SMB VoIP System Options: Is Hosted or On-Premise Right for You?

If you're considering a new business VoIP solution, one of the first questions you may ask is: should I consider a hosted/cloud or on-premise phone system? Most hosted solutions require zero on-site hardware, except phones; on-premise solutions need on-site equipment to operate. (That's the key difference, as you probably know.)

We're going to help you decide with this blog, drawn upon our experience providing service for both hosted and on-premise solutions to tens of thousands of SMBs. Plus, we've asked a few IT Managers to weigh in on hosted vs. on-premise for their businesses.

Either way, if you're making a switch to VoIP, you're making a good decision. Businesses that transition to VoIP reduce their costs by up to 40%, and save up to 90% on international calls. Nitty gritty comparisons of individual services can only be undertaken with your specific business needs in mind, but we'll address the big picture factors below.

On-Premise IP PBX Systems for SMBs

The IP Server 900 is a high-performance on premise IP phone system manufactured by TELCO


  • Total customization of platform, data, security
  • Potentially more cost effective in the long run
  • If quality and consistent Internet connectivity is a concern, you can keep your phone calls separate from your Internet traffic (with an on-premise phone system and PRIs)


  • Significant upfront cost
  • Must be maintained by in-house IT staff or consultant
  • No guaranteed reliability
  • No support for remote employees

Exercising Full Control Over Your Phone System: Pros and Cons

The key benefit that an on-premise phone system offers your business is maximum customizability and ongoing value. If you are a systems administrator, or have one on your team, who is an Asterisk or Elastix whiz, for example, you can take full advantage here. You will be able to add and configure as many phone applications as you like— and at no additional cost if you select an open source solution.

Some businesses also choose an on-premise system and PRIs due to their Internet connection speed, as pointed out in this blog. "VoIP requires about 90Kbps for good quality...If you use VoIP while surfing the net and your connection isn’t strong enough, you will have poor sound quality and dropped calls." Keeping phone calls on the phone lines will ensure that calls are not dropped due to your staff's Internet usage patterns.

Despite the customizabilty, on-premise phone systems tend to suffer from a higher total cost ownership for the SMB. This is because although on-premise solutions are associated with higher upfront costs for ongoing savings, the ongoing savings can be diminished by unanticipated and variable maintenance costs.

In a nutshell, those costs are as follows: Initially, you will pay for the phone system infrastructure, any licensing fees for the provider you choose, and PRI service setup— should you need a new one. On an ongoing basis, you'll pay for the PRIs or SIP trunking service, as well as in-house electricity and extra bandwidth needed to run the phone system 24/7. But then, even if your team can seamlessly handle the installation today, keeping up the ongoing maintenance (e.g. software upgrades, addressing hardware failure, implementing a backup SIP trunking provider) could require additional personnel expenditures and consulting services. And ultimately, an on-premise solution typically reaches end of life in 5-10 years and will need to be replaced.

"I've worked as an IT consultant for almost 20 years and dealt with both on premise PBX and several hosted systems," said Jeff Driscoll, IT Manager at Marketing Mojo. On premise is usually a poor decision for small and medium sized businesses. It is much less portable, requires specialized personnel to handle it, and often traps the business into buying from certain vendors or using the system in very particular ways."

A final issue to think about before deploying an on-premise PBX is what to do if you have geographically-dispersed offices or remote employees. Simply put, you cannot have remote employees and offices use the same physical PBX (unless you plan on laying wires across mountains and rivers between your locations). IT professionals have attempted to solve this with "hybrid" solutions (employing both hosted and on-premise PBXs and managing dial plans between them), or by simply paying for remote employees' cell phone bills. We've found none of these options are great— If you need to connect remote offices and employees with extension-to-extension dialing, free calling, and other phone system features, you should probably consider a hosted VoIP solution.

Hosted Phone System Solutions for SMBs

Hosted PBXes run through offsite hardware maintained by the phone company


  • Significantly lower capital expenditure
  • Low maintenance - equipment and software upgrades maintained by hosted VoIP company
  • Connects remote employees and offices and simplifies supporting all locations with one solution
  • Customer support is included


  • Requires business-grade Internet connectivity, which can be a challenge for offices located in very rural areas
  • Potentially costlier over the long-run for a large business in 1 location
  • Lack of total customization

Consistency, Cost Effectiveness, Time Savings, Leading Features

Hosted phone systems rely on your Internet connection to operate and typically do not require your business to purchase hardware beyond the phones. All of the physical infrastructure (servers and wiring) and the IT specialists who oversee them are offsite. With a hosted provider, you can shake these responsibilities, get IP phones, plug the phones into your Internet jacks, and manage your phone system from a web portal.

Your SMB may save a lot with a hosted VoIP system. The savings on phone system infrastructure, coupled with a hosted pricing plan that fits for your business' phone usage patterns (e.g. unlimited calling plans for high usage call centers or pay-as-you go for low usage phones) can reduce your business phone bills by double-digit percentages. A small software company in Pennsylvania found that switching to a hosted PBX solution saved him 60%on their monthly telecom costs.

Besides costs savings, hosted PBX solutions also offer a range of features, leveraging the latest web technologies. Most hosted services come with attendant menus, ACD queues, business hour rules, and other staples of industry PBXes. But that's just scratching the surface. Cloud solutions today can offer:

  • Unified communications interfaces that enable employees to see each other's availability and collaborate via instant messaging, calling.
  • Voicemail-to-email
  • Softphone mobile app support for employees to take their work phones on-the-go
  • Call queue monitoring and reporting interfaces
  • Video conferencing solutions
  • Integrations with CRM platforms such as Zendesk and Salesforce

While it is certainly possible for you to find an on-premise solution with a few of these features, you're likely to find more with a hosted provider that is focused on rolling out cutting-edge solutions to its customers. As a person responsible for smart IT decisions, you might consider cloud phone system providers with an eye for long-term operational improvements you can make for your business.

The biggest disadvantages to a hosted solution lie in getting "stuck" with a provider that is the wrong fit or doesn't deliver on its promised quality of service. For example, you select a provider only to find the auto attendant feature, a key feature you rely on, doesn't work as you thought. Or, perhaps you find that there is a 20+ minute wait to speak with a Tier 1 customer service rep, which can be frustrating lag in your day. To mitigate the risk here, we recommend that you trial hosted services when considering providers. Contact their customer service department, and ask the questions pertinent to your business before signing any contracts.

Topics: SMB Leadership, Business Technology, Office Management