Cloud-Hosted PBX vs. On-Premise PBX

Like it or not, business phone systems are headed to VoIP.  So, if you haven’t made the change already, you will soon. And when you do there will be decisions.  Do you choose on-site or cloud-hosted PBX?  There are some fundamental differences between the systems and knowing what those are will simplify the decision and deliver a higher level of satisfaction for the company, its employees and even callers. Cost, expansion, and other considerations are laid out to make it possible to compare the hosted IP-PBX and the on-premise IP-PBX within the same categories to learn of the greatest differences.

Breakdown of Hosted vs. On-premise IP-PBX

What is Hosted PBX?

In a hosted PBX or hosted VoIP system, the provider is responsible for housing the IP-PBX and managing the technology required to deliver service to the phone system. The desk sets connect to your network and the calls, signaling, and features are handled through an IP-PBX server at the provider’s location. The provider of the hosted PBX charges a monthly fee that includes calling time and many options and features

What is On-Premise PBX?

On-premise PBX is also known as an IP-PBX phone system. It is similar to a traditional PBX system because it is installed at the business locations, usually in a computer equipment room or phone closet. The signaling is done with an IP phone to the IP-PBX server using a LAN. Calls can go through a traditional phone company as well as voice over Internet (VoIP) using SIP trunking. Gateway cards are used to connect the system to the traditional phone company provider. The provider can be the one that already provides service, though a SIP trunk can be configured for use with an Internet service telephone provider (ISTP).


Purchasing an on-premise IP-PBX phone system involves buying hardware, which includes a server with the proper number of interface cards (if needed) to connect the telephone company with the IP phones. Hosted IP-PBX only involves purchasing IP phones, though a router and network switch may be needed to ensure there is one specifically dedicated to VoIP.

Hosted PBX:

  • Lower initial equipment cost and set-up cost
  • Network qualification is performed by the customer. Any upgrades are at the customers expense
  • All IP-PBX feature programming is done by the customer
  • No maintenance costs of the IP-PBX, but all on-premise and remote phones and network devices are the responsibility of the customer
  • Low monthly service cost
  • Easy to add extra lines
  • Many upgrades and new features are included
  • Extended features, like conferencing, may come with additional costs

On-Premise PBX:

  • Higher initial cost and set-up cost
  • Potentially higher maintenance costs
  • Lower monthly cost after expenses are covered
  • Ability to SIP trunk to get lower cost calls

IP phones can be identical regardless of layout. The other equipment, such as server, software, routers, switches and battery backup can be very specific for the individual system. $3,000 to $5,000 is typical for purchasing a server with the necessary software and cards. Ongoing server maintenance with hosted PBX will be the responsibility of the provider, which if purchasing an on-premise PBX, the cost would become the burden of the owner, if not included in the IP-PBX package.

Expansion Costs

Adding more phones to a hosted PBX is as simple as purchasing more IP phones and plugging them into existing network jacks or computers, unless any kind of additional licensing is required. With on-premise PBX, additional IP phones must be purchased and the PBX may have to be expanded, depending on the number of card slots available in the server.

Other Considerations

Your phone system needs to fit your particular business, in terms of size, features and functionality, and budget.  Here are a few considerations supporting each type of system.

Positives for Hosted PBX

  • Lower initial cost
  • Providers have more resources than users, so new features are possible
  • New feature installation is handled by provider to avoid confusion
  • Moving a phone system is easy. IP phones are plugged into a broadband connection.
  • Patches and upgrades of the IP-PBX are handled by the provider
  • Loss of Internet or catastrophic events have no effect on operations because calls can be re-routed to other numbers or desktop phones can be relocated.

Positives for On-premise PBX

  • Over time, cost of ownership may be lower than monthly charges of a hosted system.
  • Having on premise PBX gives user control to create, adjust and delete users as desired
  • New open source feature sets can be added without any license fees
  • Current carrier does not have to be changed
  • SIP trunks can be added to save on calling costs
  • Server ownership can reduce expenses over time
  • No DIY time on the part of the customer
  • Professional training of staff on new IP-PBX system is handled by the provider