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					 ”Ease of Communications” – On Demand EIM Solutions




 Prepared for WebEx




 By the 8020 Group
 August 19, 2006




8/23/2006                                         Page 1 of 8
Introduction to Enterprise Instant Messaging
The use of Instant Messaging (IM) is growing in business as a preferred means of communications. Delivering
the best of both worlds – email and phone-based communications - IM provides a cost effective means to
electronically communicate both synchronously and instantaneously. IM‘s other unique features have also
helped accelerate its rapid adoption in the business world: Presence awareness, and permission-based lists of
addressees, i.e. a user has a low risk of receiving Spam or other unwanted messages.

However, enterprise users’ rapid adoption of public Instant Messaging services with their free, downloadable
clients, such as AOL, MSN, and Yahoo Messenger, have begun to put IT departments in difficult positions. Their
major concerns are security risks, compliance with regulatory requirements, and loss of productivity.

While many users see nothing wrong with their use of these services without the sanction or knowledge of their
IT departments, the security threats such mostly well-intentioned users pose can be significant. Viruses and
worms are beginning to use IM services as vehicles for their transmission, and enterprise networks are
beginning to get infected through unprotected IM services.

Instant messaging is a form of official communication into and out of a company that in certain cases falls under
the jurisdiction of regulations such as Basel II, Sarbanes-Oxley, SEC 17 a-4, or HIPAA. Numerous customers,
for example, report their sales forces are commonly using IM services. In that case, are price quotes or
contractual agreements, even if transmitted informally via IM, legally binding? Companies and regulators
increasingly think so. Given that is the case, such communications then benefit from being monitored or even
archived. The free, public IM systems cannot meet such requirements.

Additionally, the use of Public IM systems can lead to misuse and loss of productivity. Empirical evidence
suggests that some companies experience rates of personal IM use that exceed 50 percent, i.e. half of IM
communications can be for personal use. Companies also report of confidential corporate information being
passed on through IM channels that cannot be monitored or archived.

According to recent market research, a majority of companies do not allow free IM systems to be used, primarily
                                                                   over security and productivity concerns, as
                        Considered/Use Free IM Services?           shown in the figure on the left. A significant
                                                                   number of respondents indicated they would
                  50%
                                                                   eventually stop tolerating free IM systems.
                  40%
   %Respondents




                                                                   To address these three principal concerns -
                  30%
                                                                   security, compliance with regulatory
                  20%                                 44%
                              38%                                  requirements, and loss of productivity –
                  10%                                              companies are increasingly adopting the use

                  0%
                                                                   of Enterprise Instant Messaging (EIM)
                           Free IM Ok             Free IM Not Ok   systems. Available as On-Premise software as
                                                                   well as On-Demand hosted solutions, EIM




8/23/2006                                                                                            Page 2 of 8
systems allow enterprise users continued access to Instant Messaging services, all the while allowing the
enterprise to ensure security, improve compliance and prevent misuse.

Thus, the decision for an enterprise to leave the risks of proliferating, free IM services behind in favor of
implementing EIM is twofold: First it needs to consider the economic benefits of EIM over public IM systems (i.e.
assess the ROI of EIM systems for its operation), and second it needs to decide which principal approach to go
with (i.e. select On-Premise software or an On-Demand hosted solution).

What then are the true costs of EIM to the enterprise and what are its benefits? This paper first presents the
major ROI drivers to adoption of EIM as told by actual and prospective EIM customers. But its principal focus is
on presenting a model for the Total Cost of Ownership (TCO) of EIM systems, comparing the prevalent systems’
upfront and recurring costs. Again, primary customer and secondary public domain research provided the inputs
for the model.


ROI Drivers
The principal ROI drivers cited by customers that led to their adoption of EIM are:

        Effective means of communication, reducing telephone costs
             o   Supports synchronous as well as asynchronous communications

        Security benefits:
             o   Allows secure communications, controlling electronic threats
             o   Permits secure file transfer

        Compliance benefits:
             o   Improves regulatory compliance through audit logs, history and transcript retention

        Uncontrolled use benefits:
             o   Allows users to retain control of who to communicate with
             o   Allows monitoring
                 of unauthorized                                                 Business Drivers for EIM
                 use that leads to
                                                          30%
                 wastage of
                                           %Respondents




                 resources and lost                       20%
                 productivity
                                                                25%                   25%             25%
                                                          10%                                                                      19%
  When asked about their                                                                                           13%
motivating, more general business                         0%
                                                                Improvement




                                                                                                                                    Don't need IM
                                                                                                      Cheap/Easy
                                                                                      Presence/Live




                                                                                                                   Avoid free
                                                                 Productivity




                                                                                                                    services




drivers, interviewed EIM customers
                                                                                                        to Add
                                                                                         Contact




and potential customers a variety of
reasons as shown in figure 2, with
about a fifth not interested.

                                                                                Figure 2: Business Drivers for EIM




8/23/2006                                                                                                                       Page 3 of 8
EIM could be used only for company-internal communications such as between collaborative teams or
departments, or it could be used for interacting with external users such as customers, suppliers or partners.
EIM solutions also permit federation, which is the interaction with Public IM or other EIM systems – an example
is the use of EIM to provide customer support and service.

While this paper’s focus, the competitive TCO model, allows an organization to evaluate their total costs of
ownership primarily comparing the offerings of different vendors, an additional exercise in financial evaluation
can be determining the Return on Investment (ROI). Such ROI calculations would ascertain the principal
economic benefits from the use of EIM solutions, requiring apportioning tangible amounts to the principal
benefits and savings that resulted from the above-mentioned customer research. The most important cited
benefits are listed here and shown in graphical format in figure 3:

                                                                                  Cost savings:
                                                   Reduced Telephone Costs            1. Reduced telephone
                         Cost Savings
                                                                                          costs

                                                                                  Reduction of security risks:
                                                   Attack – Virus Infections          1. Attack – virus infections
                                                                                      2. Data Loss – retains

                                                      Data Loss – Retains
                                                                                          record
 EIM Benefits             Reduction of                      Record
                         Security Risks                                               3. Compliance – allows
                                                                                          auditing and logging
                                                     Compliance – Allows
                                                     auditing and logging
                                                                                  Improved productivity:
                                                                                      1. Avoids unauthorized
                                                   Avoids unauthorized use
                                                                                          use that happens when
                                                                                          Public IM is allowed
                          Improved                 More effective than e-mail

                         Productivity                                                 2. Quicker and more
                                                     Ideal for better, faster             effective than e mail
                                                       customer service
                                                                                      3. Ideal vehicle for better,
                                                                                          faster customer service

                         Figure 3: EIM Benefits


EIM Cost Components

The installation and use of On-Premise EIM solutions involves multiple equipment and software components.
The principal vendors offer fairly complex rate structures in order to provide tailor-made options to a wide
category of users. License costs include costs for servers as well as client access licenses. Servers for intranet
and extranet use may require separate installations and licenses. Additionally, there are per user license costs
that may be one-time or recurring. And vendors offer additional features and services that bear add-on costs.
These include telephone support, web conferencing support, federation charges, auditing and logging services,




8/23/2006                                                                                           Page 4 of 8
and so on. Costs for specific security solutions for EIM as well as infrastructure and operating costs have also to
be considered. The various cost components are listed here:

        Upfront:
            1. Licenses: (considering discounts, Rate Contract or special fees)
            2. Server: Cost of server license – intranet or extranet servers
            3. Federation: License costs for allowing interaction with other users that employ well known IM
                   solutions
            4. Other Services: Auditing, Logging (24 hr logging), Customization, Deployment, Initial Training,
                   Telephone support, others
            5. IT Setup: Infrastructure such as dedicated servers (hardware and operating system software),
                   firewalls and security devices, content security software, IT staff for setup

        Per user:
            1. Licenses: User license or user fees (considering discounts, slab rates)
            2. Training: Direct costs, time

        Continuing costs:
            1. Maintenance: Annual maintenance fees, upgrade costs, patching, external support and
                   helpdesk, back up and disaster recovery costs; failover, storage costs
            2. IT Support: Internal IT staff salaries resulting maintenance, monitoring and log analysis costs


All of the above applies to On-Premise solutions, while only some apply to On-Demand solutions. Server
licensing costs, for example, are not necessary for On-Demand or hosted solutions. Thus, On-Demand or
hosted EIM solutions are alternate offerings that are rapidly gaining popularity as they save users and IT
departments from a host of complexities and set up costs.

With On-Demand solutions, customers only pay monthly per-user costs. No other external costs are required as
these solutions are being hosted by the vendors, and are being maintained at all times with the latest upgrades
and bug fixes. Each enterprise account is managed separately and securely. Value offerings could be based on
a fixed per-user cost per month or a “pay-per-use” charge.

With the On-Premise solution, on the other hand, one has to install the hardware and the software, pay upfront
for all the licenses, manage the maintenance and support on an on-going basis and pay regular user charges.
This upfront investment must then be amortized over time and a very large user population.


Vendors:
Several vendors have entered the market place for both On-Demand and On-Premise EIM solutions, the
principal vendors are:

        On-Demand solutions:
            o      WebEx
            o      Omnipod



8/23/2006                                                                                           Page 5 of 8
            o    Various Public IM Services

        On-Premise solutions:
            o    Microsoft Live Communication Server
            o    IBM Lotus Sametime
            o    Jabber
            o    Mainframe Messaging (Older systems)

TCO model
The aforementioned principal focus of this paper, the formulation of a TCO model, includes the upfront
investment cost as well as other costs that are incurred by the customer in deploying and operating an On-
Premise EIM solution. A quantitative perspective that brings all these costs to bear is very critical in making an
educated and informed decision on the cost-effectiveness of a targeted EIM solution. For an On-Demand
solution, on the other hand,
the TCO model becomes
vastly simplified. One has
to simply reckon the annual
cost on basis of the
monthly cost to be paid
per-user times the number
of users supported, and the
calculations are complete.
Principal TCO cost drivers
are shown in figure 5.




                                                     Figure 5 – TCO Comparison Cost Elements

We have used this approach to modeling EIM TCO into a financial model for use by customers to evaluate their
total cost of ownership associated with each of the alternatives. By using as many real world numbers as
possible, the model is a reliable predictor of the relative costs of these different scenarios. By performing total
cost analyses with the model, such as the one demonstrated above, customers can take the guesswork out of
the financial aspects of choosing an optimal EIM solution.


Results and Conclusions
An analysis of the licensing rate structures of prominent EIM vendors as well as interviews with leading users of
EIM solutions has been used to develop the TCO model and determine the average upfront and annual
operating costs on a per user basis. Given the need to amortize On-Premise solutions with all their hardware
and software costs, per user EIM costs are very high if the number of users is below 1,000, but they begin




8/23/2006                                                                                              Page 6 of 8
stabilize beyond 5,000 users. For smaller systems, upfront costs can be as high as $250 per user, while annual
operating costs can be as high as $50 to 75 per user.

Using the quantified TCO model yielded these insights:

        Up front costs
                                                                                                                               Vendor Cost Comparison
        asymptotically approach




                                       UpFront Cost per User ($/User)
                                                                                                       $250
        $45 to $50 per user as a
        steady-state value for                                                                         $200
                                                                                                                                                                            Microsoft

        very large installations.                                                                      $150                                                                 IBM
                                                                                                                                                                            Akonix
        I.e. On-Premise                                                                                $100                                                                 Facetime
                                                                                                                                                                            IMLogic
        installations can be                                                                           $50
        expected to never cost                                                                          $0
        less than that amount.                                                                                 0       2,000     4,000       6,000      8,000    10,000
                                                                                                                                    No. of Users



                                                                                                       Figure 6: Vendor Cost Comparison: Upfront Costs / User

        Annual operating costs                                                                                                 Vendor Cost Comparison

        asymptotically approach                                                                        $250
                                       Annual Cost per User ($/User)




        $10 to $15 per user per                                                                        $200
                                                                                                                                                                           Microsoft
        year for large                                                                                                                                                     IBM
                                                                                                       $150
        installation, including                                                                                                                                            Akonix
                                                                                                       $100                                                                Facetime
        internal and external
                                                                                                        $50                                                                IMLogic
        costs. Again, On-
        Premise installations                                                                            $0
                                                                                                               0       2,000     4,000       6,000      8,000    10,000
        can be expected to
                                                                                                                                    No. of Users
        never cost less than that
        amount.                                                                                         Figure 7: Vendor Cost Comparison: Annual Costs / User

                                                                                                                                Vendor Cost Comparison
        3-year NPVs approach
                                                                                                        $250
        $60+/- per user (at a 8%
                                                                        3-Year NPV per User ($/User)




        hurdle rate) for very large                                                                     $200
                                                                                                                                                                            Microsoft
        installations, again forming                                                                    $150                                                                IBM                 a
                                                                                                                                                                            Akonix
        lower cost boundary below                                                                       $100                                                                Facetime
        which On-Premise                                                                                                                                                    IMLogic
                                                                                                         $50
        systems are not expected                                                                                                                                                                to
                                                                                                          $0
        fall.
                                                                                                                   0    2000       4000         6000      8000     10000

                                                                                                                                         No. of Users


                                                                                                        Figure 8: Vendor Cost Comparison: 3-year NPV / User




8/23/2006                                                                                                                                                                             Page 7 of 8
                                             At 0% discounting, IBM Lotus Sametime is more expensive than Microsoft Live Communication Server.


                                                 IBM Lotus Sametime Cost Comparisons                                                                        Microsoft LCS Cost Comparisons

                                      $250                                                                                                     $350




                                                                                                         C o s t p e r U s e r ($ / U s e r)
 C o s t p e r U s e r ($ /U s e r)




                                                                                                                                               $300
                                      $200
                                                                                            Up Front                                           $250                                                    3-yr NPV
                                      $150                                                  User Quote                                         $200                                                    User Quote
                                                                                            Annual                                             $150                                                    Annual
                                      $100
                                                                                            User Quote                                         $100                                                    User Quote
                                      $50
                                                                                                                                               $50
                                       $0                                                                                                       $0
                                             0   2,000   4,000     6,000   8,000   10,000                                                             0   2,000   4,000    6,000   8,000   10,000
                                                           No. of Users                                                                                            No. of Users




                                                                 Figure 9: Cost Comparison: IBM Lotus Sametime & Microsoft LCS



The interviews and the use of the TCO model clearly show that for the smaller enterprises (those with lower
number of users), both upfront costs as well as ongoing costs are very high for On-Premise solutions when
amortized on a per user basis. Add to this the higher capital costs, the inflexibility that comes with the On-
Premise model and the hassles of software maintenance and upgrades, and the On-Demand offering becomes
a very attractive proposition for small and mid-size enterprises.

However, given that On-Premise systems’ costs do not decrease below $45 per user for the upfront costs, and
3-year NPVs do not decrease below $60 per user combining upfront and ongoing costs, On-Demand or hosted
solutions also offer compelling cost advantages to large and very large enterprises at the right price.

In the primary research conducted with several users, spread over different sizes and types of enterprises, it
was found that there are quite a few EIM customers that have a user bases below 1,000 or 2,000 users; some
as low as 100 to 200. The research also indicated that On-Premise solutions were most attractive to enterprises
with less than 10,000 users. Apparently, small firms are less concerned with the security implications of using
public IM systems thus preferring those free systems, while larger firms seem to be less likely to use IM or EIM
due to security and productivity concerns.

The growing popularity of hosted software offerings in other domains, also known as “Software-As-A-Service” or
On-Demand solutions bear testimony to these compelling cost advantages.




8/23/2006                                                                                                                                                                                           Page 8 of 8

				
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