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Like many a good idea before it, IP telephony has proved to be a late bloomer. For years, merging voice and data networks has promised an array of benefits, ranging from cheaper calls to simpler phones. So what's kept most companies from ditching their traditional phone switches and services? Cold, hard reality--in the form of today's already-overloaded networks.

In this month's Enterprise Technology, we look at why that situation is changing, especially for internal calls in far-flung organizations. Here's the inside story on how to make a voice-over-IP phone system work for your business--from managers who've made the leap.

A lot of things have changed in the office over the past 25 years. Fax machines transformed document transmission, PCs turned managers and administrators into "knowledge workers," and wireless technology is ushering in a new era of mobility. We've even seen cappuccino makers replace coffee machines.

Yet the telephones gracing the desks of most workers have changed remarkably little. Voice mail is an enduring scourge of the workplace, with cryptic forwarding and conferencing features that flummox even savvy employees. Now Internet Protocol-based data networks--ranging from small local area networks to the Internet--offer a solution: Replace dedicated voice-based systems with phones that connect directly to data networks.

It's an appealing vision. Calls within the business, even among offices at different locations, ride the local or wide area network to bypass phone company fees. Outbound calls pass through a gateway and onto the public switched telephone network (PSTN), ensuring that IP phones can complete calls to any destination.

IP telephony can deliver big-ticket features even to cash-strapped businesses. Voice mail can flow into the same in-box where e-mail and faxes reside, making it easy to track, sort, play, and forward messages. Conference calls and call-forwarding can be set up using intuitive PC-based interfaces. Mobile workers can make calls over the Internet, sidestepping the premiums charged by cell phone service providers and calling cards.

The list of potential benefits is long, but companies haven't rushed to place voice communications on their data networks. Executives have balked at the risk of shifting crucial, established phone operations to failure-prone networks. IP telephony also requires voice-aware network gear such as switches, routers, and gateways that can recognize voice traffic and move it along without delay. Often, companies simply haven't been able to justify expensive upgrades to recently acquired network hardware and software.

Ballistic Growth

Those objections fall by the wayside as network reliability improves and voice-capable network gear proliferates. Market research firm International Data Corporation projects that paid IP-based call minutes from businesses will skyrocket to nearly 230 billion minutes in 2005, up from 328 million in 2000 (see the "IP Telephony Use" chart below).

Much of the growth is likely to come from enterprises with more than 500 employees. IDC expects IP call-minutes for large businesses to leap to almost 128 billion in 2005 from just 13 million in 2000. In the past, says IDC analyst Elizabeth Farrand, almost all call-minutes came from consumers and small offices. Farrand identifies Net2Phone, an early provider of consumer-oriented voice-over-IP services, as a key player in the consumer and small-business market.

High hopes are hardly new to IP telephony. A 1998 IDC report projected that it would be "widely deployed" in businesses by 2001. But Erin Thompson, an analyst for telecommunications industry think tank Allied Business Intelligence, believes the logjam is on the verge of breaking. "It's definitely taking a little bit longer than some people had expected," she says. "A lot of the activity has just happened in the last six months."

While most IP growth today is concentrated in smaller, more nimble organizations, some large deployments are under way. Dow Chemical is in the process of rolling out 40,000 IP telephones, and Lucent has begun a trial installation of 2500 phones at its facility in northern Illinois. Cisco Systems, a leading IP telephony vendor, has more than 25,000 IP phones on its desks worldwide. After all these years, IP telephony appears to be poised for success. But why now?

Ken Camp, a senior member of the technical staff at telecommunications training firm Hill Associates, is a specialist in IP telephony. Camp says that enormous growth in available bandwidth has set the stage for adoption. At the same time, big and small companies alike are assessing the potentially large cost savings of moving phones onto the IP network.

High Price, No Dice

For growing small businesses--200 users or more--the affordability of an IP system over a personal branch exchange (PBX) phone system is the key issue, according to Camp. "Cisco makes [an IP] gateway that's about $25,000. But when you look at an investment into a PBX, it's typically $150,000 to $200,000 for comparable hardware," he says.

Tom Stephens, network group leader for supercomputer manufacturer Cray, cites cost as a main reason the company rolled out 650 IP phones at its offices in Chippewa Falls, Wisconsin, and Mendota Heights, Minnesota. Cray had split from its parent company--Silicon Graphics--in April 2000, and was deploying a new data network and replacing an existing PBX system in the process. When Stephens compared costs between a PBX upgrade and an IP telephony deployment, the numbers weren't even close.

"We got a traditional PBX quote, and since we had to put in an all-data network too, we put them together," recalls Stephens. "The cost of going with a traditional PBX was about equal to the cost of a whole data and voice network. So basically, we got the data network for free."

Of course, your current phones aren't going to cut it on an ethernet network. IT departments should plan for sticker shock when it comes to outfitting employees with IP phones equipped with ethernet jacks and network components. 3Com's SIP Phone, for instance, retails for $395, which is about twice the cost of a high-end traditional desktop phone.

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