ShoreTel and the M5 Acquisition: "A Sign of the Cloud to Come"

22 Feb 2012

Recently ShoreTel announced the acquisition of M5 networks, a New York-based hosted services carrier offering a VoIP-centric platform with early geographic strengths in New York City metro and Chicago metro area. Accounts now span the US. M5 has been noted to make recent purchases Gekotech and Callfinity with the intent of offering a broader UC-based platform which includes Unified Messaging, IM/chat, presence, and mobility.

Gartner Group predicts that the "Voice as a Service" market will grow annually with a CAGR of 36% to $2.2B before 2015 from the current $700M market), a short three years out.

ShoreTel has stated that it views the hosted UC market as complementary to its premise-based business and this acquisition delivers on its commitment to provide a cloud-based hosted solution in FY2012. The addition of M5 will enable ShoreTel to reach a large and growing market segment of customers that are looking to deploy VoIP communications through a hosted model. ShoreTel, as I do, sees cloud computing, virtualization, data center economics and the flexibility of services-based models driving the Unified Communications as a Service (UCaaS) market. ShoreTel states that, through this acquisition, it will be well positioned to give customers an "ultimate" choice between on-premise and hosted UC solutions.

This acquisition can be viewed as strategic as well as risky for ShoreTel. There is debt at stake here for ShoreTel, and yet it puts ShoreTel in the center of offering choices to its customers: does the enterprise want a traditional premise-based model or a hosted, cloud-based model? It's the enterprise's choice.

ShoreTel has been known in the market for its "ease of implementation and management" model when compared with its competitors. ShoreTel commonly demonstrates a fully working system at a prospect's site in less than 30 minutes with the ability to make calls, transfer, conference, use voice mail and even UC clients. This ease of implementation management theme can now be transcended to the cloud as well. In addition, ShoreTel (and other premise-based manufacturers) has a better track record of implementing UC historically better than the cloud providers and can bring this skillset and UC integration with M5.

Up until recently, the focus in the cloud has been the SMB market. ShoreTel has been known for its sweet spot in this (and larger) market segments and the M5 acquisition truly complements it. This acquisition of M5 and its own sweet spot for up to 1000+ users complements one another.

In our consulting practice, we are seeing an uptick and a definite interest in the VoIP/UC cloud offering by the larger enterprise based on capital available and the headache factor. It's not just for the SMB market any longer. UCaaS is here for the enterprise.

In my opinion, ShoreTel clearly is an early adopter, taking the plunge through an acquisition rather than partnering with a cloud-based provider as other manufacturers have done looking to offer some type of a hosted, cloud-based solution. This strategically places ShoreTel on the front-end of the cloud adoption curve, being able to control their destiny through the acquisition. In my opinion, this is truly a "sign of the cloud to come."

Several important talking points here:

The cloud is here in the UC market as a real, longer-term offer and solution to the enterprise community. The cloud helps facilitate the introduction of Unified Communications to the user community without the "headache" of managing another set of applications in the enterprise, and thus delegating responsibility (and thus accountability) to the cloud provider.
Telecom and VoIP/UC is not a core competency of IT nor is it a core application and is different than more traditional software models, including ERP, Oracle, and SAP among others. Telecom is simply not aligned with IT because the application, in most cases, is owned by the core business unit, while IT is the custodian. Many IT departments are looking to "delegate" Telecom away from their daily responsibilities. It's simply a headache they really do not want.
Capital available for many enterprises is, at best, difficult, for upgrading and replacing entire infrastructures, and the choice now offered by ShoreTel for on-premise or in the cloud will provide enterprises the choice of an operations-centric model vs. a more traditional capital-based model.
A word of caution for the cloud-based model: it's an all-in-one solution and an all-eggs-in-one-basket approach. The VoIP/UC cloud solutions provider that is engaged and contracted with will supply, in most cases, the MPLS network along with the hosted VoIP/UC solution.
In our consulting practice we are seeing (a) more and more interest by the larger enterprise to a managed/cloud-based model, and (b) terms for 24-36 month term and even terms for as long as 60 months. Strong SLAs and contract terms and conditions for possible contract outs must be considered and included. Also included should be business dynamics (downturn), the vendor team's periodic performance, and metrics to track all troubles, root cause analysis, and fixes. These are an absolute must if one is to consider this model as an alternative to the premise-based model.
In the UCaaS model enterprises desire, in most cases, to have the equipment and the headache of such off their premise, and in the provider's central office. (An alternative to the cloud-based model is a managed, premise-based model, with an operations-based model still intact, but the hardware on the premise.)
With an annual CAGR of 36%, ShoreTel will be positioned for overall company growth as the VaaS and UCaaS markets grow.

A word of caution, though. ShoreTel must be strategic in its approach to the cloud. The cloud is a huge disruption for the premise-based VAR community, and totally changes the resources, implementation, and maintenance models VARs have offered until now. The value-add of a cloud-based model and "what's in it for the VAR" are key points for ShoreTel's growth in the cloud and how they expect to embrace the hosted cloud community.

This is truly a significant, strategic acquisition for ShoreTel at this juncture in the early adopter segment of this growth market. ShoreTel has the vision and foresight to see the next wave coming and will be ready as the market matures if it can integrate M5 with the ShoreTel infrastructure and offer a solution that is truly robust, and not just dial tone and voice mail to the enterprise community.

The M5 acquisition truly places ShoreTel on the front end of the growth curve, and this can be a significant win for ShoreTel's market growth and leadership in the UCaaS space. ShoreTel must:

Tell the right "story" to the enterprise community about the cloud as an alternative to the premise-based model and why it makes sense (or in ShoreTel's case an either/or model)
Come up with a VAR program that is enticing for a cloud-based model for growing this product
Integrate M5 well with its organization into a cohesive, single-branded model.

So kudos to ShoreTel for taking the plunge and making a strategic acquisition for growth in the hosted VoIP/UC space. In my opinion, you have the foresight and vision to grow the company in a growth market area, and will be able to offer an all-in-one solution through this acquisition rather than the "safer" partnering, sometimes ad-hoc solution of a carrier with a premise-based manufacturer.