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Why TCO Isn’t the Best Metric for Comparing UCaaS and On-Premises Solutions

Adoption of Unified Communications-as-a-Service (UCaaS) solutions has skyrocketed in recent years, and market growth shows no signs of abating. Analysts with Global Market Insights expect the UCaaS market to see almost 20 percent gains through 2030 as organizations seek to support remote and hybrid work models.

The ability to deliver business phone system services to users regardless of location has become a key selling point of UCaaS. Cloud-based phone systems enable users to access voice, messaging, collaboration and other features from a single interface using virtually any device. UCaaS also allows organizations to take advantage of the latest capabilities without complex and lengthy phone system upgrades.

But a key selling point of UCaaS has always been total cost of ownership (TCO). By moving their phone systems to the cloud, organizations eliminate the upfront costs of purchasing and implementing on-premises hardware. All costs are transferred into an opex model, with a predictable monthly fee that includes administration and maintenance, network access, help desk support and other services.

Vendors have long touted TCO as a benefit of UCaaS over on-premises phone systems. But is TCO the right metric?


The On-Premises Perspective

Despite the rapid adoption of UCaaS, most organizations are deploying on-premises unified communications (UC) platforms. According to a recent market analysis by Eastern Management Group, 61 percent of enterprises with more than 1,000 employees that acquired a new UC solution purchased an on-premises system. It’s not just a preference of large companies — small to midsize businesses (SMBs) with fewer than 300 employees bought an on-premises system 25 percent more frequently than UCaaS.

Security and regulatory compliance features were cited as important factors in choosing an on-premises system, which could explain why banks and healthcare organizations prefer on-prem by a significant margin. Organizations also said that on-premises UC provided productivity improvements, and they liked the ability to offer users self-service provisioning.

Interestingly, customers also cited TCO as a reason for investing in on-premises UC. The ongoing cost of UCaaS can add up over the projected lifespan of a traditional on-premises phone system, and increase as more users and features are added. In fact, a 2018 study by Nemertes Research Group found that the operational costs of UCaaS were 13 percent higher than on-premises UC for organizations with fewer than 50 employees. For larger organizations, the cost of UCaaS was nearly double.

Which analysis is correct?   

The Problems with Using TCO

Both TCO calculations are accurate, and the conflicting results illustration the difficulty of using TCO for comparing cloud and on-prem. TCO is a good means of evaluating specific solutions within either the on-premises or UCaaS category, but not for evaluating the two types of solutions. Here’s why:

  • The capex and opex pricing models of the two types of solutions have a different value basis, depending on whether you consider a phone system to be a long-term investment or a cost of doing business.
  • On-premises and cloud-based platforms have different cost factors. Furthermore, UCaaS pricing bundles in cost factors, making it difficult to perform a direct comparison.
  • While UCaaS and on-premises UC provide users with many of the same features, the technologies are too different to afford a meaningful comparison.
  • Organizations derive very different benefits from on-premises and cloud solutions. Generally, these benefits are more important to the decision-making process than TCO alone.

Simply put, TCO is not the best metric to use when determining whether to invest in an on-premises platform or move to the cloud. In our next post, we’ll dive deeper into why that’s the case and discuss factors that should be considered.  

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