This article originally appeared in the April 2011 issue of INTERNET TELEPHONY.

Demand for hosted VoIP services remains on the upswing as businesses continue to see the appeal of outsourcing their communications in an effort to drive down costs and allow them to focus on their core competencies rather than on managing infrastructure and applications.

“From our IP PBX (News - Alert) survey, it appears that businesses are increasingly embracing a hosted services model, as their capacity needs will depend on how robust the economic recovery is, and hosted services allow them to more easily ramp their capacity needs up and down without a huge cash layout for equipment,” noted Infonetics (News - Alert) Research analyst Matthias Machowinski in releasing a study on the market at this time last year.

According to some estimates, hosted IP communications can be deployed at a 30 percent lower cost of ownership than an on-site IP PBX solution and can increase enterprise productivity by $500 per employee, per year.

Competition in the hosted VoIP and UC market is intense, according to ABI Research (News - Alert), but service providers are differentiating themselves by building on their service provisioning and integration capabilities, quality of service, service bundling, and price. The firm in September forecast that the VoIP services space –which it categorizes as including VoIP integrated access, SIP trunking, hosted IP PBX/IP Centrex and managed IP PBX services – will double within five years. If that happens as expected, this market opportunity will surmount $20 billion by 2015.

What’s more, forecasts point to a 13 percent compound annual growth rate in revenues and a 19.6 percent CAGR in lines between 2010 and 2015. This is despite growing competition from low-cost providers and market price pressures.

Meanwhile, Infonetics Research (News - Alert) reports that service provider revenue from residential/SOHO and business VoIP services increased 20 percent between 2008 and 2009, to $41.6 billion

IP connectivity services are the fastest growing segment of the business VoIP services market, followed by hosted VoIP and unified communication services and managed IP PBX services, according to the research house.

“The trend of companies outsourcing their communications infrastructure has taken off in earnest, as enterprise decision-makers look for cost savings without having to compromise on features and functionality,” says ABI Research senior analyst Subha Rama.

The move by businesses to replace legacy phone systems is driving much of the growth in hosted VoIP. And it’s not just small and medium businesses that are embracing hosted VoIP. Organizations adopting this outsourced model run the gamut from very small businesses to very large, multi-location organizations.

"Even large businesses that traditionally shied away from hosted services for mission-critical communications are deploying hybrid models, [and] experimenting with hosted services in smaller doses," says Rama of ABI Research.

Indeed, because large companies also tend to be widely distributed – with several branch offices and sometimes telecommuters – hosted VoIP makes perfect sense. That’s because it can enable all those locations to be served from the cloud easily, affordably and consistently.

To elaborate on that last point, hosted VoIP solutions can enable employees to work remotely and still have the same calling functionality (including the ability to transfer calls between extensions, for example) and business caller ID appearances as they would were they all in the same physical location.

"Hosted IP telephony platforms have come a long way over the past 10 years and can provide flexibility, risk avoidance and economic scalability for enterprises looking to implement advanced IP communications capabilities," says Elka Popova of Frost & Sullivan (News - Alert). "According to our research, hosted IP telecommunications deployments have been embraced most by enterprises with a variety of geographically-dispersed locations such as government, education and retail organizations."