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PBX Phone Systems: Unpacking the Jargon and Understanding Your Options

This article was updated on January 2, 2024

The invention of the telephone revolutionized how people talk to one another, but  the PBX phone system kickstarted a brave new world of business communications.


With PBX telephone systems, businesses are enhanced with an efficient system for managing and routing calls. Need to quickly transfer a customer to a different department? PBX has you covered. Want an auto-attendant on your busy phone lines? It’s PBX that makes it possible. Just want some hold music? Okay, you know the drill …

Photo of a smiling man looking at something on his cell phone screen

Today, PBX solutions are fully digitized, operating in the cloud. This means that you don’t need to install complex copper wires and physical landlines anymore. A good internet connection is what you need to use cloud-based PBX phone services. Setting up this system is usually more cost- and time-effective than more traditional options, as well.

Let’s look at how PBX technology works, what to look out for, and the advantages of different systems. 

What Is PBX?

PBX stands for Private Branch Exchange — a type of telephone network that’s assigned to (and controlled by) a single entity. You might find a PBX in a hospital, office building, or university — basically, anywhere that makes and receives a lot of calls.

The origin story of PBX telephony starts in the 1960s, when businesses were struggling with the existing telephony infrastructure. At the time, all calls had to be routed through manual switchboards at telephone companies. This made making and switching calls difficult, time-consuming, and expensive.

So, businesses began to set up their own internal switchboards, essentially controlling their own miniature phone networks. This meant call queues were shorter, operating costs were lower, and networks were more customizable. They could now set up their own system for call forwarding between company departments.

Then came the internet, and the field of business communication changed yet again. By the mid-2000s, the VoIP (Voice over Internet Protocol) approach to phone calling appeared on the scene. This meant that your voice could be transmitted over internet architecture as data packets, rather than using traditional phone networks. It also meant that PBX could be offered virtually, as a cloud-based model.

This begs the question: What is a PBX system today? A PBX system can be hosted either on-premises, in the cloud, or as a hybrid of both — which provides businesses with customizable calling features.

In addition to call routing capabilities, it’s also common to see features like interactive voice response (IVR) menus, call monitoring, recording, and more.

Different PBX System Types

Each type of PBX system has its own particularities and advantages. Let’s compare each of the approaches:

Traditional or On-Premises PBX

The first PBX business phone system was “on-premises.” We’re talking physical, hardware-based telephony here — analog systems that used copper wires and switchboards.

Traditional PBX required lots of special equipment, including PBX cabinets with switching/routing components, extension lines, trunk lines, multi-party bridges, call distributors, and more. As such, they were typically located in large server rooms in an office building.

However, that’s not to say that an on-premises PBX business phone system is necessarily limited to one location. It’s possible for businesses to create “multi-site” PBX systems that connect multiple office buildings in different cities around the country. 

This is done through a network configuration (like VPN (Virtual Private Network) tunneling or SIP (Session Initiation Protocol) trunking) that connects each location to one central on-site PBX server.

Hosted PBX and Virtual or Cloud PBX

Hosted PBX is a broad term for the outsourcing of telephony infrastructure.

In the days of analog phone calling, this meant a third-party company managing the hardware for your PBX telephone system. Since telecoms companies often had their own large data centers (and the know-how for maintaining them), it made sense for them to provide subscription-based PBX phone systems to businesses.

The main advantage of this is that less on-site hardware is required at your offices. This translates to a lower upfront cost and a faster time to get your PBX phone systems online. Plus, you don’t need an in-house technical engineer to set up everything. However, it does still require the installation of some PBX phone lines and physical handsets.

These days, hosted PBX can also refer to VoIP-based systems that are hosted digitally over the internet and accessed via software. As the name suggests, cloud PBX is a digital technology that’s managed on the internet.

The principal distinction when it comes to traditional PBX vs. cloud PBX is the underlying architecture. Traditional PBX uses analog signals on dedicated copper wires. Cloud PBX uses digital signals (called “data packets”) transmitted over internet connections.

The advantage of virtual PBX is that it’s typically more affordable and faster to set up, with less equipment and installation needed. Businesses simply have to download and install their PBX provider’s VoIP software, attach a headset to their computer (if needed) and get to exploring all the new capabilities.

Virtual PBX services come with a wealth of features like auto attendants, call recording, local phone numbers, and more. And, if at any point you need access to more phone lines or features, scaling your system is typically an easy turnaround.

For this reason, many small business PBX systems are now managed in the cloud — it’s quickly becoming a preferred solution for businesses that don’t own existing telephony infrastructure.

Hybrid PBX

Hybrid PBX systems have gained popularity as a transitional solution for businesses moving from traditional telephony to the cloud.

This type of PBX service is customizable; businesses can pick and choose the features they want to keep from their existing phone system, and supplement it with cloud software where it falls short.

For instance, you might have a perfectly good PBX telephone system in place. But when it comes to conference calling, you prefer to use an external solution that integrates with your workflow and calendar apps.

It's less common for a newly established company to adopt a hybrid model, but the system has its advantages for businesses who already own legacy equipment. It can be more cost-effective to simply maintain what you have, rather than rip out the old wires and make a sudden digital transition. That said, this model will probably wane over the long-term.

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How Does a PBX Work?

Now, we’ll explore the technical side of things — how a PBX system actually works behind the scenes. To answer this question, we’ll explore it in two parts:

How does PBX work with analog infrastructure (traditional):

A basic PBX system consists of three main parts — the Cabinet, the Automatic Call Distributor (ACD), and the PBX call lines.

The PBX Cabinet is the brain of the operation. It contains a switchboard component for call handling and controlling features like call queues, voicemails, and auto attendant functions.

The Automatic Call Distributor was introduced to reduce the manual workload involved with handling a PBX Cabinet. For instance, it can assign incoming calls based on predefined rules.

The PBX call lines are the infrastructure that carries the signals between phones. You might have hundreds of these connecting to different desks in a building.

How a PBX telephone system works in the cloud (virtual):

Virtual PBX business systems are hosted on the internet and use programmable software. Let’s explore how they connect your voice calls from A to B:

A Virtual Switchboard is a term for the software that handles call routing. Using customizable rules, it can send incoming and outgoing calls to different places, establish connections, and run interactive programs like IVR.

VoIP software is what keeps your PBX voice calls connected. This technology relies on internet-based connectivity to transmit voice packets between senders and recipients. For added security, it’s common for encryptor software to scramble this data as it makes the journey; that way it prevents call snooping or data loss.

On-Premises Vs. Hosted or Virtual PBX Systems: Which is Better For Business?

So, what’s best for your business? Is it worth installing a traditional PBX or should you go for a hosted phone system? Let’s compare the pros and cons:


Communication is absolutely essential for business. Without it, you have no way of liaising between teams or speaking to customers, negatively impacting your productivity and business outcomes.

So, when starting a business, it’s important for you to figure out a long-term, scalable communications solution. Ideally, it would be quick to install, easy to configure, and intuitive enough for your staff to understand without extensive training. For small business’s needs, a virtual PBX service checks all of these boxes.

For existing businesses, cloud PBX excels in the convenience stakes, too. As an example, such systems can get more readily integrated with the other tools — think CRMs, productivity platforms, and more — that a business already uses. This can improve collaboration and, therefore, productivity across an organization.

Cloud PBX systems, what’s more, bring far more convenience for any business with hybrid or remote working teams. Those teams can access and use such systems from virtually anywhere, meaning their full range of business communications are still available to them outside the office.


Getting started with an on-premises PBX system can be intimidating because of the hefty price tag often associated with the equipment. Once that’s arrived, you then have the cost of continually maintaining the set up.

One of the most valuable things about virtual PBX phones is that you don’t have to sink a large amount of capital into expensive hardware. Instead, with cloud-based solutions, most services are paid for on a monthly subscription calculated per user, meaning it’s possible for even small startups to have their own tailor-made communications platform.


On-premises PBX systems are secure in that you physically own the hardware. You can keep it under lock-and-key, install security cameras, and more. There’s also the firmware security to take care of — things like firewalls, encryption protocols, and access controls. This typically means your business needs a dedicated security lead to manage this workstream.

Most cloud PBX phone systems are built with security standards to protect customer data. For example, Vonage invests heavily in security and privacy measures and maintains a wide range of compliance certifications across our product lines. They include ISO 27001, PCI-DSS, SOC, HITRUST, and CSA STAR, to name just a few.

Integrations With Other Business Tools

Another benefit of cloud PBX is the opportunity for seamless integrations with other business software and tools that your team already uses.

For instance, Vonage Business Communications (VBC) offers integrations with Customer Relationship Management (CRM) programs, such as Salesforce. As well as integrations with collaboration tools like Microsoft Teams and Slack, which boost internal communications and team productivity.

The result is better communication and higher productivity. You can’t really do this with traditional PBX — at least not in the same way — because you need to convert your call data from analog to digital format.

What If You Need More Than a Virtual PBX? Enter Unified Communications as a Service (UCaaS)

The terms “PBX” and “UCaaS” get thrown around a lot in the world of business communications. While there’s some overlap, the two are conceptually distinct. Let’s explore the differences:

What is UCaaS?

UCaaS stands for Unified Communications as a Service. It’s a broad type of cloud-based communications software that has all the features and advantages of a standard Virtual PBX, and more besides. In fact, a UCaaS set-up integrates all of your communications needs on a single centralized platform, including:

  • Phone calling: This is the domain of the virtual PBX. Yes, a UCaaS solution will come with calling capabilities built in.

  • Instant messaging: Conversations are great for getting into detail, but we also like to talk with our thumbs. That’s why SMS/MMS is important for client outreach and regular business communications.

  • Video conferencing: If you’re working remotely, it’s nice to be able to speak face-to-face with someone. With Vonage Meetings, you can have high-quality video calls with up to 25 people at once.

  • Mobile app: Forget being limited to one device; UCaaS lets you communicate from any place at any time.

  • Extensive integrations: Any good UCaaS will integrate with your other software, such as CRMs and management apps for productivity tracking.

Other Benefits of UCaaS Platforms

Besides the extensive communications features, UCaaS platforms also typically come with service-level guarantees. These are essentially promises made by the supplier that you (the customer) can hold them to.

For instance, a UCaaS provider might provide an uptime guarantee. Vonage’s uptime reliability stands at 99.999%*. Such companies may also offer security guarantees to adhere to particular jurisdictions’ regulations or to perform regular penetration testing and iterative patches.

*The 99.999% claim is based on Vonage's average up-time and/or availability.

It’s nice to have this peace of mind, which isn’t always the case with on-site PBX telephony that can experience disruptions and outages.

Choose the Right Business Phone System for Today and Tomorrow

Many organizations have come to believe that a PBX phone system can be an essential piece for business communication.

Whether you go for an on-site or virtual PBX, you’ll be able to make high-quality calls to anyone in the world.

For small businesses, going for a digital, cloud-based PBX is typically more accessible, cheaper, and easier to set up. It’s also worth looking into unified communications solutions that also bring added features like business messaging, video conference, and more to your business.

Contact a Vonage expert today to learn more about getting the right system for your business.

Still Have Questions About PBX Phone Systems?

VoIP (Voice over Internet Protocol) is the technology that lets us transmit voice calls over the internet. It works by converting your voice into data packets, encrypting them, and then sending them to their destination via high-speed fiber-optic cables.

VoIP is the backbone of the modern, flexible communication capabilities with a virtual PBX system.

PSTN, or the Public Switched Telephone Network, represents the traditional phone system using copper lines. If you’re using a traditional PBX, this is the technology architecture that you’re dealing with.

However, while Virtual PBX primarily relies on VoIP, it can still interact with PSTN. For instance, your virtual PBX system can connect calls seamlessly between internet-based VoIP and traditional PSTN networks. 

This is a fundamental capability of the virtual PBX, and it’s made possible through Gateway devices (handling digital-to-analog conversions) and PSTN interfaces (that establish connectivity between devices).

So, if you’re using a VoIP system, you can still call someone using a traditional system, and customers using traditional systems can still call your VoIP based system.

It depends. If your company requires features like call routing, voicemail, and auto attendants, a PBX system offers the control and flexibility you need.

That said, scaling businesses would likely benefit from the enhanced productivity that comes with a UCaaS platform.

You can make the most of features like video calls, conferences, file sharing, and integrations with other business software. It’s an effective way to scale a PBX phone system — retaining the core features and adding value on top.


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Want to know more about PBX phone systems? We’re here to help! Call us at 1-844-365-9460, or fill out this form! A dedicated specialist will explain:

  • Why a digital, cloud-based PBX is typically more accessible, cheaper, and easier to set up than an on-premises option
  • The wide range of features and benefits offered by a Unified Communications as a Service (UCaaS) solution
  • How to weigh your options for a PBX phone system — on-premises, hosted, cloud-based, hybrid, and more

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