider, annual maintenance or licensing costs are generally eliminated.

Another area of cost savings is in the cost of MACs (Moves, Adds and Changes).  Depending on the size of an operation, MACs can be a large and inconsistently occurring expense.  For example, at an average cost of $150 per MAC for legacy phone system changes, this can add up very quickly.

A third area of cost savings is in monthly infrastructure / utility services cost. The delivery of multiple services over IP allows for a converged delivery of voice, Internet access, applications and WAN services.   Businesses with multiple locations can experience reductions in usage and infrastructure between locations.  Services located in the network also reduce the space and power required for on-site equipment saving utility costs.  The “Green” aspects of a hosted solution are the focus of next issue’s column.

Ranging over into the “soft” cost side of TCO, businesses need to consider the internal costs related to managing technology.   Consider the time spent administrating, troubleshooting, performing maintenance and upgrades, backing up and restoring technology solutions.  Many times the knowledge needed to perform these skills is specialized and not needed in other areas of the business, so the time it takes to accomplish a task is actually longer than it should be.    Hosted services  allow for maximum utilization of available resources, and limit the businesses’ dependence on specialized, and not always necessary  skill sets, while allowing the IT resources in the business to focus on strategic (and not administrative) initiatives.

An example TCO comparison of a traditional Phone system purchase to a hosted model:

Scott Kinka is the Senior Vice President of Network Services for Evolve IP, a provider of hosted solutions and managed technology that is unifying and simplifying the way businesses communicate. For more information, please visit www.evolveip.net.

Read part III of the series;
Covering Your Assets: Effective Business Continuity / Disaster Recovery Through a Hosted Solution