Checklist: Calculating the Total Cost of an IP Phone System

Checklist: Calculating the Total Cost of an IP Phone System

TCO involves everything from network preparation to maintenance to bandwidth costs.
by Robert Poe | January 20, 2009   

Knowing what you’re going to have to spend on a new IP phone system requires more than looking up the price of the box. Several factors go into calculating the total cost of ownership, or TCO. Additional costs can start long before the actual equipment purchase and continue for years thereafter. Together they can add up to multiples of the original equipment cost. The full range of expenditures that make up the TCO fall into two categories: upfront and recurring. Here are 10 such costs to include in your calculations when you’re moving to a new IP PBX.

The Definitive VoIP-News Guide to IP Phones
1. Upfront: Planning the purchase. To make the right IP phone system purchasing decision, you’ll have to pay for some staff or perhaps consultant time in advance, according to Marty Parker, principal at UniComm Consulting LLC. First, you’ll want to do a survey of your requirements, including how many users you’ll need to support, and what kinds of phones and features they’ll want. If you’re going to support multiple sites, you’ll probably need to do an analysis of your IP network to make sure it will be able to handle the new traffic it will have to carry with the required quality of service.

Depending on the size of the purchase and other factors, you may find it advisable to put out an RFP (request for proposal). That may take considerable staff time and even some training time for the staff putting together the document. And you’ll certainly do a TCO study of one sort or another. At the very least, Parker noted, that will involve the controller and the IT manager getting together for a couple of hours and working out the numbers on the back of a napkin or in a spreadsheet.

2. Upfront: Upgrading infrastructure. If your network analysis indicates the need, you may end up spending considerable money upgrading your infrastructure. Particularly if you’re going to take advantage of the ability to serve several branches or sites from a single centralized IP PBX, you may require more advanced data equipment to carry the voice traffic back to the central location. Such upgrades can run as high as 50 percent to 100 percent of the cost of the telephony system itself, according to Parker. Other possible preparation needs include providing additional air conditioning, equipment space or racks.

3. Upfront: The purchase cost of the IP phone system. Here’s where your requirements survey will come in handy. Though the decision on which system to buy deserves a checklist or two of its own, the main thing to remember is that the PBX is just one part of the purchase. Moving to IP telephony opens up all kinds of new opportunities and choices to make. You may provide different users with IP desk phones, or softphones with headsets. With some systems, users with minimal needs may be able to keep using their old phones. You may purchase hardware and software separately, and the software licenses may cost considerably more than the hardware.

4. Upfront: Installation and integration. You might buy and install a low-end turnkey IP telephony system yourself. If so, add the cost of staff time for the installation. Otherwise, the reseller who sold you the system will probably install it and get it up and running. Even then, further integration with other office systems may be necessary, according to Parker. “When the guy who sells you the IP PBX says ‘OK, I’m done,’ it means the PBX works,” he explained. “But you haven’t told the network the PBX has permission to use it. You haven’t integrated it with [Microsoft] Active Directory so it can use the LDAP (lightweight directory access protocol) information. You haven’t integrated it into the monitoring and management consoles, so you automatically get the alarms and alerts. You haven’t integrated it into the [corporate IT] help desk so they know how to answer the user’s question and solve it. All of that has to be done.” The result could be significant additional spending on integration.

5. Upfront: Customization. Even integration can be a fairly straightforward if specialized task. But you may want some capabilities and features that require custom work. For example, you might want to put “call-me” buttons on your Web site. Similarly, some of the integration with your other office systems could require custom work. Often IP telephony systems will come with prepackaged, pretested modules to make them work with various email, directory or CRM applications and services. Others just include an API. In the latter case, or when the modules don’t work with the applications you’re using, you’ll need to pay someone to do custom integration programming.

6. Recurring: Maintenance. Maintenance contracts will be a major ongoing expense to include in your total cost calculations. But the contracts will be more complex than in the days of all-in-one phone systems. To start with, you may end up buying multiple contracts for hardware to cover equipment from different vendors. The annual cost will typically run from 5 percent to 12 percent of the list price of the equipment, according to Parker. A key factor affecting price is whether support is available only during business hours or 24/7. Another is whether service technicians come to your site to install parts, or you receive them by courier and have to install them yourself.

Software is typically less reliable than hardware, so maintenance contracts are more expensive — from 8 percent to 18 percent of the list price, according to Parker. Maintenance is necessary because software is designed for a broad range of applications, and some bugs will inevitably show up in individual applications that designers couldn’t have foreseen.

Robert Harris, president of consulting firm Communications Advantage Inc., warned that maintenance contracts can be deceiving. “I have seen maintenance costs, when calculated over four or five years, make the least expensive system to buy the most expensive in TCO,” he stated. He added that some vendors require customers to buy only authorized maintenance contracts, while others allow maintenance by third parties. The latter tend to be more competitive in price, Harris claimed.

7. Recurring: Upgrade insurance. Software maintenance contracts may not include upgrades to new versions of the software. If not, you may end up buying upgrade insurance, also known as software assurance or upgrade protection plans. These costs too can be significant. That’s why some companies decide against them, preferring to wait until they think they need the capabilities of the new versions and then paying the retail price to upgrade.

Vendors are naturally trying to make that harder to do, according to Harris. The life span is software releases is getting shorter and shorter, he said. And while the new versions often add lots of new features, in many cases the older versions remain perfectly functional, but the vendor just decides not to support them anymore.

8. Recurring: Utilities charges. Depending on your new system’s requirements, electricity charges for air conditioning and for powering the new system and phones could end up about the same as with your old system. They also could be significantly more, or even less. Either way, they will be part of your TCO.

9. Recurring: IT staff. With a new IP telephony system, administration will likely be cheaper and easier. You won’t have to call the reseller you bought the system from every time you want to move, add or change users. But that means you’ll have to assign someone on your staff to at least oversee it. Thus while each operation may take less time, it will still cost money. Parker offers a rule of thumb to estimate the costs. To administer a unified communications system serving a thousand users, figure on allocating one-fourth of an IT staffer’s time. For smaller installations, decrease the time accordingly.

10. Recurring: IP bandwidth requirements. One of IP telephony’s greatest benefits is that it allows you to consolidate the telephony functions for numerous sites in one place. That saves considerable hardware and staffing costs. But it also means you need additional IP bandwidth to carry all the voice traffic back to the central location over your corporate IP network. The additional payments to your service provider will undoubtedly be less than what you’re saving because of the consolidation, but they still count as part of your TCO.

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