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According to one embodiment, a system includes an overlay network device which includes an interface adapted for electrically communicating with a virtual overlay network (VON) gateway, logic adapted for receiving a plurality of packets from the VON gateway, logic adapted for determining whether the plurality of packets comprise an overlay header, logic adapted for de-encapsulating inner packets of packets comprising an overlay header, logic adapted for performing services on the plurality of packets or the de-encapsulated inner packets, and logic adapted for encapsulating the serviced inner packets or the serviced packets with an overlay header to be switched to a destination address in a virtual network and sending the encapsulated packets to the VON gateway or logic adapted for sending the serviced packets to the VON gateway without encapsulating the packets with an overlay header to be switched to …