In-Depth

Can Skype and Office 365 Replace Traditional Enterprise Phone Systems?

Skype for Business Server and the new Cloud PBX option in Office 365 are gradually becoming viable alternatives to traditional telephone systems, but many key features are still under development.

• By Jeffrey Schwartz
• 08/31/2016

While Microsoft has long aspired to take control of office telephony over the past two decades, it has largely accepted a supporting role among a small percentage of organizations. A growing number of enterprises and businesses of all sizes have started taking notice of Microsoft's latest efforts with its new on-premises Skype for Business Server and the Cloud PBX service recently added to Office 365, which both offer extended telephony and videoconferencing functions and viable public switched telephone network (PSTN) connectivity.

Few large enterprises have switched their entire telephone systems to Skype for Business and Cloud PBX, though experts say it's underway in many organizations and under serious consideration among numerous others. Many are moving incrementally, some at more advanced stages than others, while some remain skeptical or have no short-term plans to replace their existing telephone systems with Skype for Business or Cloud PBX.

A variety of telecommunications industry experts and Microsoft partners say the company's new Skype for Business and Cloud PBX have become a more credible alternative, though Microsoft today is a relatively small player in the telephony market, now dominated by the likes of Cisco Systems Inc., Avaya Inc., NEC Corp., Mitel Networks Corp. and ShoreTel, along with a crowded subset of online-only alternative providers such as Ring Central Inc., 3CX, Vonage, Ooma Inc. and Grasshopper.

Microsoft's improved credibility notwithstanding and the company's small share lines actually in use, experts believe it has potential to increase in the coming years, contingent on the feature set reaching parity with what incumbent providers offer. One major feature that's lacking but on the roadmap is auto-attendant, a core function in existing PBXes, though that's in the pipeline for later this year. The features in both the on-premises and cloud versions are similar and can be deployed with a hybrid architecture, for those who want the server in a large office but want to use the online version at remote locations.

Observers say a growing number of organizations are in the early stages of deploying or evaluating Microsoft's telephony offerings because they're considerably less expensive. Microsoft's release of Cloud PBX this year has another strong pull: It's an option to Office 365 subscriptions. Commercial Office 365 subscriptions grew 45 percent in the last quarter over the previous year, Microsoft said in its most recent earnings release. Microsoft also pointed out that 70 percent of its Enterprise Agreement Office renewals were cloud subscriptions. Overall, Microsoft now counts 23 million Office 365 subscriptions and 90,000 partners now offering the service, a 25 percent increase. The release of Cloud PBX earlier this year also coincided with the new Office 365 E5 option, which for $47 a month provides the Skype for Business client and the ability to make and receive domestic phone calls, and for an additional $12 it includes international dialing.

Employees can either connect headsets to their PCs or use Skype for Business-compatible phones from a variety of suppliers, including Polycom Inc., Logitech and HP Inc. Skype for Business and Cloud PBX also now have a connector to existing PBX systems, for organizations that want to retain their existing phone sets.

At this point, however, only 31 percent of organizations using Microsoft's universal communications (UC) apps, including Outlook, Skype for Business or the previous Lync client, identified Microsoft as its IP telephony (IPT) provider, according to a recent survey of enterprises by Chicago-based Nemertes Research Group Inc.

While Microsoft represents the largest percentage, Cisco trailed just slightly, accounting for 29 percent, with Avaya tracking third at 16 percent and numerous other companies showing single-digit percentages, according to the survey, which the firm says was not sponsored by any company and is based on interviews with enterprises ranging in size from $50 million in revenues to more than $20 billion. Robin Gareiss, founder and president of Nemertes, says among enterprises looking to tie UC to telephony, it's largely becoming a two-horse race between Cisco, the current market share leader, and Microsoft, which currently has a small overall share of the market.

Cisco vs. Microsoft
"From a research perspective, we see a lot of companies weighing Cisco versus Microsoft, particularly among larger companies," Gareiss says. "A lot of them are running trials with Microsoft voice. Most of them are using Microsoft for the more UC functions like presence and instant messaging and some of the conferencing features, as well."

Microsoft must overcome some hurdles but is certainly gaining ground, according to Gareiss. "We are definitely still hearing from companies that there are issues with voice quality and integration -- that is a big challenge," she says. "That said, we have a lot of large clients that are using Skype for Business for voice and doing fine with it. It's a slow transition. Most of them are going from Cisco to Microsoft and just trying to standardize on Microsoft for everything."

Diane Myers, senior director of research for IHS Inc.'s VoiP and UC practice, agrees that Skype for Business is showing gains, but from a relatively small base of lines installed. Overall that small base accounts for less than 5 percent today compared with market leader Cisco at 30 percent. However, Microsoft's UC apps are a strong draw for those considering Skype for Business as an alternative to an existing PBX, according to Myers.

"Microsoft definitely leads on the UC front, they are by far the No. 1 vendor, but on the telephony portion, they are very small, relatively speaking, when we speak about other providers like Cisco, Avaya, Mitel, NEC and others," Myers says. "They have made inroads and there are absolutely businesses using them for the telephony piece but it is not as widespread as Microsoft would probably hope."

Sonu Aggarwal, founder and CEO of Unify Square, a provider of management services for Skype for Business, believes about 30 percent of the Fortune 500 have plans over the next several years to incrementally replace their PBXes with the Microsoft PBX platform. Aggarwal claims his company works with 10 percent of those large companies, and said at least 10 percent have already moved significant portions of their employees over to Skype for Business.

"A majority of large enterprises seem to have intent to move to Skype for Business as their telephony and communications replacement solution but they are at varying stages and more typically at earlier stages in that transition," says Aggarwal, who was a one-time group manager at Microsoft on an earlier version of Skype for Business when it was known as Office Communication Server. "Some notable enterprises have done the whole nine yards, and reached nirvana, but most enterprises are on their way there and are figuring out how to get there."

Expanding Skype for Business
Microsoft will be rolling out some important new capabilities later this year. The lack of an auto-attendant feature, which allows for the automated routing of calls, is seen as a key deficiency in the Cloud PBX service. Microsoft is also promising to roll out extended PSTN access beyond the United States and is working with Logitech and Polycom on Project Rigel, an effort to expand the scope of the Surface Hub video conferencing system.

Perhaps the biggest complaint about Skype for Business and Cloud PBX is their lack of management tools, Gareiss says. "One of the challenges I see among companies using Microsoft is getting the right management tools and that's particularly true in the cloud right now," Gareiss says. "Microsoft is severely deficient right now in solid management and monitoring tools for their cloud-based service, and that's been preventing some companies from forging ahead."

While Microsoft acquired some reporting technology from Event Zero that it plans to implement into the Office 365 Administration Center, for now the lack of that ability is a deal-breaker. "The biggest challenge for them is getting the right management tools in place," Gareiss says.

Lower Cost
One reason more IT decision makers are moving to Skype for Business, or at least considering the possibility of doing so, is the fact that the capital and operational costs are considerably less than it was in the past, according to Gareiss. At $1,194 per user in this year's survey, she says it's still more costly than the median of $1,040 and Cisco, which tracked at $997. Not long ago, Gareiss says, the average cost with actual price paid and deployment and staffing was more than $2,000. "They've really brought it down but they are still among the highest ones," she says. "But there isn't the disparity there used to be. I would say, overall, when I look at Microsoft from years' past, the cost to operate their offering has gotten lower and the learning curve is getting better. It's still higher than others, but not much higher than it used to be. Cost-wise, Microsoft is heading in the right direction."