Business Tips

What’s the Difference Between Cloud-Based and On-Premise Phone Systems?


Lady Talking on Optimum Mobile Phone


Communication is at the core of any business. Whether you're connecting with clients, coordinating with remote teams, or managing daily operations, your phone system plays a pivotal role in facilitating that communication. When choosing a business phone plan, your first step should be determining whether you want it to be a cloud-based phone system or an on-site system. Many organizations have been transitioning to a cloud phone system (or a hybrid phone system) because they typically have lower upfront costs, are scalable, and require reduced hardware and maintenance compared to on-site systems. In fact, according to recent data from Gartner, more than half of enterprise IT spending in key market segments will shift to the cloud by 2025.

Ultimately, however, determining whether an on-premise phone system or a cloud-based phone system is right for your business depends on your organization's specific requirements, budget, and preferences. In this article, we will break down key distinctions between cloud-based and on-premise phone systems and help you determine which is right for your business.

What Is a Cloud-Based Phone System?

A cloud-based phone system, sometimes referred to as a Cloud PBX (Private Branch Exchange) or a VoIP (Voice Over Internet Protocol) system, operates over your existing Internet connection rather than through a traditional phone line. The software is hosted on servers in secure data centers operated by a service provider. These servers manage call routing, voicemail, and other phone system functions. When a user initiates a call, the request is sent to the cloud server via the Internet. The cloud server processes the call and determines the appropriate route.

One of the most significant advantages of cloud-based phone systems is that they enable users to make and receive calls from anywhere with an Internet connection—a benefit particularly useful for remote workers and businesses with multiple locations. Keep reading to learn more about the benefits of cloud-based phone systems.

Benefits of cloud-based phone systems

Scalability: With cloud-based phone systems, it's easy to add lines and features to reflect your business's changing needs.

Functionality: Cloud phone systems offer a variety of useful features, including call forwarding, voicemail-to-email, call recording, auto-attendants, and conferencing.

Setup: The cloud-based installation process is simple and requires little more than downloading the required software. As the system's infrastructure and software are hosted in secure data centers, business owners don't need to purchase and install physical hardware, like traditional on-premise equipment.

Integration: Many cloud-based phone systems can integrate with other business tools and software, such as customer relationship management (CRM) systems, email, and collaboration tools.

Cost savings: Lower upfront costs, no need for extensive equipment, and predictable monthly fees make cloud-based systems a budget-friendly option for small businesses.

Flexibility: Cloud-based systems are managed via an online portal, meaning employees can access them from anywhere with an Internet connection.

Reliability: Because the infrastructure is hosted remotely, rather than physically, cloud-based phone systems are less susceptible to damage or service disruptions—such as those caused by natural disasters, power outages, and hardware failures—than traditional landlines.

Cloud-based phone systems: additional considerations

Dependent on Internet connection: With a cloud-based phone system, if your Internet goes down, so does your phone. That’s why it’s important to choose a reliable Internet provider that offers around-the-clock customer support in case a connection issue occurs. When you sign up for service with Optimum Business, you’ll have access to 24/7 customer service. And if an issue occurs, your customer service team will start working to resolve it the very same day—even if it requires an on-site visit.

Limited control: With a cloud-based system, maintenance and updates are performed by your service provider, which may limit your ability to make immediate changes or customizations.

Security concerns: Cloud-based systems often require robust encryption, access controls, and regular security updates to safeguard against unauthorized access, data breaches, or cyberattacks on cloud infrastructure. Choose a reputable provider and, if you find it necessary, implement additional security measures to help protect your business’s data.

What Is an On-Premise Phone System?

An on-premise phone system, also known as a PBX system, is hosted within your physical business location. This system is either owned or leased by the business and is installed and maintained on-site, typically in a dedicated telecommunications room or data center within the organization's facilities. Having an on-premise phone system gives you complete control over your system's hardware and software, such as servers, switches, routers and telephones.

Nowadays, advanced on-premise phone systems can work with the Internet. For example, businesses can implement Session Initiation Protocol (SIP) trunking, which connects the on-premise phone system to the Internet via SIP providers. It’s possible to use IP technology and make connections through the Internet. The IP technology allows for VoIP (Voice over Internet Protocol) communication, which is the transmission of voice calls using digital packets over an IP network.

Learn more about on-premise phone systems below.

Benefits of on-premise phone systems

Reliability: In areas with unreliable Internet access, on-premise phone systems may be the more reliable option, as they don’t require an Internet connection to make or receive calls.

Control and customization: With on-premise phone systems, businesses can quickly and easily tailor features to meet specific business needs—without the need to wait for a provider to implement changes.

Security: Because on-premise phone systems are not connected to the Internet, there’s less risk of unauthorized access, making them a great choice for those who prioritize security.

On-premise phone systems: additional considerations

High initial costs: On-premise phone systems require an upfront investment in hardware and installation—not to mention the space required for hosting it. You also need to establish the infrastructure for the setup, if that hasn’t been done previously.

Scalability challenges: Expanding or reducing your phone system can be costly and time-consuming. Scaling an on-premise phone system may require additional hardware and resources, making it more complex and potentially costly compared to cloud-based systems, which often offer easier scalability.

Limited accessibility: Since on-premise systems are tied to physical locations, you can't easily access your system remotely, which can be challenging for businesses with remote workers or multiple locations.

Maintenance and upkeep: On-premise phone systems require ongoing maintenance, including software updates, hardware repairs or upgrades, and general system administration. This can be managed by in-house IT staff or outsourced to a vendor.

Setup: Installing an on-premise phone system can take from a few days to weeks, depending on the scale of the operation. This includes the size of the organization, the extent of customization required, and the availability of IT resources.

Cloud-Based Phone System vs. On-Premise Phone System: Which is Right For My Business?

Still unsure which phone system is right for your business? We'll explore the factors you should consider when deciding between cloud-based and on-premise phone systems.

Available features

On-premise and cloud-based phone systems offer a similar range of features and capabilities for small businesses. With Optimum Business Hosted Voice cloud-based system, you’ll get a variety of features, including caller ID, company directory, and music on hold. Our plan also offers advanced features like single number reach, which allows multiple users to be reached simultaneously at a single phone number. This feature is particularly useful for professionals who need to maintain accessibility while on the move or working from different locations. With Optimum Business Hosted Voice, you also can easily add and remove extensions or change call-routing rules with just a few clicks.

Optimum Business’s on-premise option, Optimum Voice, offers over 20+ advanced features, including:

Call waiting: Alerts you with a special tone when someone else is calling you while you are already on the phone.

Rollover hunting: Allows incoming calls to your primary phone line to roll over to the next available line and, if all lines are busy, directs the call to voicemail.

Business continuity forwarding: Forwards calls to a pre-determined number during a power outage or when the connection to the cable modem is lost so you never miss a call.

Call waiting with music: You can select from 12 music choices, specify the maximum time you want a caller to stay on hold, and allow only a certain number of callers to be put on hold.

All of this ensures your customers never get a busy signal. Other features, such as call forwarding, find me, and enhanced voicemail ensure customers can always reach you, even if you're working remotely.

Hardware requirements

As mentioned earlier, cloud-based phone systems don’t require the purchase or use of any additional hardware. Instead, data is transmitted over the Internet and managed entirely by your service provider. On the other hand, an on-premise PBX system requires hardware—such as voice gateways, routers, servers, and phones—to be kept on-location. All those pieces of hardware are then connected through the organization's internal network. Unlike in-house systems that rely on physical desk phones, cloud systems use software-based phones known as softphones. A softphone is a software application that's installed on an Internet-connected device to make phone calls.

Questions to consider:

  • Does your business have a physical location to set up and maintain all the hardware?
  • Have you already invested in an on-premise system?


Cloud-based systems offer lower upfront costs, while on-premise systems require an initial investment. As on-premise systems require purchasing and maintaining physical equipment, this initial investment can be significant. You'll need to purchase the equipment itself, plus pay for its maintenance and upgrades, and find space to keep it all. Cloud-based phone systems, on the other hand, integrate costs into your monthly Internet plan.

Question to consider:

  • Would you prefer to pay for the upfront investment of an on-premise system or extend payment with monthly installments for a cloud-based system?

Internet reliability

Cloud-based systems are housed in secure data centers equipped with redundancies to help ensure your connection never goes down. If your Internet does go out, however, you’ll lose connection. In these cases, on-premise systems may be the more dependable choice.

If you determine that a cloud-based phone system is the best option for your business, consider choosing an Internet carrier that provides both Internet service and cloud-based phone capabilities, such as Optimum Business. You’ll get the benefit of our LTE Wireless Failover solution that will help keep your critical devices online in case of regional outages.

Question to consider:

  • Does the Internet service offered by your carrier provider have a reliable connection?


If your business is likely to expand or downsize, a cloud-based system's scalability might be advantageous. Scaling an on-premise phone system may require additional hardware and resources, making it more complex and potentially costly compared to cloud-based systems, which often offer easier scalability.

One option for adding more phone lines without purchasing dedicated lines or new hardware is trunking. With Optimum Business Trunking, you can have up to 24 simultaneous call sessions and up to 100 Direct Inward Dial (DIDs) telephone numbers. Learn more about SIP trunking here.

Questions to consider:

  • What are your growth prospects? Do you anticipate needing more phone lines in the future?

Remote work

Evaluate your need for remote work capabilities. If you have remote employees or need to maintain communication during emergencies, a cloud-based system is more suitable because it can be accessed from anywhere.

Question to consider:

  • Would a remote phone system make communication between workers and customers easier?


Consider how much control you want over your phone system. On-premise systems provide more control, while cloud-based systems require less management.

Questions to consider:

  • Do you have the internal resources, such as an IT staff, needed to manage an on-site phone system?
  • What level of support do you need and want?

To summarize, there are numerous factors to think about when selecting your phone system. Many organizations tend to migrate to the cloud after considering the costs of modern on-premise hardware and the staffing needed to keep it running. However, the choice ultimately hinges on your organization's unique circumstances. A cloud-based phone may be a suitable choice for one business but not for another that has already heavily invested in its traditional on-premise phone system. For those looking to extend the lifespan of a premise-based PBX, the cloud-based phone system is an excellent option to integrate into the existing legacy system.

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