The Case for Hosted Exchange

An Osterman Research White Paper
Published December 2012


Because email and other messaging capabilities are so critical to the communication, collaboration and file transport capabilities of most organizations, they have in some respects become a utility like electricity. For example, the typical information worker spends 165 minutes per day doing work in their email client/interface, making it the most important single tool that the typical user employs.

Moreover, email is so critical to the operation of any organization that it no longer provides any substantive competitive differentiation between companies. Like other utilities, then, the goal is to a) ensure that service remains available as close to 100% of the time as possible while b) simultaneously being provided as inexpensively as possible. For many organizations, managing email internally is a thing of the past, just like producing one’s own electricity is a concept of the past. For example, as shown in the following figure, a growing proportion of email users will be served by a hosted solution over the next few years.

Proportion of Email Users Served by Cloud Delivery 2012-2014


A growing number of organizations are finding that the way to accomplish lower costs and better management of email is through the use of Microsoft Exchange as a hosted service, a model in which a remote third party provider manages all backend services for a flat monthly per user fee. The advantages of this approach for organizations that want to realize the benefits of Exchange are that uptime of the Exchange infrastructure can be very high and the cost of managing Exchange can be reduced significantly – typically more than 50% compared to on-premises management, as shown in the following table. Further, the use of a hosted Exchange service allows an in-house IT staff to be deployed to other projects that will provide more value to the organization as a whole, enabling organizations to realize more value from the IT staff members.

Monthly TCO per Seat On-Premises and Hosted Microsoft Exchange


This white paper discusses the benefits of managing Exchange in the cloud. It also lays out the detailed costs of managing a hosted versus an on-premises Exchange environment. Finally, it provides information on a leading provider of hosted Exchange services that has sponsored this white paper, Rackspace Hosting.


Microsoft Exchange Server is the leading business-grade messaging system employed in North America and is currently used by 170+ million people worldwide. Exchange offers a number of capabilities, including email, calendaring, task management, address lists, and access to shared document repositories, and other functions. Exchange was originally introduced in June 1996 and has been upgraded several times since to include additional and enhanced features. The current version is Exchange 2013, released in late 2012.


Hosted Exchange has been offered for several years by a large and growing number of providers around the world and, more recently, by Microsoft itself. There are more than 100 providers of hosted Exchange services worldwide, although these vendors vary widely in terms of their capabilities, the number of users they support, the ancillary services they provide, their pricing, etc. Osterman Research anticipates continued uptake of hosted Exchange in its various forms, as shown in the following figure.

Proportion of Exchange Users Served by a Hosted Service, 2012-2014


There is a perception that hosted Exchange is intended only for small businesses, while on-premises Exchange deployments are better suited to larger organizations. This is no longer the case as many larger organizations are realizing the benefits of migrating to a hosted Exchange model.



Why should your organization consider migrating to hosted Exchange? There are a number of important reasons to consider doing so that are focused on direct costs, opportunity costs, security and other benefits, as discussed below.


Many decision makers believe that an internally managed Exchange deployment is less expensive to deploy and operate than hosted Exchange. While in some cases that perception is accurate, very often it is not. Osterman Research’s cost models have demonstrated that an on-premises, 100-seat Exchange deployment costs nearly $49 per seat per month over a three-year system lifetime, while a 1,000-seat deployment costs just over $21 per seat per month1. Given that hosted Exchange offerings are priced substantially less than this, the direct cost savings from using hosted Exchange are substantial. It is also important to note that leading providers of hosted Exchange include the licensing costs as part of their service, further reducing the cost of hosted compared to on-premises Exchange.


Further, a hosted Exchange deployment provides more predictable costs than on-premises deployments because the cost per seat is fixed over the lifetime of the contract with the hosting provider. This predictability of costs manifests itself in two important ways:

  • Unforeseen problems can create additional costs for an on-premises deployment, including natural disasters, power outages, moves to new facilities and other events that can add to the cost of managing on-premises Exchange in a somewhat unpredictable manner.
  • An organization that continually adds users will, at some point, reach the maximum number of users that its infrastructure will support and will then have to add servers and other infrastructure to support new users. This creates a step function in the total cost of ownership for an Exchange environment can drive up the cost of Exchange management dramatically.


Among the more important issues that any organization should consider is that of the opportunity cost of IT staff members or, in smaller organizations, individuals who are charged with maintaining on-premises systems. Most decision makers understand that finding and retaining qualified IT staff is not particularly easy. As a result, in-house IT staff members should be used in a manner that allows them to provide maximum benefit to their employer, while also giving them a satisfying work experience that will motivate them not to go elsewhere. Using hosted Exchange frees IT staff members from the requirement to constantly monitor the servers to ensure continuous uptime, freeing them for work that is not only more interesting to them, but also more compelling for the business.

With hosted Exchange, IT staff can be deployed on projects that offer more competitive value to the organization and can also result in greater IT job satisfaction. For example, if an IT staff member can manage a messaging capability very well, he or she provides some level of value to the organization. However, if the same staff member spent the same amount of time implementing new CRM capabilities that could convert a higher proportion of prospects into customers, it is very likely that much greater value could be realized from the same level of effort.


Although Exchange is an easy system for users to employ, it is not a simple system to manage internally. It requires expertise in a number of areas, particularly when deploying a new version of the system, it requires expertise in each of the several server roles that comprise the Exchange platform, and it requires expertise in various other technologies that are integral to the Exchange ecosystem. The cost to develop this expertise can be high and, for smaller organizations, often prohibitive. In contrast, the use of a hosted Exchange provider can offer access to well-trained technical support staff that are available on a 24x7 basis that can typically resolve problems quickly and with minimum expertise from their customers.

The service aspect of hosted Exchange should not be overlooked when considering a provider of the service. Because few companies operate on an 8-to-5, Monday through Friday schedule, it is just as critical to have access to Exchange expertise at 11:00pm on a Saturday night as it is during normal business hours. This allows users to have their issues resolved in a timely manner without the cost and burden of maintaining in-house staff to manage a help desk, etc. In short, a specialist will virtually always offer better service and support when resolving Exchange-related problems.


One of the more compelling benefits of hosted Exchange is the fact that a third party is managing the entire backend infrastructure, thereby minimizing the impact of major and minor services outages and the ensuing loss of email that can impact any business. For example, a hurricane or tornado can knock on-premises systems out for days or even weeks, while less serious problems like power outages or storms can bring down messaging capabilities for hours or even a few days. While these events can also impact providers of hosted Exchange services, leading providers will back up their customers’ email, allowing uninterrupted receipt of email for customers until they can come back online. This is something that a non-technical staff member or senior executive can do.

Further, in the event that a customer’s facilities are made unavailable for any length of time, employees can still access their hosted Exchange accounts from anywhere using a Web browser, a mobile device or a copy of Outlook or Entourage on their home computer.


One of the chief benefits of hosted Exchange is the speed with which email services can be deployed. For example, deploying hosted Exchange typically requires little more than the modification of an MX record and a change in the configuration of local email clients. Adding new users to an existing hosted Exchange deployment normally requires just some simple modifications in a Web-based administration tool. This makes it easy to add or eliminate small numbers of users, or even entire business operations, which is particularly important when integrating merged or acquired companies into an Exchange infrastructure.


A hosted Exchange capability allows organizations to be more flexible in the way that they deploy email to their employees. For example, a company may opt to manage Exchange in-house for its corporate headquarters, but provide hosted Exchange to each of its field offices that do not have an in-house IT staff. This allows the organization to provide highly available messaging services that provide a consistent user experience across the entire organization, but at much lower cost than if the IT staff was used to manage the satellite offices.


Migrating from one version of Exchange to another is just that – a migration, not an upgrade. Because Exchange does not allow an in-place upgrade to a new version, the cost of migration can be very high and even prohibitive for smaller organizations. Using a hosted Exchange provider, on the other hand, minimizes or even eliminates the cost of migration, since some providers will migrate their customers to a new version at no charge. Not only does this minimize the IT pain and the time required to migrate, not to mention the potential for downtime in the system, but it also dramatically reduces the overall cost of Exchange management over the long term.


Another important benefit of hosted Exchange is that much of the network traffic that would normally take place with an on-premises deployment of Exchange is transferred to the hosting provider. For example, a hosted Exchange provider that also offers anti-virus and anti-spam filtering will eliminate 75% or more of the email that would normally come into the network as spam, only to be quarantined and eventually discarded by end users. This saves significantly on both bandwidth and storage, costs that are growing exponentially and unpredictably in smaller organizations.


Virtually all leading hosted Exchange providers operate very secure physical facilities that include video surveillance capabilities, multiple employee access points using multi-factor authentication, tracking and monitoring tools and other capabilities that protect their customers’ data from being compromised. In most cases, the security provided by hosted Exchange providers exceeds the security that their customers could afford to deploy.

Measures, such as SSAE 16 audits or WebTrust certification, can provide an extra level of assurance for customers. SSAE 16, for example, is a set of professional auditing standards that assesses the internal controls that a provider uses, as well as the auditor’s opinion on the effectiveness of these controls.


Many organizations will want to maintain at least some part of their Exchange infrastructure in-house. The use of a hosted Exchange provider allows this sort of hybrid solution. For example a corporate headquarters with thousands of users could have Exchange deployed in-house, while remote offices that do not have dedicated IT staff or specialized Exchange expertise could use a hosted solution. This permits all users in the company to have the same experience with Outlook or Entourage and with their mobile devices, while at the same time driving down the cost and complexity of managing Exchange.

Another variant of the hybrid approach can be to offer hosted Exchange for some users and a less feature-rich email offering for other users whose needs are not as sophisticated. For example, an organization could deploy hosted Exchange for office workers while deploying an email-only, non-Exchange solution for workers behind retail counter or on a factory floor.



While IT can benefit significantly from a hosted Exchange deployment, so can end users. Among the many user benefits associated with the use of hosted Exchange are those discussed below.


A hosted Exchange account can be accessed via Microsoft Outlook on Windows or a Mac, as well as from any leading Web browser. This permits users to access their email, calendar, tasks, address lists, Exchange public folders and other content and data sources from virtually any desktop, laptop, netbook or other platform. In addition, an Exchange account can also be accessed from any POP or IMAP client, including VMware’s Zimbra desktop client.


While Apple Mail, the mail client that comes with Mac OS X, has allowed users to access Exchange for many years as a POP or IMAP client, OS X began providing full support for Exchange in August 2009 with the introduction of Snow Leopard. Exchange support is also built into iCal, the default Mac calendaring application; and Address Book, all of which come standard on a Mac. While lacking some of the features of Outlook 2011 for the Mac, Mail, iCal and Address Book provide robust and native functionality for hosted Exchange users.


In addition to a variety of desktop and browser-based platforms, a hosted Exchange account can also be accessed using BlackBerries, iPhones, Android smartphones, iPads, Android tablets and Windows Phones, among other platforms. This is a critical issue, since a large and growing number of email users consider their mobile platform to be an essential component of their email access – for some users, it is their primary email platform after hours.

Also in the context of mobility, for organizations that employ BlackBerry devices a hosted solution can provide further cost savings, since it eliminates the need to manage a BlackBerry Enterprise Server infrastructure on-premises. Exchange currently offers full BlackBerry support in contrast to Gmail, for example, that does not officially support IMAP access on BlackBerry devices2.


One of the key benefits of hosted Exchange is that users who create content in Exchange will see it automatically synchronize across all of their access devices. For example:

  • A user can create an appointment in Microsoft Outlook on their desktop and it will appear very shortly thereafter on any mobile devices connected to Exchange.
  • An email can be created using Outlook Web Access on a laptop and then appear in the Sent Items folder in Outlook on their desktop at home.


Mobility in the context of being able to access email, calendars, etc. on mobile devices is important. However, “Big M” mobility – the ability for individuals to work from any location on any device – is becoming more important as fewer workers have a permanent location assigned for their work. For example, a growing proportion of organizations allow employees to work from home and come into the office only when necessary, thus providing significant savings on facilities’ leasing costs, power, HVAC and taxes.

Hosted Exchange is a key enabler of this capability because it allows workers to have access to their email, calendars, address lists, task management tools, etc. regardless of where they might be working – be it from home, a hotel room or a client’s conference room. This can further add to the cost savings provided by a hosted Exchange deployment far beyond the IT-related savings that it provides.


As noted earlier, hosted Exchange can significantly reduce the per-seat cost of an Exchange environment. As shown in the following three tables for organizations of 10, 100 and 1,000 users, the cost of hosted Exchange is significantly lower than for an on-premises deployment of Exchange.

Three-Year Cost of Ownership for Hosted and On-Premises Microsoft Exchange – 10 Users

Three-Year Cost of Ownership for Hosted and On-Premises Microsoft Exchange – 100 Users

Three-Year Cost of Ownership for Hosted and On-Premises Microsoft Exchange – 1,000 Users


An examination of the tables above and the figure below reveals that the cost savings for hosted Exchange are significant. For example, hosted Exchange will result in a 72% cost savings compared to on-premises Exchange for 100 seats, and a 56% reduction in the cost of ownership for a 1,000-seat organization. It is also important to note that much of the cost savings for hosted Exchange comes from the significant IT labor cost savings available when using a hosted model. For example, as shown in the tables above, the labor component for 100 seats represents 72% of the cost of ownership for an on-premises Exchange deployment; for 1,000 seats, labor represents 69% of the cost of ownership.


Cost Savings for Hosted Exchange at Various User Levels

Osterman Research has found that the typical email system experiences mean unplanned downtime of 43 minutes during a typical month, or eight hours and 36 minutes per year. Moreover, the typical system is down for a mean of 85 minutes per month for planned maintenance, or 17 hours per year. Based on a 24x7 operation, the total unplanned and planned downtime of 25 hours 36 minutes per year equates to uptime of 99.7% for on-premises systems – a level of downtime that compares rather poorly with the standard of 99.9% among leading hosted Exchange providers.

Downtime cost for an email system is important to consider because it affects overall employee productivity and IT labor costs. For example:

  • Downtime requires IT staff to detect, diagnose and remediate the cause(s) of the outage, which typically drives up labor costs.
  • Downtime is disruptive, resulting in delays of other projects on which IT staff might be working.
  • Email downtime typically results in reduced end user productivity because users are not able to complete some or all of their work. For example, Osterman Research estimates that the average email user is about 25% less productive during periods of email downtime. If we assume that the fully burdened, average labor rate for the typical email user is $35 per hour, a one hour email outage every two months for 1,000 users will cost $52,500 in lost productivity each year. While some decision makers may balk at this “soft” cost, it must be taken into consideration as part of the cost of ownership for any email system.
  • Because a downtime incident can potentially impact a large number of users, even short periods of downtime can impose a significant employee productivity cost on an organization. This is particularly true for mobile or remote workers who might be unable to work at all when email is not available.


Although there are various employee productivity and IT-related costs associated with downtime, there are other costs and risks imposed by downtime that are more difficult to quantify. For example, an Osterman Research survey found that for a one-hour email downtime incident that occurred in the middle of a workday, 22% of information workers would switch to a personal Webmail account on a laptop or desktop computer, 15% would switch to personal Webmail on a smartphone or tablet, and 2% of employees would go home to continue working. However, if this downtime period were extended to eight hours and consumed an entire workday, we found that the percentage of employees that would switch to personal Webmail on a laptop/desktop or smartphone/tablet would increase to 41% and 24%, respectively. Moreover, we found that 10% of employees would simply go home to continue working.

When employees switch to personal Webmail during periods of corporate email downtime or go home to use their own computer to continue working, the result is that email is not being scanned for malware, phishing attempts or other potentially damaging content by corporate security systems. Moreover, content sent through a personal account is not being archived or backed up by corporate IT. The result of bypassing corporate security or content management capabilities can create significant problems for any organization, including a higher likelihood of malware incursion and data breaches, and an inability to capture business records in email for purposes of compliance, eDiscovery or to satisfy corporate policies. In addition, the use of personal Webmail to conduct corporate business presents an image to customers and others that is difficult to quantify, but almost always negative.

The bottom line is that email downtime carries with it significant costs and should be minimized to the greatest extent possible. Our research demonstrates that leading hosted Exchange providers can offer greater reliability than the typical on-premises email system, and thereby reduce the cost of downtime for the typical organization.


Because email is so essential to the way that people work in most organizations, the goal for any organization is to minimize downtime to the greatest extent possible. Conversely, the goal should be to keep uptime as close to 24x7 as possible. For on-premises solutions, decision makers will need to determine their desired Service Level Agreement, or SLA (which ideally will be as close to 100% as possible), their Recovery Point Objective (RPO) and their Recovery Time Objective (RTO) and choose an appropriate continuity solution based on these goals. The options will include:

  • Simple backup systems: these can provide a reasonable RPO or RTO, particularly if they are disk-based, but will often be lacking in terms of SLA.
  • Replication/failover systems are more expensive than backup systems, but offer generally better RPO, RTO and SLA.
  • True business continuity systems are designed to provide continuous availability with no disruption to end-users and are clearly the best option because they impose little or no interruption to the use of email. It is also important that a business continuity solution provide continuous availability to all of the systems that form the messaging infrastructure, including email servers, mobile device servers, security servers, etc.

However, sophisticated business continuity solutions are expensive to deploy, configure and maintain on-premises, and are particularly difficult to implement for smaller organizations because of the high cost per user. This is because redundant infrastructure must be built out and maintained, including a geographically separate data center that includes network access, email servers, a complete security stack, replicated data storage and other systems that will permit a rapid failover to the backup infrastructure in the event the primary system fails. In essence, a fully redundant email solution requires operating two completely separate data centers.



  • Is messaging management a core competency that offers our organization some sort of competitive or other advantage? If no, then why are we still managing it internally?
  • Do we have enough IT staff members to do everything the business requires, such as messaging, security, protecting against data leaks, encryption, tech support, etc.?
  • How much will it cost us to deploy all of the new capabilities that we will need for archiving, encryption, security and other capabilities over the next few years?
  • What opportunity costs do we face by managing our messaging infrastructure internally?
  • When we need to migrate to a new version of Exchange, and how much will it cost?
  • Do you have an offsite data backup plan that is tested and restored at least once annually, to ensure we can be back up and running if the server(s) crash?
  • Are we willing (or even financially able) to implement a fully redundant email continuity solution to ensure that email downtime is as close to zero as possible?


  • Are you financially viable?
  • How long have you been in the hosted Exchange business?
  • How long have you been in the specific business for which you are being considered (hosted Exchange, security, archiving, encryption, etc.)?
  • How many customers do you support and how has this changed over the past six months? The past year?
  • What size and type of customers do you support?
  • Can you provide referenceable customers that are similar to our organization?
  • What email volume do you support and how has this changed over time?
  • What corporate certifications or audits do you offer?


  • What is the minimum number of users that you require to set up a hosted Exchange account?
  • Does each account include a free copy of Microsoft Outlook? If so, which version?
  • Do you offer the ability to download the latest version of Microsoft Outlook for Windows and/or Mac?
  • How much storage is included per account?
  • How much does storage cost per gigabyte beyond the basic included in each account?


  • What version(s) of Exchange do you support today?
  • What security services are offered as part of a basic hosted Exchange account or for an additional fee? Anti-virus? Anti-spam? Anti-spyware? Web filtering? Outbound content filtering/data leakage protection?
  • What other capabilities do you offer, including archiving, encryption, hosted SharePoint, etc.?
  • What mobile platforms are supported, including RIM BlackBerry, Apple iPhone, Good Technology, etc.?
  • What migration services do you offer?
  • What provisioning tools are included?
  • Are disaster recovery services offered if the customer system is unavailable?
  • Can administrators easily add/delete/change services and users with a control panel or equivalent?
  • How easy is sign-up for new services?
  • Are self-migration and/or full-service migration capabilities offered?
  • Do you offer dedicated servers for those clients that need it?
  • Do you offer a dedicated technical account representative?
  • Are end-users able to manage their own configurations and settings?


  • How many data centers do you operate?
  • Do you offer data backups for disaster recovery purposes?
  • What are the specs and certifications for the data center(s)?
  • Is the data center SSAE 16 certified? If so, for how many years?
  • What architectural capabilities ensure that there is neither delay in message delivery nor any additional, unnecessary risk incurred by storing a copy of the message?
  • Do you perform full, nightly backups of customer data? If so, do you perform full tests and restores to ensure that they can be restored if necessary? How frequently?
  • Are you using your own technology or another vendor’s?
  • How scalable is your infrastructure?
  • Do your data centers have backup generators, redundant telecommunication links, etc.?


  • What Service Level Agreements do you offer?
  • How much downtime has your hosted Exchange infrastructure experienced during the past month? Six months?
  • Do you have a money-back guarantee if your service is down longer than your SLA specifies?


  • How physically secure is your data center?
  • What intrusion detection systems are in place?


  • Do you provide 24 x 7 technical support?
  • If 24 x 7 support is provided, is it live support during non-business hours or do you have to submit and email and receive a response the next business day?
  • Do you provide different means of communication including phone, email and online chat?
  • Is your support team based in the United States?
  • Is only one IT administrator able to contact support with questions or can any employee with a question or issue contact a support representative?

It is important to note that not every question will be important to every potential customer of hosted Exchange, nor will an affirmative answer be important. For example, a provider that does not plan to offer Exchange 2010 should not necessarily be disqualified if they do not plan to migrate their users to the new system for another year or two. However, these questions provide a good starting point for understanding the differentiation between vendors.


Hosted Exchange is a robust, business-grade platform that is in use by millions of business users around the world. It offers the full Exchange experience for users who can access it via a variety of platforms, and it frees IT from the burden of having to manage an Exchange infrastructure internally. Moreover, hosted Exchange from leading providers offers a fully redundant email continuity solution that can ensure that downtime is minimized and will typically be better than on-premises solutions. The cost of hosted Exchange is typically much lower than the cost of Exchange when managed on-premises, for both small and large organizations of 1,000 or more users.


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These costs include IT labor to manage the Exchange infrastructure.

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