CONVERSATION PIECES
The Internet as a phone system: Is it a revolution in the making, or mostly talk?
By Enid Tsui and Tim Reason

Cheap phone calls over the Internet, once the next big thing in telecommunications, seems to have all but melted away. Known as voice-over-Internet protocol (VoIP), it was touted as being every bit as revolutionary as the work of Alexander Graham Bell. Alongside other innovations - virtual private networks, mobile access to corporate data - VoIP promised to overhaul existing corporate telecom infrastructures.

Today, the technology exists. However, its adoption rate remains low. Worldwide IP networks carried 8 billion minutes of telephone calls during 2000, according to Probe Research, a telecom research company based in the US. However, that's only about 1 percent of calls made each year. Eager to boost those numbers, telephone operators are beginning to introduce systems that are based upon the VoIP technology but come with a growing list of additional features. Gazing into the future, the private branch exchange (PBX) - a system that is in use in virtually every single office in the developed world - may indeed become redundant. We may all be making cheaper phone calls with IP phones alongside web-based software that can function as a personal assistant.

But that future could be some way off. The major role of the CFO in any organization is to be the voice of sanity, the filter of pragmatism, protecting the company's cash from the latest IT sales pitch. Part of the reluctance to plunge into a new web-based phone system is that, so far, few vendors can prove that the ROI justifies the cost. In fact, an IP-based telecom solution may make your business run smoother and at a lower cost than a traditional network. In the current economic climate, however, only the bravest of finance managers will be willing to find this out for themselves, as early adopters of the VoIP technology.

Vendors understand this hesitation well. "I think cost savings will be the table stakes for the adoption of an IP-based corporate telecom solution," says Nick Damenti, company director of IP communication services for US-based Internet infrastructure provider Genuity. "But what will really attract companies will be productivity savings from enhanced functionality that the public switched telephone network just can't offer." (See box.) That's the party line - no pun intended - of VoIP enthusiasts, who promise a wide array of new applications. Can they deliver? For an answer, take a close look at what's on offer.

Two Cups and a String

The way we make a phone call has evolved surprisingly little from the way Bell made calls in the 19th century. An office is linked to the public telephone network by a private branch exchange. From that exchange spins the number of extensions for use within the office. Your PBX telephone is a dumb piece of hardware - the phone number of an extension depends on which wall socket a phone is plugged into - that serves as the front-end of a complex switchboard, one that is usually installed on your premises.

With the rising popularity of outsourcing IT services, a model called centrex provides an alternative to installing the full set of PBX nuts and bolts on site. Instead, companies can lease a portion of the telephone operator's mass switchboard and use that in the same way as an on-premise private switchboard. Each extension in the office has a direct connection to the leased portion in the telephone operator's network, but still retains the same relationship with other extensions. The centrex model remains unpopular in Asia, however. Jardine OneSolution (JOS), the Hong Kong-based IT arm of the Jardine Matheson Group, which operates in greater China, Singapore and Malaysia, estimates that compared to PBX, centrex only has a single digit presence in the market. Carmen Chan, marketing manager for integrated enterprise solutions at JOS, says: "The monthly cost per line is at a substantial premium over that of a PBX system."

Moving the delivery of voice to the Net seems a natural step. After all, the Internet is a fast and flexible way of communicating information of any kind. Making a VoIP phone call means that there doesn't have to be a dedicated connection between you and the other party. The voice packets are delivered over the Internet and no data is transmitted during pauses. This is very different from a traditional phone call which exclusively engages a phone line and doesn't allow other data to pass through it during the length of the call. Marthin DeBeer, vice-president of the enterprise voice and video business unit of US-based Cisco Systems, claims that relying on a single system to handle both voice and data traffic, a feature that analysts cite as the primary benefit of VoIP, results in a 30 percent capital expenditure savings, and that a ROI can be realized in 18 to 36 months. But with so few companies actually rolling out VoIP within their enterprises, those numbers are tough to verify.

Reluctance to adopt VoIP often stems from the belief that it delivers poor voice quality. Eager to bypass domestic and international tolls with VoIP technology, every budget-conscious PC-owner has tried software such as Microsoft's NetMeeting, which comes preinstalled in most Windows-based PCs. It allows users to make free phone calls to any other computer in the world via an Internet connection. This system simply doesn't work in the corporate world, however. As a phone conversation is split up into separate voice packets, there is no guarantee that the public Internet highway, jammed with data traffic of many kinds, can deliver them in an orderly and timely manner. Hence, stammered conversations are the hallmarks of this method of delivery - in telecom jargon, it's "best of effort", with no "quality of service". Few companies can afford these kind of quality wobbles.

VoIP used within a private network, however, does offer the same voice quality as an analog phone connection. It doesn't come free though. First of all, you need a dedicated ISDN Internet connection. "There is a huge difference between VoIP delivered over the public Internet with VoIP in a private managed network, where you obviously get a lot less traffic," says Justin Lobb, director of product development and management at Pacific Century CyberWorks (PCCW), the Hong Kong-based telecom company. He is describing a solution known as IP-PBX. A company's head office and its global branch offices are hooked up to the same unified IP backbone - usually in the form of a wide area network (WAN). Pure VoIP calls can be made in between the offices, either by using a PC as a phone, or by using IP phones. Outside calls are translated back into analog signals and delivered via the public switch network.

Another innovation that improves VoIP voice quality is tagging. Lim Eng, vice-president of corporate products at SingTel, the Singapore-based operator says: "This is the cutting edge technology in VoIP development. Each packet has an ID - the network will recognize it as a voice packet and gives it priority. This guarantees voice quality and eliminates the arrival time lag in between voice packets." You can set the same level of priority for video conferencing, he says. For example, this means that if your colleague, who is browsing the web (a low priority activity) will suffer an unnoticeable amount of delay while your voice packets pass through the network. However, VoIP sellers admit themselves that IP voice quality can deviate from the standard benchmark and they are still working to improve it. An additional problem is amount of downtime of an IP network. According to JOS, a PBX system loses only an average of 5 minutes of downtime per year, compared to an IP network, which can log an average of 8.7 hours of downtime per year.

Take it Slowly

For the corporate user, there are other advantages that justify the use of IP phones, despite the downtime problem. The phones are, unlike analog phones, pretty smart. Each phone is assigned an IP address together with a regular phone number. As long as it is plugged into the network, be it the LAN in the office, or the VPN when you are working from home, all incoming phone calls will be routed to your phone. The cost reduction mostly comes from an obvious benefit of linking all phones to an enterprise-wide network - instead of using an international phone service and having to press a bunch of international codes, you can reach a colleague in New York, for example, by dialing the four or five digit extension number and bypass hefty tolls.

Despite these goodies, however, companies still aren't buying. Vendors such as US-based Pingtel, Cisco and 3Com claim they have shipped around 434,000 IP phone units to date, but a lot seem to have gone to technology partners or internal users (Cisco has 26,000 employees using IP phones and has replaced PBXs with VoIP switches at 96 of its sites).

For the finance manager who doesn't want to go the whole hog, it is perfectly possible to do without IP phones and still migrate to an IP-based voice system. That is, if you don't mind using your PC as your phone. In fact, VoIP technology is best utilized together with unified messaging software. These are web-based programs that integrate your phone with your address book, so that the computer dials a number for you - either through an IP phone or a regular phone - when you click on a name on the screen. Other features include caller ID and other call management functions. For example, the program can route all your mother's calls to your mobile phone when you are out of the office, and your father-in-law's calls to your voice mail box. The list is endless. Unified message software can even work, albeit with few functions, with an analog PBX network.

It all sounds grand, but do you really need any of this? "CFOs should be aware of potential red herrings," warns Jeff Pulver, president and CEO of Pulver.com, a New York-based telecom news portal and events organizer. "This technology is real, it is happening. If you could benefit from easier telecom administration, or if telecommuters with dedicated circuits make up more than 20 percent of your staff, an IP-based voice solution is something you should adopt in 2001," he says. By 2003, he adds, start-up companies or companies moving to new buildings will automatically install a VoIP infrastructure rather than building separate voice and data networks. But, he adds: "If you don't meet those criteria, I would have a hard time selling it to you right now."

Voice, The Killer App

While IP-PBX promises easier internal administration than PBX systems, it is the hosted service model that analysts predict will be the most attractive. "Voice is the perfect application to outsource to an ASP," notes Jim Hourihan, vice-president of marketing for IP phone maker Pingtel. "The basic functionality doesn't vary from business to business. By contrast, CRM, ERP and other corporate systems vary dramatically by industry and company," he says.

And because VoIP systems can be configured using a web browser, companies can still retain some control over internal deployment and administration while leaving the hardware and software maintenance issues to the ASP. In Hong Kong, PCCW will soon launch such a package to its enterprise clients. Lobb claims the cost of installing an IP phone extension will be half that of an analogue PBX system.

Meanwhile, Singapore's dominant telephone operator, SingTel, is in no hurry to follow suit. "We just aren't certain whether our customers need, or want, the IP solution at this point," says Lim. He adds that PBX will not become redundant in the foreseeable future. There are vital calls, such as 911 emergency calls, that simply can't be left to either the voice quality and the relatively high downtime of a VoIP system, he says.

Others agree that it's worth waiting. "Right now, the [corporate] market is at a very embryonic stage," says Pingtel's Hourihan. "It's happening among the very early adopters - some would say the lunatic fringe," he says. Revolutionary or just plain nuts, the goal of making cheap calls over the Internet still remains an attractive one.

Enid Tsui is a senior writer for CFO Asia. Tim Reason is a staff writer for CFO, CFO Asia's sister magazine in the US.