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

Written by Kevin Bartley

Read about the pros and cons of hosted vs. on-premise VoIP systems so you can choose the right option for your business.

VoIP Resources VoIP Fundamentals Introduction to Business VoIP

If you're considering a new business VoIP solution, one of the first questions you may ask is: Should I consider an on-premise or hosted 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 versus on premise for their businesses. At the end of this blog, we also provide an overview of traditional phone systems just for the sake of comparison.

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 percent and save up to 90 percent on international calls. Granular 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

ip-server-900-with-esi-60-business-phone
The IP Server 900 is a high-performance on-premise IP phone system manufactured by TELCO.

At a Glance

Pros

  • Total customization of platform, data, and 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)

Cons

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

Customizability

The key benefit that an on-premise phone system offers your business is maximum customizability. Your IT staff can tweak the security and internal workings of an on-premise system to optimize it for your business, adding and configuring as many phone applications as you like.

If you work at a business with highly sensitive information, such as a bank or a security firm, the ability to secure data coming in and out of the phone system could be critical. Talk to your IT staff about what their requirements are when it comes to phone systems.

Internet Connection Speed

Some businesses also choose an on-premise system and PRIs due to their Internet connection speed, as pointed out in this Getvoip.com blog. "VoIP requires about 90 Kbps 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.

Cost

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 for in-house electricity and the 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 five to ten years and will need to be replaced.

"I've worked as an IT consultant for almost 20 years and dealt with both on premise PBXs and several hosted systems," says 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."

Geographic Considerations

Another 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 to lay 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 that 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.

Maintenance and Repair

The flip side of a fully customizable phone system is that you are essentially on your own when it comes to maintenance and repair. If something causes an outage on your end, you'll need your IT staff to quickly fix what's wrong. Keep in mind that the servers themselves will need maintenance and repair work, which drains money and manpower.

With an on-premise PBX, you are essentially on your own for maintenance and repair.
With an on-premise PBX, you are essentially on your own for maintenance and repair.

At a Glance: Pros and Cons

Pros

  • 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

Cons

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

Technical Support and Maintenance

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.

For the average small to medium-sized business, the inability to tinker with the advanced components of the phone system is actually a good thing. If something goes wrong with a hosted phone system, it's up to the professionals at the phone company to fix the issue, not the employees at your business. A hosted phone system is the answer for those who lack the technical know-how or resources to run advanced phone servers. Customer support is built into the service itself.

Customer support is built into hosted PBX.
Customer support is built into hosted PBX service.

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. O, perhaps you find that there is a 20-minute wait to speak with a Tier 1 customer service rep, which can be a frustrating interruption 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.

Cost Savings

Hosted phone systems require less money to get started. You don't have to purchase any expensive hardware upfront because the service provider already has the hardware built for commercial use. All you need is a business-grade broadband connection to use the service. Some companies in very rural areas may have trouble getting an acceptable Internet connection. But for the most part, your standard office connection should work.

This lack of upfront expenditure saves small businesses thousands of dollars in startup fees. Many hosted phone systems also come with no contract or clauses binding you to the service and offer a pricing plan that fits your business's phone usage patterns. For example, unlimited calling plans for high-usage call centers or pay-as-you-go plans for low-usage phones are available and 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 them 60 percent on their monthly telecom costs.

Range of Features

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 PBX industry staples. But that's just scratching the surface. Cloud solutions today generally outclass on-premise phone systems when it comes to features and can include:

  • Unified communications interfaces that enable employees to see each other's availability and collaborate via instant messaging
  • 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. If you’re the person responsible for smart IT decisions, consider cloud phone system providers with an eye for long-term operational improvements you can make for your business.

Geographic Flexibility

Hosted phone systems are typically flexible when it comes to remote working. Employees can generally access their office phone system from anywhere, and most phone providers offer softphones or mobile apps to make remote working easier. Many providers offer their customers the flexibility to make changes quickly, such as adding a new extension or voicemail box.

Copper Wire: Traditional (Old) Phone Systems

At a Glance: Pros and Cons

Pros

  • Time-tested option
  • More reliable than on-premise and hosted PBX options

Cons

  • Limited advanced features
  • More expensive than on-premise and hosted PBX options
  • Poorer sound quality than VoIP offers

Reliability

Copper wire phone systems, or "landline" business phone systems, still exist at many business locations and are more reliable than hosted and on-premise solutions. Phone lines stay up longer and fail less often than Internet connections do. During power outages, the Internet is automatically severed, but phone lines largely remain up. Many hosted phone services advertise their uptimes in excess of 99.9 percent, but this does not calculate the downtimes that users experience due to Internet failure and equipment malfunction.

Features

Copper wire phone systems do not suffer from a lack of basic features, such as caller ID, call forwarding, call blocking, call hold, conferencing, voicemail, and international calling, but they are limited in terms of advanced abilities. But while many hosted phone systems offer integrations with some of the leading third-party platforms, copper wire phone systems might not even allow you to send your voicemail to email. Of course, if you're fine with basic functionality, this may not be a problem.

Cost

The costs of copper wire phone systems are generally (1) more expensive than hosted in upfront expenditure and (2) more costly on a monthly basis than on-premise options. Landline phone systems require you to purchase hardware, lines, and other infrastructure upfront. Like on-premise solutions, a copper wire phone system will require maintenance and upkeep by either IT employees or phone company staff.

Call Quality

The hosted and on-premise phone systems we've discussed in this post all run on VoIP, a protocol used to transmit voice data over the Internet. VoIP sound quality is about two times greater than that of copper wire phone systems. Copper wire phone systems also struggle with remote working and scalability. Employees have to be physically present in the office to use the phone system, and new employees can only be added by routing a physical line with the help of the phone company.

Which Phone System Is Right for Me?

You don’t need to know all of a phone system's technical details to choose the right one for your organization. We wrote this post to give you a simple introduction to the most popular business phone systems on the market today. You'll ultimately have to decide if on-premise, hosted, or a copper wire phone system is right for you. In the meantime, here are some more helpful blogs to steer you in the right direction: