VoIP to Revolutionize the Way SMEs Communicate

November 16, 2005 by SAP News

Digitization of the analog world has reached telephony in the shape of VoIP. VoIP is an emerging technology that converts digitized voice data into packets via the Internet protocol (IP). By using the Internet, it breaks ground not only with analog technology but also with digital telephony (ISDN), which uses a reserved connection to transmit digitized voice data continuously between end users at a particular bandwidth. Two standards, H.323 and SIP (Session Initiation Protocol) are currently competing to gain the upper hand in the market. According to experts like Jochen Nölle, editor and Managing Director of the information portal “VoIP-Info.de”, SIP has the best chances in the long run.

Billion euro market

According to analysis by Deloitte which examined the impact of VoIP on the German telecommunications market, VoIP is particularly attractive to businesses because it cuts costs and increases flexibility and value-added services (for example, unified messaging). In a global survey conducted by the research company Economic Intelligence Unit (EIU) and the network specialists AT&T, more than 250 managers voiced similar sentiments. This survey reveals that 43 percent of companies are already using VoIP, are testing it, or are planning to introduce it in the next two years. According to the AT&T study, the reasons for switching to VoIP include the cost savings and the prospect of additional functions and higher flexibility.
Analysis by Mercer Management Consultants suggests that the market for Internet-enabled phone systems grew by 55 percent in 2003 alone. The study indicates that companies have clearly identified a need to revamp their telecommunications to meet future requirements. Figures published by Deloitte suggest that around 14 percent of companies in Germany now use the Internet to make phone calls. US-based market researchers from Gartner predict a growth in worldwide sales of VoIP to around €3.6 billion in 2007. According to a business report in a recent edition of the Süddeutsche Zeitung, SMEs have been investing particularly heavily in VoIP technology for commercial use since last year.

Converging networks – cutting costs

Thorsten Wichmann, Managing Director of Berlecon Research, is confident that “Voice over IP will eventually win through.” Integrating voice and data in a single network is more technically efficient and cost-effective in the long run than operating separate data and telephone networks, as has been the custom among firms up to now. “VoIP has the technical edge over traditional phone networks,” says Wichmann. “Using the Internet protocol for both voice and data networks allows companies to cut costs, standardize infrastructures and integrate their phone systems with other applications in new ways.”
It eliminates the need to install and maintain separate telephone networks and the charges of dedicated phone lines. It also avoids the scaling difficulties commonly associated with traditional phone systems. For example, if a company expands, relocates employees, or opens a new branch, new telephone sockets and cables have to be installed. This is often made all the more difficult by the existing structural conditions. VoIP solutions, on the other hand, can be connected to any PC workstation. Mercer expects the potential savings of VoIP to be in the region of 30 percent, solely on account of the reduced costs for phone equipment, software and service. And those are not the only savings: “Unlike very large companies, small and midsize companies don’t have the clout to negotiate discounts with traditional telecom providers,” points out Wichmann.

VoIP pays dividends for midsize firms

Switching to VoIP will yield savings above all for midsize firms (of approx. 500 employees) with a high call frequency and several locations. According to analysis by Soreon Research, over a five-year period midsize companies of this scale that use a VoIP solution exclusively can cut costs by around 31 percent. If they use an integrated solution, they can cut costs by an almost equally impressive 29 percent. In contrast to the findings by Mercer, Soreon analyst Melanie Henke predicts that the savings will largely come as a result of lower phone bills. The results of the AT&T study were similar: 47 percent of the managers surveyed cited reduced telephoning costs as the major reason for introducing VoIP. The managers were also won over by the additional services, such as the unified messaging functions (a single mailbox for all voice, e-mail and fax messages) and the ease and speed with which new users could be added and services reorganized.
However, as Melanie Henke points out, the payback for investing exclusively in a VoIP solution could take several years. At the moment, the initial investment in hard- and software for an exclusive VoIP solution exceeds the costs of acquiring a traditional PBX (private branch exchange) solution or an integrated solution.

Sorry, who did you say was on the line?

For VoIP to challenge traditional phone networks seriously in the long term, it has to offer excellent voice quality. This is not without difficulty. The voice data packages travel across the Internet in a variety of routes and have to compete with data packages from other applications. This can result in conversion problems and reduced quality in comparison to traditional phone systems. This can manifest itself as crackling, hissing and even disconnection. This is unacceptable to the vast majority of companies. Mercer consultants maintain that the only way VoIP can become successful is by at least matching the standards of quality and reliability offered by traditional phone networks. However, the analysts still have misgivings about the quality of VoIP.
Empirical research by the US consulting firm Keynote Systems between May and June 2005 led to similar conclusions. Consultants from the firm compared the quality and reliability of traditional “public switched telephone networks” and VoIP from six telecommunications providers. The main finding of their investigation was that VoIP does not yet offer the quality that users of public-switched networks have come to expect. However, this contradicts extensive research by Deloitte (Getting off the Ground: Why the move to VoIP is a decision for all CXO). According to its report, “sinking prices for VoIP equipment, better voice quality, additional functions and the increasing know-how of service providers have greatly enhanced the technology’s appeal.”

Capitalizing on the advantages

Diminished quantity is only a factor for calls made via public networks, however. It will not affect companies that use Voice over IP internally in a WAN (wide area network), LAN (local area network) or VPN (virtual private network). According to analyses by the market research companies Frost & Sullivan, IDC and Techconsult, many firms have invested heavily in the last few years to network their branches or agencies at home and abroad. Companies that have modernized their infrastructure or plan to do so have the most to gain from introducing VoIP. They can capitalize fully on the advantages it offers in terms of convergence (integration of voice and data) and reduced costs.

Dr. Andreas Schaffry

Dr. Andreas Schaffry

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