They may have had a different word for it, but even in the early days of telephony, businesses “outsourced” their networks. Even if they were allowed to, very few organisations ever managed their own devices to switch voice calls with the outside world – and even fewer laid their own cables

But in data networking, the picture has always been much more complicated. Inside the business and on the campus, most enterprises manage their own traffic; and while they might rent lines or virtual circuits beyond their perimeters, most businesses manage and own their own switches.

As complexity rises, and the cost of external services falls, however, more organisations are choosing to outsource a greater part of their data and voice networks. And converged IP networks are playing a big role in encouraging that trend.

The market figures demonstrate this. Network outsourcing has been identified as the fastest growing segment of the outsourcing market, reaching a value of $77 billion by 2008, according to Gartner analysts. This is becoming particularly prevalent in smaller organisations, which are understandably not enthused at the idea of managing mission critical switches, routers and multimedia servers.

Thomas Mendel, of Forrester Research, an analyst group, predicts that the pressure to have a competitive, expertly managed network will lead most small and medium sized companies to have outsourced their networks in the next five to 10 years.

One particular growth area – at all ends of the business spectrum – is voice network outsourcing.

The idea of running the telephone system over the data network is not new, but recently emerged technologies such as IP Centrex can offer the flexibility and quality of service that enterprises demand.

The principle of Centrex telephony is that all telephone switching is hosted and managed by a local provider who rents services to the customer, removing the need to invest in, and manage, expensive networks.

Telecoms companies have offered Centrex services for years – but with little success. “Centrex never really happened.” explains Paul Templeton, VP of enterprise solutions for Europe, the Middle East and Asia at Nortel. “The cost of deploying it in a time division multiplexed (TDM) environment was too high. But we are seeing a significant take up of IP Centrex.”

By hosting an enterprise’s telephone network over an IP network, service providers can offer a flexible and easily managed telephone system at greatly reduced rates – along with other services such as unified messaging and even video.

Technological advances have enabled service providers to offer the quality, and flexibility, of service that enterprise customers require.

However, the cost benefits of complete network outsourcing still need to be assessed on a case-by-case basis. Apart from the often high management costs, Gartner analysts estimate that between 3% and 6% of the cost of any outsourcing deal should be allocated to managing the relationship with the external provider.

For many businesses, handing over complete management of the network to a third party represents too great a loss of control – especially where so many customer-facing applications are involved.

But for others, it is more straightforward. “A lot of our customers are businesses who do not consider their network as a competitive advantage,” says service provider Cisco’s channels and alliances operations director, John Donovan.

Forrester analyst Robert McNeill predicts that these concerns will force a rise in selective sourcing, whereby the various tasks associated with network management, such as data back-up or desktop management are performed by different, best-of-breed providers. This, he believes, will encourage greater competition, drive down prices and remove the risk associated with outsourcing critical IT functions.

A benefit of this selective attitude to outsourcing is that it leaves critical decision making over the relative performance of network components with the CIO.

But whether dealing with one service provider or many, it is clear that managing outsourced telecommunications and networking functions will increasingly become a key part of the CIO’s role.