An Unbiased Look at the On-Premises vs. Hosted Phone System Debate

By Brian Ferguson
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Benefits of a hosted IP PBXThe debate focused around which phone system deployment method is preferred, a hosted PBX (aka Cloud-based solution) or on-premises, is one that has been building for years. With the rise of software-as-a-service (Saas) options and more SMBs considering them, the argument of hosted verses on-prem has become more intense. Unfortunately, like most debates, the responses that you will hear are varied, complicated, and oftentimes very biased. Many articles on the subject are written by phone system vendors that offer solutions focused around only one deployment method, and therefore favor it in all of their publications. Other articles give a laundry list of pros and cons that, although helpful, don’t give a ton of guidance on how to move forward in either direction with a decision.

Digium is in a unique position that allows us to give an unbiased opinion as to which deployment method is ideal. Yes, we are a phone system vendor, but our Unified Communications (UC) solutions are unique in that they take advantage of the same software regardless of deployment method, and deliver the same powerful user experience to each one – hosted and on-prem. Our focus is to find the deployment method that best fits each individual customer.

With that, let’s also try and simplify the matter. We can help you make a decision on which method is best for your company by asking 5 key questions. These questions require you to analyze different aspects of your business in order to determine which is the best fit for you. But before we jump into the questions, let’s define the two deployment methods so that you understand the differences as we move forward.

 

2 Deployment Methods:

On-Premises

On-Premises phone systems (also referred to as on-prem or on-site) are physically deployed at your office(s) or data center. Typically, you will buy and own all equipment including appliances, servers, interface cards and more, which will be installed at your physical locations. Your IT staff will have complete control of the system as well as responsibility for all moves, adds, changes, on-going maintenance, and updates. Your company will also supply voice service to the system via analog, PRI/T1, SIP or other connection. On-premises has been the traditional option for phone systems for decades.

Hosted/Cloud

Hosted, or Cloud-based phone systems, are deployed by a hosted provider in an off-site data center. Your company will pay a monthly fee to use the system, which is connected to your office via a public or private Internet connection. The only equipment you will typically have to purchase are desk phones. You will have some control over moves, adds, and changes, and the hosted provider performs all updates and maintenance. You will not need to supply voice service as the provider delivers that as well.

Now that you know the difference between the two phone system deployment options, let’s help you decide which is best for your company by looking at 5 simple questions:

 

5 Questions:

 1. How Would You Prefer to Pay?

There is a distinct difference between the two options when it comes to payment preference. On-prem systems are almost always fully paid for up front, also known as a CapEx expense for your business. Money will need to be paid out and exchanged for full ownership of the equipment and licenses. This method is great for companies that have the budget and prefer to own the equipment they use. On-prem systems typically have a better Total Cost of Ownership (TCO) when looking purely at equipment costs.

Hosted systems allow companies to leverage OpEx, which turns your phone service into a monthly expense. OpEx is often the preferred method by today’s CFOs because it offers tax advantages and frees up cash for revenue-generating spending opportunities. Hosted customers pay a monthly fee that can be reduced with extended contract terms. Although on-prem systems typically have a lower TCO, hosted customers see equal financial benefits through tax savings and lower IT costs.

 Bottom Line:

  • Choose on-premises if you have the budget and cash upfront to but the system outright in exchange for ownership and control
  • Choose hosted to take advantage of the tax benefits of OpEx, and move your phone system purchase to a phone service expense

 

2. What Is The State Of Your IT Group? What Are Their Priorities?

When talking about the state of your IT group, you want to know how many people are available and if they have the time to manage a phone system. If you have a group that has the willingness and knowledge to support it, than on-premises gives them full control of the system. If not, hosted can take on the responsibility and free up the IT team to focus on other projects.

The priorities of your IT group are often a more important consideration when deciding which deployment method to go with. You may have a group that is fully capable of managing a phone system, but would rather do something else that actually helps you generate revenue. Many large enterprises are justifying the higher TCO of hosted systems by using their IT resources in areas that directly generate revenue, such as system integration or customer experience projects.

Bottom Line:

  • Choose on-premises if you have the resources and desire to maintain your own phone system in exchange for full control and better long-term system TCO
  • Choose hosted if you want to IT to focus on revenue generating projects instead of maintaining a phone system

 

3. Do You Need Full Control?

On-premises deployments deliver full control of the system, which includes moves, adds, changes, fine tuning network settings, advanced IVR creation, and more. Hosted providers open up enough of the system for a user to do what they want to do, but handle everything else. Allowing a service provider to do the bulk of managing the phone system is also attractive to small businesses with limited or no in-house IT support.

Bottom Line:

  • Choose on-premises if you need (or want) full control of your phone system
  • Choose hosted if you could care less about full control and prefer the provider to handle the heavy lifting of phone system maintenance

 

 4. Do You Have Multiple Offices or Remote Users?

On-premises systems are certainly capable of handling remote users and multiple offices, but it’s more complex and more expensive. Oftentimes, additional equipment is required to connect the offices or users together that is not necessary in an hosted environment.

Bottom Line: If you have remote workers and multiple offices, consider hosted to save money and avoid installation headaches

 

5. Scalability: How Flexible Do You Need to Be?

Are the staff levels of your company fairly stable? Do you foresee any spikes or drops in the number of employees due to growth or contraction during the lifetime of the system? If you predict significant growth or contraction in your business during the time you use the system, hosted is the best choice. With hosted, you only pay for what you use. If you need to add or remove users, you either start or stop paying for them on a month-to-month basis. With on-premises, you pay upfront for the users you have, and if you contract, you have paid for an unnecessary user. Seasonal businesses should deploy a hosted solution since they only have a certain number of users for a portion of the year (such as a ski lodge or a CPA group).

Bottom Line: If you foresee significant changes in staffing levels, both up or down, consider hosted. Changes  to users can be made immediately you only pay for what you use.

 

As you can see, choosing whether you want your phone system to be on-premises or hosted depends on several factors. There’s not a one-size-fits-all answer, as both methods have advantages and considerations that need to be taken into account. Once you walk through the 5 questions above, you should have a better idea of which is best for your business.

 

At the risk of adding a layer of confusion, sometimes you may have a need for both deployment methods, referred to as a hybrid solution. Don’t worry, we’ve got you covered there, as well. Keep reading to see when a hybrid deployment option might make sense for your business.

 

For more detailed information on this business decision, check out our Hosted vs. On-Prem guide here!

 

There Are 2 Comments

  • Mark Petersen says:

    you are forgetting that many companies lease there PBX and use external consultants
    also a benefit with Hostet is they often provide 24/7 support
    you also have to consider scaling of you company with an on premiss PBX the amount of phones support is often fixed 10, 25, 50, 200…
    and you end up in an expensive upgrade just to get one more user, because you have outgrown you PBX
    where with hostet you just pay per user, and it can therefor scale up/down as needed

  • Rob Winkle says:

    Good article. The one thing I would argue is the complete control you refer to as better with on-prem. Cloud based has more features and is much easier to make changes via your provider’s web portal. Also if you choose the right provider, they can make those changes with just a simple email to their technical assistance center.

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About the Author

Brian Ferguson

Brian Ferguson is the Product Marketing Manager for Switchvox. Since becoming part of the Digium team in 2010, Brian has worked in multiple sales and marketing roles supporting Diguim’s reseller channel and helping SMB customers use Digium solutions to solve their business telephony challenges. With an additional 10 years of sales management experience in a retail environment, Brian has extensive experience working with a diverse range of technical products and brings a unique perspective in helping problem solve for customers. He graduated with honors with a BS in Business Management from the University of Alabama at Huntsville. He enjoys numerous, short walks on the beach (as opposed to long ones) and loves to travel.

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