Hosted PBX Systems: The Essential Guide

Updated: April 30, 2009

A hosted PBX system is an IP phone system that can be leased or rented on a monthly or annual basis, eliminating the need to buy expensive equipment. Instead, most of the equipment is hosted by the service provider, and all communication is routed through that provider to and from your company's site or sites. Typically, this setup has the advantage of being very easy to predict in terms of cost of operation, and it is also easier to install and get up and running than all competing systems. A hosted PBX solution can also be cheaper to operate, but as usage and number of users increases, the cost advantages of hosted PBX systems typically disappear.

PBX is an acronym for Private Branch eXchange, which is the switching system that manages calls between internal or local users. It also shares a number of lines that connect to the external public phone system and parcels them out as needed to the local users. In addition, enterprise PBX systems have other features that allow them to take incoming calls, send them to the correct extensions, connect calls to answering services and so on.

In traditional business phone systems, the PBX was typically a piece of equipment at the company's physical location, hidden in a storage cupboard. Connections came in to the PBX from the external phone system and lines ran from it to all the phone extensions in the business. In a hosted PBX system, that model is extended, with the PBX itself stored at a remote location by the service provider. The service provider manages the system and the business just needs phones — usually obtained from the service provider.

If you're ready to buy a hosted PBX solution and want to research the best options, see The Definitive VoIP-News Guide to Hosted PBX and The VoIP-News Hosted PBX Comparison Guide . Otherwise, read on for an impartial look at the technology behind hosted PBX, how it can fit in to your business and the basic points to consider.

How It Works

Hosted PBX systems all run on IP networks, meaning that they use the same circuitry and wiring as your company's data network or LAN. They pass information back and forth via the same mechanisms as any office network or the Internet itself. The advantages of this setup are that your company only needs one set of wiring in its office for all communication needs, data and voice networks can cross-communicate with one another more easily, and you probably only need one person to administer and maintain the voice and data networks.

With a hosted PBX or VoIP system, your company will typically be provided with a special router or switch that attaches to the network and is then connected to the outside world. This switch or router communicates directly with the hosting service that provides the hosted PBX. Sometimes this connection is made over the public Internet (but using secure protocols), and other services provide a dedicated connection that operates just like the Internet. However, this connection is private and restricted to provide better bandwidth, security and service levels.

When a call is made, the phone connects to the IP network, then gets switched out to the remote hosted service, which establishes what number is being called and creates a connection — either via VoIP protocols across IP networks or via the regular phone system. The remote service can also create other connections, interact with the call in other ways and, in general, provide enhanced services.

The advantages of this technique are that it is easy for the service provider to upgrade the system and that very little local infrastructure is needed at your office location. The disadvantages are that your company loses some control and that a staff member cannot easily customize the system. In addition, there are some regulatory requirements like HIPAA (Health Insurance Portability and Accountability Act) that are harder to comply with when using a hosted PBX solution.


The specific benefits of a hosted PBX solution over traditional phone systems or PBXes are:

  • A cleaner and simpler infrastructure
  • Lower operating costs
  • Simplified equipment and maintenance
  • Unified communications
  • Improved scalability and growth
  • Improved features for business operations


Hosted PBX systems vary considerably in cost, but prices have been coming down for the past couple of years, due to rapidly increasing competition in the small-business market. Even so, they're very unlikely to dip below the current lower end of the price spectrum, as that is approaching parity with common low-end pricing for the most basic residential phone systems. Prices typically range from about $35 per user, per month to as high as $300 per user, per month for expensive, high-end solutions. There are often additional one-off setup costs, and the lower costs do not always include equipment. Some vendors rent equipment, some include the rental in the monthly fee and others require companies to purchase equipment.

If your business is upgrading from an old phone system, it will definitely save money with a hosted solution. If there is any uncertainty in terms of call volume, growth, scalability and usage pattern, your company is likely to be better off with a hosted solution. Hosted solutions are also usually best for small businesses (those with 20 or fewer employees).

Other Things to Consider

Hosted PBX systems come in a number of flavors. The simplest solutions just require an administrator to plug phones in to the network, add or configure the VoIP router and set the necessary options via a Web-based tool. More complex PBXes provide specialized switches to attach to the network, as well as additional features and services.

Make sure that you understand what extra equipment the service you choose requires and exactly how much it will cost to buy or lease it. Hosted VoIP providers should be able to furnish you with an exact quote quickly. You should also have a list of telephony features that your company must have and would like to have. The aforementioned resource, The Definitive VoIP-News Guide to Hosted PBX , will give you an idea of possible features.

In order to get the most from a hosted VoIP system, your business also needs to make sure that its IP network and connection to the Internet has sufficient bandwidth. You'll also want to know if you can use existing IP phones (if you have them) or whether you must buy or lease proprietary phones. Consider the ability of the service to manage multiple locations if your business has remote offices, and find out how easy the system is to install and operate, which will determine whether an on-staff administrator will be necessary. Finally, consider whether the system provides the kinds of tracking, metrics and reporting tools that your company needs.

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