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Hosted PBX

PBX Definition: Hosted PBX Basics
A hosted PBX system delivers PBX functionality as a service, available over the Public Service Telephone Network (PSTN) and/or the internet. The first hosted PBX was introduced to the market in late 1997 by VirtualPBX. Instead of buying PBX equipment, users contract for PBX services from a hosted PBX service provider, a particular type of Application Service Provider (ASP). The first hosted PBX service was very feature-rich compared to most premise-based systems of the time. In fact, some PBX functions, such as Follow-Me Calling, appeared in a hosted service before they became available in hardware PBX equipment. Since that introduction, updates and new offerings from VirtualPBX and other companies have moved feature sets in both directions. Today, it is possible to get hosted PBX service that includes far more features than were available from the first systems of this class, or to contract with companies that provide less functionality for more simple needs.
PBX Software is not the same as a hosted PBX system. A Hosted PBX service may utilize PBX software, especially if they utilize the internet more heavily than the PSTN, but PBX software is generally targeted at businesses that would essentially host their own PBX system on a server. This PBX software is generally difficult to configure and use, and lacks many features of both premise-based and hosted PBX systems.
The central functions of a hosted PBX service are similar to those of hardware PBX systems installed at the user’s premises. The main difference is that hosted PBX customers don’t buy, install, or maintain any PBX equipment. Instead, the PBX equipment is kept by the service provider, who then shares access to the system among many users (customers). As with premise-based PBX systems, key functions that can be provided by a basic hosted PBX include:
  • Present a single business number that gives access to all company employees and departments
  • Answer calls with a custom business greeting
  • Offer a menu of options for directing the call, such as connecting to a specific extension or to a department
  • Provide a directory of employee extensions accessible by inputting digits corresponding to employee first or last names
  • Evenly distribute calls to a department among available employees through Automatic Call Distribution (ACD)
  • Place callers on hold when they are waiting for an available department employee
  • Play music or custom messages whenever callers are waiting on hold
  • Take voice messages for any employee extension, for a department, or for the company in general
  • Allow transfer of calls between extensions
  • Conference multiple incoming calls with employee extensions
  • Provide detailed call records and real-time system management
Note that not all of these functions are available from every provider of hosted PBX services, just as they are not available in every PBX product provided by equipment vendors. It is up to the customer to determine what functions best suit company needs and arrange for the corresponding service. The hardest mainstream features to get in a hosted system are real Automatic Call Distribution (ACD) instead of simple hunt groups, flexible company directories, call transfers between extensions (or to an operator or an ACD queue), and real-time system monitoring. In addition, there are a host of other advanced functions that are needed in specific situations that only a few, or even one, providers have been able to make available.
One function of premises PBX equipment that is not part of most hosted PBX services is sharing incoming lines among multiple users. Usually, it is necessary for each employee in a company that purchases hosted PBX services to have a dedicated phone line. This issue is offset by the abilities of hosted PBX systems to handle far more capacity than customer premise equipment (CPE) and to scale as company needs change. CPE systems typically have a smaller number of incoming lines than user extensions. When traffic is high, these PBX systems can ring busy. A hosted PBX usually has a lot more available lines and can handle a much higher number of calls. In addition, hardware PBX buyers often are on a tight budget and buy small systems that can’t grow as the company grows. There is no capital outlay for hosted PBX services, and extensions can be added (or deleted) as need change. Hosted PBX customers pay only for what they need.
There are a wide variety of other advantages that a hosted system has over premise equipment. The most important of these benefits is the ability to route calls to any phone, anywhere in the world, rather than just to phones wired directly to the PBX inside an office environment. This and other major advantages of a hosted PBX system are discussed in detail elsewhere, and include much lower entry cost, lower support costs, ease of management, greater flexibility, and dramatically improved scalability.
Diagram & Operation
Image of a Hosted PBX Diagram
In a hosted PBX, incoming business calls are answered on the service provider’s hosted PBX equipment. Because the cost of this equipment is shared over many users, hosted systems can have some of the most complete and feature-rich systems available in the market. Callers place calls from any phone, and the calls are routed over the Public Switched Telephone Network (PSTN) to the hosted PBX system. The hosted system answers the calls with a recorded greeting, plays a menu of connection options to the callers, and then routes the call to appropriate employee extension or to a holding queue (ACD queue or hunt group) for a department, such as sales or support.
As the call is routed forward from the hosted PBX equipment, an outgoing call is made over the PSTN to the specific phone number of the employee that the caller is trying to reach. In a premise-based PBX system, each extension in the system is associated with a specific telephone, usually a desk phone somewhere in the office. In a hosted system, each extension is associated with a particular person. This person can take the call on any phone, anywhere in the world. Employees typically can manage their own extensions, and enter any phone number – or even a list of phone numbers in systems with follow-me calling – where they can be reached. This allows employees to work anywhere – in the office, at a branch office, on the road, or from a home office – and seamlessly receive business calls as though they were in a single office location. This ability to empower distributed employees is the single biggest difference between hosted PBX systems and premise-based equipment.
An incoming call to a company employing a hosted PBX service is made up of two separate calls (legs) over the PSTN. The first (incoming) leg occurs when the call is answered by the hosted PBX equipment. The second (outgoing) leg happens when the call is routed out of the PBX system and picked up by an extension owner. Calls to voice mail or kept on hold are made up of only the incoming leg. Per-minute charges for incoming phone calls have to account for both of these call “legs,” although some vendors are now offering “single-leg” billing plans for which only the incoming leg is billed.
Callers that know the extension number of the employee they want to reach simply enter that number and the system places a call to the phone number(s) that the employee has currently designated as the place where he wants to receive calls. Usually, the employee can change this designation at any time and work from an alternate location.
When callers know what department they want but don’t have the name or extension number for a particular individual, they usually have the option to be sent to a holding queue to wait for the next available agent (employee) to take the call. Many low-end systems do not offer any type of holding queue, and callers must know who they want to speak with before they call. Other low-end systems send callers to a “hunt group” – a list of phone numbers to try and find someone available. Hunt groups usually have the drawback that every phone number must be tried, in the same order each time, in an attempt to find an employee that can take the call. In such cases, the first extension on the hunt list usually gets swamped with calls while other extensions are used only when there is a heavy load. Another disadvantage of hunt groups is the time it takes to try each extension to find one that isn’t busy and has someone ready to pick up the phone.
Higher-end hosted PBX systems employ a variety of techniques to assure that calls to a holding queue are answered more efficiently. The most prevalent approach is through the use of Automatic Call Distribution (ACD) queues. A system with ACD queuing keeps track of which employees are already taking calls and how long it has been since each person finished prior calls. Incoming calls are put into the queue waiting for the next available employee and are routed automatically to the employee that has been off the phone the longest. ACD queuing evenly distributes calls to employees while insuring a minimum wait time for each caller on hold. ACD queuing typically adds little or no cost to the deployment of a hosted PBX, as the hosting company either has this technology in its systems or it does not. However, most hosted PBX providers claim they have ACD queuing when all the really have is hunt groups, sometimes modified to randomize calls but not really ACD queuing. Serious businesses usually need the advantages of true ACD queuing, whether in premise-based equipment or in a hosted PBX.
other definitions – creating market confusion
As the market continues to evolve, several other terms have been confused with the term “Hosted PBX” – here are a few other definitions you should know:
    • software pbx
      This type of PBX consists of software running on a PC or other computer. This type of PBX is very similar to a hardware PBX. See the section on premise-based PBX equipment for more details on operation. Some vendors have called this a “Hosted PBX” because the PBX intelligence is “hosted” on a computer, rather than hard coded into the hardware. It is not, however, a true hosted PBX service, it’s just another way to do a premise-based PBX.


    • virtual pbx
      This term is widely used throughout the industry to mean a hosted PBX. This is because a company named VirtualPBX invented the first hosted PBX and created the market for this class of service. While VirtualPBX does indeed offer a hosted PBX, this usage is illegal because the term Virtual PBX is a trademark name owned by the company. The company is actively working to protect its trademark.


    • ip centrex or voip pbx
      Voice-over-Internet-Protocol is a technology that delivers calls over the internet. Typically, a VoIP PBX is made up of a computer running PBX software that has the ability to route calls through an internal business network to IP telephones. This type of device is almost identical to the Software PBX discussed above, it just uses network wires and protocols to deliver the call. Again, it is “hosted” in that it hosts PBX software, but it is made up of equipment installed inside a businesses’ office, and is not a hosted PBX service. In addition, it needs hardware to connect to the PSTN.


  • hosted voip pbx (voip hosted pbx)
    This is a new type of product based on VoIP technology and can truly be classified as a “Hosted PBX.” As with any true hosted PBX, a hosting company provides PBX service from outside the company. Incoming calls are answered at the hosting site and sent, via internet, to phones in a customer’s business. This technology has high promise for future use, once early problems can be resolved. The biggest drawbacks today are call quality and reliability of service, since call quality and service levels are much higher on today’s PSTN than they are over the internet. Another major problem today for most VoIP systems is that businesses work hard to protect their computers and networks from outside attacks with firewall and other security technology. VoIP systems must have an opening for calls to be routed through firewalls, making them difficult to configure and install. An additional problem with a hosted PBX based on VoIP technology is that implementation requires someone inside the customer’s business to learn a lot of new terms and methods.
Strengths of a Hosted PBX
Hosted PBX systems have a number of important advantages over premise-based PBX systems. As with any mature technology, however, there are a wide variety of providers for this type of service and a correspondingly wide spectrum of offerings. Potential customers need to verify that the strengths listed here are included in the system they are investigating.
call routing to any phone
An inherent advantage of most hosted PBX systems is that calls can be routed to any phone, of any type, anywhere in the world rather than only to phone physically connected by wiring to an in-office PBX. Employees can seamlessly receive business calls whether they are working in the office, at home, or on the road. (Note that this is often not true for hosted VoIP PBX systems.) This ability to send calls anywhere has helped spawn a whole new way of doing business – the Virtual Office. Many users of hosted PBX services do away with the expense and commuting required by a central office and do all there work through distributed employees.
lower up-front costs
There is no capital expense for starting a hosted PBX service. This is especially important to new companies on tight budgets, but can also apply to established firms that outgrow their existing PBX equipment.
lower support needs
Telecommunications is a large branch of technology with its own terms, equipment, and tribal lore. With a hosted PBX, the service provider does the complex system management. Customers save on both headcount and headaches.
Customers of premise-based PBX systems spend a lot of money buying systems of either fixed or limited size. Many of these customers opt for small systems that they quickly outgrow. (Typical small businesses replace their PBX hardware every two years, until they reach maturity.) Other companies buy larger systems, paying for more than they need right now but hoping to get full value out of the system at some future time. Hosted PBX services are offered on the basis of the number of users, not the size of the system, and can scale up or down at any time. Customers pay only for what they need – with no future penalty.
call capacity
Hardware PBX systems can only handle as many calls as the number of incoming lines in the system. When more calls come in, callers get a busy signal and the company loses business. Adding more lines means costly and difficult equipment upgrades or new systems. Hosted PBX services typically use systems with far more lines than an affordable premise-based system. If the service provider manages capacity well, callers should never hear a busy signal. If you are a hosted PBX customer and your callers get frequent busy signals, it’s time to change service providers.
full feature set
Almost any PBX feature available today can be provided by either a premise-based PBX system or a hosted PBX service. However, getting full features in a purchased system is usually very expensive, while getting full features in a hosted service is just a matter of picking the right provider. Additional costs for a full-featured hosted service are very low, so customers can usually afford to get the best. A good hosted PBX can give even small businesses all of the functionality of a PBX system that costs hundreds of thousands of dollars for just a small monthly fee. (Note: be careful to choose the right service provider.) Also, premise-based equipment can’t provide the breadth of routing options needed by modern distributed companies.
fault tolerance
A well-designed hosted PBX incorporates redundant components and multiple PBX systems with automatic fail-over. (Again, it is important to choose the right provider.) No single component can bring the system down, and even failure of an entire system simply rolls calls over to another system. While this level of fault tolerance is expensive, sharing the cost over a lot of users makes it affordable. It is possible to get some of these capabilities in premise-based systems, but it is usually prohibitively expensive for all but the largest companies.
distributed administration
A well-designed hosted service lets users manage their own extensions. The users can log in or out of ACD queues, change phone numbers, and configure the system to their own needs. With premises equipment and lower-end hosted systems this type of activity often requires time and knowledge from a system administrator.
Weaknesses of a Hosted PBX
The best hosted PBX services offer almost all of the features and benefits of premise-based PBX systems. Some things, however, are hard to offer in a hosted environment, and only the best services offer these functions. Features that fall into this category include real Automatic Call Distribution (ACD) instead of simple hunt groups, flexible company directories, call transfers between extensions (or to an operator or an ACD queue), and real-time system monitoring.
Some functions of premises equipment are hard for any hosted system, such as sharing a limited number of business phone lines among a larger number of users. In a hosted system, each user needs to have a separate line. As mentioned elsewhere, the high call capacity and scalability of a hosted system usually offset this drawback. Hosted users can take many more calls than the limited number of lines in a hardware PBX would allow, and they only have to pay for what they use instead of either over-spending or under-providing for their needs. The promise of hosted PBX services offered through VoIP technology will further reduce this problem by providing phones “lines” through the internet.
The last important weakness for a hosted PBX service deals with dialing between extensions. With a hardware PBX, employees can usually dial each other without going out onto the telephone network. These systems offer an “intercom” type function that connects users to each other. In a hosted system, the users may be anywhere, in or out of the office. Placing a call to another company employee means dialing their number directly or dialing into the hosted service and selecting their extension, because the PBX is out on the PSTN, not inside the building. In some hosted PBX services, this drawback has also resulted in an inability to transfer calls between extensions, but better hosted systems have solved that problem.
How much a hosted PBX service costs depends on the provider and the quality of the service. Higher-quality business systems will will include higher-end features like ACD queuing instead of hunt groups, integrated conferencing, and real-time monitoring. Some lower-end providers that started out with simple voice-mail capabilities have now entered the market. Don’t expect these providers to offer the same features as true hosted PBX systems. Today, however, it is possible to get very low cost on even the best systems, like VirtualPBX.
With a hosted PBX, there is no capital outlay for PBX hardware, so the up-front cost is very low. Most providers today have no setup fee at all. For companies already in business there is not even a cost for new phones, since most already have cellular and/or desk phones.
Ongoing costs include the cost of phone lines, hosted service extension fees, and per-minute charges for incoming calls. There is no ongoing support or maintenance cost for equipment, since these tasks are done by the service provider. The cost for incoming business telephone lines vary widely, but usually fall between $10 and $20 per month, not including taxes and other government-mandated fees. Usually, a company will need one incoming phone line per employee that answers the phone. Other approaches include giving each employee a cellular phone, which they need anyway, and forgo land lines, and having employees telecommute, using their existing home phones instead of buying new phones for the office. Under these approaches, it’s possible to eliminate charges for incoming phone lines.
Hosted PBX providers typically have a monthly service fee for access to the hosted PBX system. Such service fees typically include some number of extensions and many include some free minutes for inbound calls (more on this in the next paragraph). Usually, there is one extension needed for each employee in a company, and there may be a few extra voicemail-only extensions for taking messages or making company announcements such as driving directions or office hours.
In addition to monthly service fees, most hosted PBX providers have some cost per minute for incoming phone calls. This is because the providers have to pay for calls in and out of the system from the telephone network. Typical per-minute rates for hosted PBX service run between 4 and 8 cents per minute, about the same as calls into a toll-free number. Many plans include 100 to 2,000 free minutes, meaning that per-minute fees only apply after the free minutes have been used.
Applying these rates to some client examples gives the following table:
typical costs for hosted pbx systems

5 User System 40 User System
Up-Front Costs None None None None
Monthly Costs Per Month Per Year Per Month Per Year
Telephone Lines $ 75 $ 900 $ 600 $ 7,200
Hosted PBX Service Fees $ 45 $ 540 $ 95 $ 1,140
Per Minute Charges Per Month Per Year Per Month Per Year
200 Min/User/Month $ - $ - $ 264 $ 3,168
Per month Per Year Per month Per Year
Total Annual Costs $ 120 $ 1,440 $ 695 $ 8,340
Phone lines are $15/mo per line. Five-user system costs $45 per month and includes 1,000 free minutes. Forty-user system costs $95 per month and includes 2,000 free minutes. Usage is projected at 200 inbound minutes per employee, with overage on 40-user system at 4.4 cents per minute.
As can be seen by comparing these costs against premise-based PBX equipment, a hosted system will cost over 50% less than a hardware PBX if toll-free service is needed, and between 17% and 35% less for businesses who use a local number. In addition to the overall cost saving, it is usually much easier to get up and running on a hosted service and there is no need to come up with a large amount of capital to acquire the system.
Some companies today have gone to a “virtual office” where there is no central place of business. Employees work from home and take calls on home phones or cellular phones. This makes a hosted PBX an even better bargain, as the cost of the phone lines goes away, replaced by existing phones. At this point, the only costs for a hosted PBX are the service fees and minutes. The following table shows the result:
typical costs for virtual office hosted pbx systems

5 User System 40 User System
Up-Front Costs None None None None
Monthly Costs Per Month Per Year Per Month Per Year
Hosted PBX Service Fees $ 45 $ 540 $ 95 $ 1,140
Per Minute Charges Per Month Per Year Per Month Per Year
200 Min/User/Month $ - $ - $ 264 $ 3,168
Per month Per Year Per month Per Year
Total Annual Costs $ 45 $ 540 $ 359 $ 4,308
Phone system cost savings for a virtual office are staggering – from 69% to 94% over premise-based hardware PBX systems. While not all companies can move to a virtual office concept, it’s no wonder this approach is becoming so popular. For more detail on these calculations, see: