One of the biggest trends to emerge in our industry over the past few years is hosted or cloud voice solutions. In this blog article, I’ll explain the major differences between a traditional premise-based IP PBX system and a newer hosted voice solution, and the pros and cons for each. As a provider of both hosted and premise-based voice solutions, I’ll also share my personal take how to evaluate these two types of voice solutions for your business.
Before I begin, here’s a little disclaimer: The opinions expressed in this article are mine and not those of Allworx. Allworx asked me to pen an article on this topic and I decided to contribute this piece without any pay or compensation.
I began my career in telecommunications in 1992 with NEC Business Communications in Las Vegas, Nevada. On my first day on the job, I met William Bennet, then CEO of MGM Enterprises, and toured the recently installed NEC NEAX2400 system at Excalibur. When I saw what at the time was the world’s largest hospitality PBX phone system, I was hooked immediately on the technology, and spent the next 24 years providing voice solutions to small and medium businesses locally, nationally and even internationally.
I work daily with prospective customers to gather business requirements to determine the best voice solution for each customer and make recommendations for their long-term telecommunications strategy. There are many factors to take into account, but at the minimum, I try to assess the following questions during the initial fact-gathering process:
- How many phones?
- How many call paths?
- Need remote phones?
- Need soft phones?
- Have multiple locations?
- Want to integrate with CRM, Skype for Business or other applications?
- Need unified messaging?
- What is the existing infrastructure (e.g., wiring, switches, existing handsets, routers)?
- Who oversees IT: In-house staff or an outside managed service provider (MSP)?
I also try to understand what business goals each customer is trying to accomplish with the new voice solution:
- Reduce costs
- Enhance employee productivity
- Improve customer experience
- Improve call routing
- Make it easier to do moves/adds/changes
At the end of the day, both premise-based and hosted voice solutions can address most of the requirements listed above. So what is the difference between these two types of voice solutions? A premise-based IP PBX means there is going to be an appliance in the closet somewhere in your office that connects your phone endpoints to the local area network (LAN). In a hosted voice solution, instead of having that appliance in the office closet, it is located in a data center somewhere, a.k.a. the infamous “cloud.”
Key Advantages of Premise-Based IP PBX Solutions
From an SMB buyer’s perspective, I believe these are the key advantages of implementing a premise-based voice solution:
- Minimal space and power needed. To install a premise-based IP PBX system, you generally need nothing more than a rackmount unit that takes up 1 RMU of space and very little power. When I’m installing one of these guys, I’m usually swapping out an old analog phone system that takes up considerable wall space in modules or cabinets, consumes a great amount of power, and is so proprietary in nature that it almost always requires a “truck roll” (an in-person visit by an expensive, hourly rate technician) just to make even the simplest changes to the system.
- Better protection against internet outages. Although a premise-based IP PBX system runs on LAN, it can remain up and running even when there is an internet outage. These premise-based systems have built-in auto failover options so if the local internet connection is down, calls can be re-routed thru backup analog lines, emergency cell phone numbers or secondary office locations. Also, even during an internet outage, system users are still able to call each other with no issues.
- Reduction in telecom costs. There are several ways to connect these systems to the outside world, but premise-based IP PBX systems are built primarily for SIP trunking, which can lower monthly operational costs by more than 50% than other legacy trunking methods such as analog lines or PRI. With SIP trunking, you pay for only the amount of call paths you need vs. PRI, where you have to pay for 23 call paths even if you only need 10! Most analog POTS (plain old telephone service) lines with taxes average about $40 per line, and depending on the SIP provider, you can easily get two or more call paths for the price of a single POTS line. Keep in mind that with POTs lines, there can be severe limitations: Some business phone features such as Find Me/Follow Me with presence settings may not be available. Also, there can be limitations imposed by carriers on the availability of DID (direct inward dialing capability) and other dial plan features.
Key Advantages of Hosted Voice Solutions
- No upfront cost. For very small businesses, some prefer a low monthly payment offered by a hosted voice solution that includes phones and voice call usage rather than having to purchase an IP PBX equipment upfront.
- Ideal for very small businesses. Generally, we find that a hosted voice solution fits well for customers with ten or fewer handsets and where we know the internet connectivity is not going to be an issue. Much of this is driven by the long-term cost of ownership, which I’ll explain more in a bit.
- Easy system upgrades and maintenance. With a hosted voice solution, there is generally never a need to worry about software or hardware upgrades as it is always kept up to date, and the system maintenance is included in that monthly recurring charge.
Why So Many Business Customers Are Disappointed With Hosted Voice Solutions.
Unfortunately, I’ve had to rescue countless unhappy customers of RingCentral, 8x8, Nextiva and its ilk. Sometimes, it’s not necessarily the hosted voice providers’ fault. Hosted voice solutions require the internet connectivity to be available 24/7 with excellent and robust characteristics, and low packet loss and latency. Unlike premise-based IP PBX systems that offer back-up plans, if internet connection is down or flaky for any reason, you will have either no voice service whatsoever or will have major quality of service (QoS) issues.
I have seen so many customers who have run into this issue after switching to a hosted voice solution and decide to replace it with a premise-based IP PBX system only after they’ve been badly burned by the experience. Sometimes this bad experience is caused by a bad hosted voice provider and other times, it is due to the transport issues of the Internet Service Provider’s (ISP) cable modem or other telephone company. In any event, it is highly frustrating to the business customer to determine what the issue is. What’s even worse is that those disappointing hosted voice solution experiences reflect negatively on the overall VoIP technology, which is unwarranted.
I Love to Sell Hosted Voice Solutions… But Recommend Premise-Based IP PBX Systems for Most Businesses.
Cost is a big factor in considering the difference between hosted and premise-based voice solutions. Generally, hosted voice solutions are going to cost you much less upfront to get started. But after your business starts scaling with additional phones, the cost-per-seat model of hosted voice solutions means that over time, they will always cost more than a premise-based IP PBX system. This per-seat monthly recurring revenue model is great for me as a provider who offers both types of voice solutions because, over time, I will always make much more money selling a hosted voice solution than a premise-based voice solution.
So this is my industry insider secret to anyone reading this article: I love selling a hosted voice solution as a provider but a premise-based IP PBX systems is almost always better for the customers. Most times, when I show my prospect customers the longer-term costs of ownership and ROIs of the hosted- and premise-based voice solutions, they will choose the latter.
With a premise-based IP PBX system, I make a nice profit upfront. But after the initial system installation, since most of your support requests can be handled in minutes and remotely at no additional charge, there is little opportunity for me to make incremental revenue. I can only invoice additional service fees to you when you’re adding additional phones, moving or making enough significant changes to require a physical visit to your location. Think about that for a moment… A premise-based IP PBX system is basically a “set it and forget it” system with minor changes you can perform yourself or make with a quick call or email to your provider in minutes at no charge! I generally prefer our customers contact me for any changes, no matter how small, so they can focus on running their businesses and not have to be the “phone person” as well.
Just to illustrate the point I’m making here, we recently met a customer who received a bid for a 10-phone system from a hosted voice competitor at about $350 per month plus taxes. Over 60 months, that customer would pay about $21,000. We ended up selling them an Allworx’s premise-based IP PBX system at about $5,000 with their monthly SIP trunks at only $100 per month, which included five unlimited call paths including local and long distance. The total cost of ownership for the Allworx system, including the SIP trunks, over 60 months for that customer will be about $11,000 – a saving of $10,000 during the same period. Our Allworx offer also included a full five-year warranty on all the phones, hardware and software upgrades. We can also provide a local installation and service versus our competing hosted provider that would have shipped them a box of phones and given them an 800 number to call. Examples like this occur every day, month after month, year after year, and are another reason we end up replacing so many hosted voice solutions from companies like RingCentral, 8x8, Nextiva and the like.
My Rule of Thumb for Choosing a Hosted- Versus Premise-Based Voice Solution
My personal opinion of premise-based IP PBX systems is that they are generally a better solution, and are almost always better if 10 phones or greater are required. You may call me “old school,” but I truly believe that when the correct premise-based IP PBX solution is selected and designed properly, there is no reason this purchase should not be able to adequately serve the long-term needs of a business for a minimum of six years and could easily be the solution for 10 years or more. Most system feature enhancements are now in the form of software updates and every five years or so, a new series of phones allows for a technology refresh without having to forklift upgrade the entire premises-based communications platform. For most businesses, it is a good rule of thumb to expect to replace PC’s about every three to four years and phone systems between six to 10 years.
It is a great time to be shopping for telecom products for businesses because there have never been so many options in mobility and productivity, while providing a competitive edge for businesses. While we are all communicating in many different ways besides voice such as text, email, social media, the companies that are reachable and respond immediately with an actual person are the ones that are going to win in the long run.