Should I use an in-house phone system or a hosted phone service?

First, let's talk about the physical difference. An in-house system means you buy or lease the equipment and a hosted service means you only have phones.

One of the most often asked questions I get is “Should I buy my own phone system or use a hosted service?” The answer to that question really depends on your business size, number of calls you receive and types of calls.

The short answer is to go with a hosted solution if you have a small business, expect only a small number of calls, and only want a fairly simple call handling. But as we all know, things aren't usually this simple.

Should you own some equipment physically installed and maintained at your location, or can you use a vendor-run service via the Internet? To start with, you need to examine your broadband Internet connection capacity.

When using a hosted service, each VoIP phone call will require some high priority use of your Internet connection. The amount of bandwidth depends on which type of audio encoding is used. For the best quality speech, you'll want G.711 which uses around 90 Kbps per phone call. You may be able to use G.729 which uses around 32 Kbps. The maximum number of phone calls is also limited by how much concurrent data traffic you want to have while still having a reasonable response to data requests.

As a general rule of thumb, I recommend taking the your maximum upload bandwidth, cutting it in half, and then dividing by 32 Kbps or 90 Kbps depending on which encoding you will use. For an average DSL connection providing 256 Kbps up and 768 Kbps down, this results in either 4 calls using G.729 or 1 or 2 calls using G.711. But remember, this is based on cutting your available data bandwidth in half so expect a degraded performance when using the Internet.

A hosted solution has a lower cost initial equipment and setup, lower to no maintenance costs., and may have lower monthly costs. However, your total cost must also factor in increasing your Internet bandwidth to make up for the bandwidth used by phone calls. And if you need more than a few phone calls at one time, you may be looking at a significant upgrade on your data connection.

An in-house PBX can still use your data connection (SIP trunks) if desired but can also use the traditional phone company telephone lines. In some areas you can get phone lines from Verizon (FIOS), AT&T and Time Warner which actually come to you over a digital connection but don't take away from your data bandwidth.

Expect the typical in-house PBX to cost from $1000.00 to $20K+ depending on how many simultaneous calls, number of extensions, and desired features. You should be able to get all the basic features with every PBX but expect to pay extra for Automatic Call Distribution (ACD) and sometimes call recording/monitoring and some other features generally used by larger businesses.

Another component of the cost of an in-house system is installation. And don't forget about maintenance, repairs, upgrades, enhancements, etc. When making your decision it's a good idea to payout all the expected costs and go over them with your service provider before making a firm decision.