Gartner's insight into the Market
Communications as a service (CaaS) is an alternative software-based delivery model for IP telephony and unified communications services, where business users secure a utility-based pricing model. And we believe it will have staying power, if the providers of this service emphasise an evolution to advanced multimedia functionality and help customers manage costs.
What is Communications as a Service?
Organisations with legacy premises-based and carrier-network-based telephony solutions are increasingly switching to IP technology. This may be either in-house infrastructure or one of three types of outsourced.
Gartner defines CaaS as IP telephony that is located within a third-party data centre and managed and owned by a third party. In this case, the use of enterprise-class communications applications and technologies is offered as a service. End-users are not required to make capital investments in communications applications, nor would they be responsible for the maintenance and management of the communications infrastructure.
The main distinctions between this and other outsourced IP telephony solutions are:
• The assets are not carrier-grade.
• The service is not ‘in the network’.
• The assets are multi-tenant in terms of usage.
For hosted IP telephony, however, the infrastructure is located within a third-party facility and managed by a third party, but owned by the enterprise using it. The IP telephony solutions may be hosted on shared or dedicated resources. A third type of service is IP Centrex, where the IP telephony infrastructure is located within a telecommunications carrier’s central
office facility and managed and owned by that carrier.
What is the Value Proposition?
The CaaS value proposition is that it is a completely outsourced solution, transferring all communications responsibilities to the provider. The user receives the basic telephony services, including dial tone, local calling, long-distance calling, PBX-like features and voicemail. The provider includes the handset along with an integrated access link. This is complemented with support services for LAN/WAN management, remote monitoring, moves, adds and changes (MACs) and quality of service.
CaaS is a utility-based offering that enables companies to add or remove users as needed. The comprehensiveness of CaaS dictates that the enterprise does not have to devote any resources to managing or supporting voice services. But this level of support comes with a price premium over a managed service with the end-user still responsible for telecom services and infrastructure. However, the higher CaaS fee includes the voice service, infrastructure and, just as importantly, management. The CaaS provider can then package additional UC-like services such as fixed-mobile convergence (FMC), Outlook integration, video and collaboration for a price premium.
Who Should Use It?
Small businesses (fewer than 100 employees) are the natural sweet spot for hosted services, but any large enterprises, particularly in the education, government and non-profit sectors, will also be attracted to the CaaS value proposition.
Organisations seeking a high degree of customisation and business process integration are not strong CaaS candidates. These organisations would be better served by on-site IP-PBXs, over which they have full control. However, telecommunications users not seeking customisation are encouraged to consider CaaS adoption now.
One primary target market right now is professional services firms with well paid employees — such as legal, financial, recruiting, consulting and architecture firms. These types of organisations will pay a premium in order to receive:
• Cool features like Outlook Integration and transparent calling.
• Strong customer service and service reliability.
The more advanced unified communications functionality, like collaboration and video, is expected to become more widely available in 2008.
When will it be widely adopted?
In terms of maturity and market acceptance, CaaS is still considered an emerging technology, close to the ‘peak of inflated expectations’ on the latest Gartner Hype Cycle for networking and communications technologies.
The market for communications as a service (CaaS) has started relatively slowly as providers determine how to define, package and market the service as a value-added IP telephony offering. However, Gartner forecasts the combined market for hosted IP telephony, IP Centrex and CaaS to grow to more than US$6 billion worldwide by 2011. By 2011, CaaS will surpass both hosted IP telephony and IP Centrex in terms of end-user spending. Although this growth rate is impressive, the market is a very small piece of a communication services and infrastructure market worth nearly US$1 trillion. We believe that users will begin to embrace CaaS more enthusiastically from 2009.
Barriers to Adoption
CaaS competes with other enterprise voice delivery models such as managed IP-PBX, hosted IP-PBX and IP Centrex. Each has its own niche, but only CaaS provides a completely outsourced solution where the enterprise only uses the service and pays the bill. CaaS success is therefore dependent on providers offering a rich set of IPT and UC offerings at a price-point below what enterprises can offer internally.
The market for telephony, messaging and contact centre applications ‘as a service’ is growing rapidly. However, Gartner believes that adoption of these services is being hampered by confusing messages and value propositions put forth by vendors in the market. Gartner recently conducted a review of 48 vendor portfolios, and found that they classify CaaS as “hosted voice” or “hosted IP telephony” services. In presenting their offerings, the vendors all used a single product name to describe a wide continuum of value. The vendors reviewed included system integrators, regional value-added resellers, IT outsourcers, telecommunications carriers and niche providers.
These vendors are presenting the market with a single service description that offers no differentiation between key service attributes. In short, they are positioning their services to be “all things to all people”. Unfortunately, in the minds of most end-users, these attributes are major drivers, or inhibitors, to adoption. By offering the market a definition without distinctions, buyers are unable to make an informed acquisition. A number of providers are marketing their “bare bones” VoIP offerings as CaaS. Users, in turn, are likely to be underwhelmed by such services in terms of both quality and functionality, resulting in poor perceptions of CaaS as a concept.
Organisations will need to take it upon themselves to learn about the various market offerings for communications services. End-users should demand transparency from their potential service providers to help them better understand how prices are allocated to feature-sets. Gartner typically advises that the only considerations for acquisition should be feature-sets and service-level agreements. However, in embryonic markets, like CaaS, bundling is often used to mask pricing inconsistencies.
Who are some of the Providers?
Technology service providers are bullish about CaaS’s potential because of the opportunity to bundle more new features and capabilities to avoid service commoditisation. Recognising the potential market opportunity, a wide variety of providers around the world have entered the market, ranging from traditional Tier 1 service providers and cable operators to small communications specialists to regional- and vertical-focused players. Niche service providers are likely to consolidate as the industry matures.
Some providers represented in the Australian market include Avaya, Genesys, M5 Networks, Siemens, IBM and Interactive Intelligence, along with many hosting companies like Dimension Data, Webcentral, HP, EDS and CSC.
Recommendations
In the communications market, CaaS will dominate some areas more than others. Gartner expects telephony to remain a premise-based, user-owned solution for a number of years; however, CaaS IP telephony solutions will show strong growth globally. At this stage, we recommend that organisations:
• Avoid adoption of CaaS and IP Centrex offers until there is a clearer understanding of all cost elements within solutions portfolios.
Investigate the costs of: local, long-distance and international calling; feature components; major or minor feature enhancements; simple and complex moves, adds and changes (on-site and remote); and annual price benchmarks.
• Perform detailed total cost of ownership and return on investment studies of their communications requirements by comparing premises-based and utility offerings (for example, IP Centrex and CaaS). Independent, third-party consultants such as BearingPoint and Accenture represent good resources for due diligence activities and case development.
• Be careful selecting a provider, as the number of small niche providers is exploding and the quality of executive management and customer references will therefore be vital in determining the focus and efficacy of these smaller providers.
• Given the volatility of pricing, avoid signing contracts for any longer than 24 months. Typically, federal, state and local government organisations prefer contracts of five to 10 years in length. Biannual benchmark studies, funded by the end-user and the vendor, may reduce exposure.
About the Author
Eric Goodness is a vice president at Gartner Research, where he leads research on managed services in the communications sector. His research and advisory services focus on customer and vendor outsourcing and IT services issues surrounding business communications. Prior to joining Gartner in 2000, Eric held senior positions within the communications out-sourcing and IT services industry at companies including Nortel and Cabletron.
