IT and Business Insights for SMB Solution Providers

On-Premises vs. Cloud-based PBX

Hosted VoIP or PBX in a closet? Our experts weigh in. By James E. Gaskin

Companies today still need phones, and many older PBX systems consisting of an odd box on the wall with proprietary cards and an arcane command-line interface have long passed their expiration dates. Now that copper pairs powering land-line phones are down to about 30 percent of active lines, customers will almost certainly move to VoIP (Voice over Internet Protocol) phone systems.

Their first big decision: run their hardware on-site, putting new VoIP hardware with a browser interface in a closet now full of key system hardware, or let their VoIP provider host the hardware in the cloud? Both options have advantages and disadvantages, and both have their fans. But the trend for smaller businesses leans strongly toward hosted VoIP systems.

Cost Comparisons
Ken Landoline, principal analyst at Current Analysis Inc., focuses on unified communications and call centers. "The bottom line generally is that hosted VoIP systems are less expensive to start with and for the first several years. Breakeven, where the monthly payments start to surpass the cost of on-premise hardware purchases, is about year four." A long-time "voice guy," Landoline says the typical refresh rate for a PBX was 12 years, but companies that didn't worry about upgrading their features sometimes went as long as 20 years. Those types of users will spend far less with an on-premises system.

"Early on, cloud systems' up-front cost savings sold the systems. Now people are looking past that to the advantages and disadvantages of the cloud model." Ken Landoline, Principal Analyst, Current Analysis Inc.

"But that assumes you don't upgrade, you don't add new features, and your maintenance costs stay low," says Landoline. "And bigger companies will need a trained person to maintain the phone system, which isn't necessary for hosted VoIP installations."

Some customers considering on-premises phones for new installations balk at wiring every phone location with two sets of copper wire: one for voice and one for data. Many VoIP phones include an Ethernet pass-through port, so one Ethernet port supports both the phone and computer, eliminating thousands of dollars for cabling installation.

Feature Comparisons
The feature set for hosted VoIP phone systems caught up with on-premises installations six or seven years ago, according to Landoline. "Now that the cloud systems have come up to speed, they have identical features. The technical differences have disappeared."

"Early on, cloud systems' up-front cost savings sold the systems," continues Landoline. "Now people are looking past that to the advantages and disadvantages of the cloud model."

Hosted VoIP providers complain that a direct comparison of hosted and on-premises systems is not apples to apples and ignores many values of hosted systems. "We install both, but we're a huge proponent of hosted VoIP," says Donald R. Howard, president and CTO of My IT Company, a managed outsourced IT firm west of Chicago in Warrenville, Ill., with an office in Hamburg, Mich. "You avoid all the issues of the hardware becoming obsolete. Not the handsets, but the head end. Often, to get nine phones you have to overbuy and get an extra card that supports phones nine through 12."

For Howard, the advantages stack up quickly. Besides flexibility to add or delete phone lines and their monthly fees as needed, "hosted systems can do what on-premises systems can't in the areas of business continuity and disaster recovery. For $35 per month you can add these features onto your service. If there's some outage, like a tree falls on your lines, weather, or whatever, we can instantly reroute calls over your disaster recovery network to other phones and cell phones. The forwarded calls are announced as being from your business so you can answer them properly."

"Cloud telephone business continuity has been slow to take off," says Landoline, "and vendors haven't been pushing it. About a year ago Siemens announced a cloud business recovery solution that switches from your on-premise system to the cloud system. It runs in parallel with your on-premise phones. Programs like the Customer Engagement Continuity program from Siemens are starting to trickle out from other vendors."

Companies with multiple sites struggle to keep their on-premises hardware and software systems in sync across locations, says Landoline. "With a cloud system, it's all the same across multiple location sites."

Landoline has noticed another advantage of cloud systems, especially for larger companies. "More and more companies are trying to do away with their IT shops. It's hard to find qualified IT people, and they want to run with fewer IT people anyway." The days of separate datacom and telecom technical staffs are long gone, and voice has been absorbed by the data side. "The voice guys fought valiantly, but lost."

VoIP-Friendly Customers
"Vertical markets may be more important than size when looking for hosted VoIP customers," says Landoline. "Government agencies find it hard to get large money up front for new phone systems, but easier to get approval for the monthly business charge. Maybe universities want to pay $5,000 per month rather than coming up with $250,000 up front." These trends are consistent across governments at the federal, state, and local levels.

Companies that vary their workloads widely based on the time of year often save big with hosted VoIP. "If a company jumps from 50 employees to 500 during Christmas, that's a huge bump in hardware cost," says Landoline. "But with a cloud system, they just flip a switch."

Distributed companies, especially those with multiple small offices, find a cloud VoIP phone system fits their needs exactly. "I have a customer with 18 phones now, and she started with just four," says Howard. "Every employee is a virtual employee."

Before a proposal, Howard examines the prospect's physical plant carefully. "We have a checklist with questions to ask to find the best solution. How is their bandwidth, and the internal wiring or wireless capabilities, ROI timetable for hardware, what feature sets they need, and their level of comfort with the cloud versus tangible things."

But be prepared for facts and money-saving proposals to sometimes lose to emotions. "Some clients would be better off with a hosted solution," says Howard, "but they want to watch the lights flash on their own hardware."

About the Author

JAMES E. GASKIN is a ChannelPro contributing editor and former reseller based in Dallas.

ChannelPro SMB Magazine

Get an edge on the competition

With each issue packed full of powerful news, reviews, analysis and advice targeting IT channel professionals, ChannelPro-SMB will help you cultivate your SMB customers and run your business more profitably.