Should your next phone system be Hosted or Prem?


Customer who need to upgrade their communications systems often struggle with the decision to go to a cloud-based option versus replacing their old office phone system. At City, we believe in the cloud model so much we’ve built a whole business around it, but that doesn’t mean cloud is the best option for every customer. How can we help people make an educated choice when presented with the two options?


There are merits to owning a phone system versus subscribing to business communications as a service (hosted phone systems). Owning the system means you have direct, physical control over it. You can secure it within your IT infrastructure. If you need to move or expand it, you can shop around for the best deal on upgrades and enhancements. And once you spend the money to buy it (lay out the capital expenditure), you should have a lower annual ownership burden.

But the arguments for ditching the physical phone system for its virtual successor are compelling too.

To start with, cloud-delivered/managed phone systems (let’s agree to call themhosted phonesystemsfor the sake of this article) typicallyinclude the maintenance and servicein the subscription price. Which means that you get all ongoing support and upgrades at no additional charge.

Then there’s the argument thathosted phone systemsare more portable. On a premise-based system, vendor help is sometimes needed to make physical changes to your system. If you need to re-locate end-pointson your hosted phone system, simply moving the end-point or making a software change gets the job done.

If your communications systems are critical to your business, you need to plan for disasters. Not all premise-based communications systems have redundancy and resiliency (failover and backup) options. Hosted phonesystemshowever, because they are services designed to meet the needs of multiple clients, are built in high-resiliency and fail-resistant data centers. They are also engineered tohandlelocaldisastersmore robustly(should the Internet connection that runs the service go down, the service should be able to route calls to a new data path, another office, even cell phones if needed to keep you up and running).

Hosted phone systems aremoreeasilyscaleable. With a premise-based system, you pay for every expansion and own any excess capacity once it’s bought but no longer needed. In the cloud, expanding and contracting the system to meet your changing business environment is as simple as adding or reducing subscribers, usually with little to no penalty.

Finally, you pay for hosted phone systems as a fixed monthly subscription cost so they appear on your accounts as a simple expense (there are tax benefits to this as well as the benefit of not having to finance what can be an expensive piece of company infrastructure).

Does this all mean that hosted communications systems are a better deal that premise-based phone systems? The way we guide customers to answer that question for themselves is by helping them work up a Total Cost of Ownership Analysis.


Based on the progression of communications systems, we feel strongly that the best total cost of ownership time frame to compare is five years. A physical phone system may last beyond five years, but new capabilities, options, and advances in computing power will render it outdated within that time frame.

To build the hosted-side of a Total Cost of Ownership comparison between premise and hosted communications systems, you work from thetotalmonthly costs of thesubscriptionsyou need. Make sure you includes all seat licenses, trunking, e911 services, and application licenses (like unified-communications clients and contact-center seats). Account forup-front installationand setup charges. And if the phones are not included as part of the monthly subscription (they usually are), factor in the expense of buying thedesktop equipmentyou need.

The premise-based side of the comparison is more complex and should include the following:

  • The total purchaseprice.Include all physical hardware, software licenses, up-front support contracts, trunking modules, desktop equipment, etc.
  • Annual maintenance and support.After the initial support contract expires, many equipment vendors offer (or require) annual support contracts. Factor these costs in for the full five years.
  • MAC work.Expect to need to make programming changes and moves on your communications system. With hosted phones, you typically make these changes yourself or call in for free support to get help. In a premise-based environment, optional expansion (new and replacement phones, adding trunks, adding new features or applications), and phone moves are almost always outside the scope of the support contract. To make a fair and honest comparison between cloud and premise-based systems, anticipate that 5% of your up-front system cost will be spent on MAC work per year. If you can more accurately predict seat-count growth, use the original pricing to estimate new system and end-point costs as a guide but realistically, double them since post-system pricing is always higher than the original installed pricing.
  • Cost of internal (people) resources.This is the biggest unaccounted to owning a phone is the internal management expense. The advantage of owning your own system is that control it, but you need to allocate staff to manage it. That staff costs your business. We work with large clients who have full-time staff dedicated to the management of their premise-based systems. With hosted phone systems, the management burden shifts to the service provider. You may still have staff time invested in oversight and coordination, but you should factor the labor cost savings of not having to have your IT or telecom staffer ‘working’ on the system.
  • Network differences.With a cloud-based systems, the costs of network (the telephone lines to connect you to the outside world – the phone numbers, local and long-distance toll charge, conference and collaboration capabilities – are all part of the subscription. With a premise-based system, these are additional services you need to purchase that can add up over time.
  • The cost of money.If you pay cash up front for your new system, that is money that could be invested back into your business. Assuming you run a profitable business, money you invest into growth should have a quantifiable return. That lost return is the cost of using that money to purchase a system. If you yield 10% net profit on the money to use to run your business, the cost of money for your system purchase is 10% of the purchase price. Per year! If you were to lease or finance the purchase instead, you will pay finance charges for the money you borrowed. Either way, there is a real cost of money that should be factored into the total cost of ownership.


When you do this analysis, will premise-based systems be cheaper over the expected life of the system? They might. If they are, then you can focus the decision in on the cost of the benefits to cloud (the costing model, resiliency, scalability, portability, and the value of always having the newest technology available, etc.).

If you have an opportunity that is struggling with how to approach the decision between purchasing their own replacement communications system and moving to a cloud-based solution, we can help you develop a customized Total Cost of Ownership budget to compare the two. Contact your Channel Manager (or hit me up directly) for help.

Steve MedcroftShould your next phone system be Hosted or Prem?