Guide to VoIP phone systems

VoIP phone systems are the latest generation in business telephone technology. VoIP suppliers can offer a business the benefits of a modern business phone system while avoiding the need to purchase, install and maintain expensive telephone hardware at its premises. This guide will help you understand how VoIP phone systems work, the benefits that they can bring, and whether they are the right telephone system for your business.

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Voice over Internet Protocol (VoIP), also called IP telephony, is a telephone communication technology that allows businesses to make and receive telephone calls over the internet without the need for traditional telephone lines. The technology was originally developed in the 1970s with mass market VoIP telephone services beginning in the early 2000s.

Before VoIP technology was developed businesses were limited to Multi-line or conventional PBX (Private Branch Exchange) business phone systems which ran on analogue or digital (ISDN) telephone lines and which need a business to purchase, sometimes expensive, telephone hardware and install that equipment on its premises.

The development of VoIP technology has led to the next generation of PBX systems:

  • On-premise IP-PBX business phone systems which use VoIP technology to make/receive telephone calls over the internet with the telephony hardware installed at a business’s premises.
  • Hosted VoIP phone systems that use the internet to make/receive telephone calls but where the IP-PBX hardware is owned by a VoIP phone system supplier and located or hosted ‘in the cloud’ at that VoIP supplier’s data centre. VoIP suppliers can offer a range of VoIP services to businesses.

We compare functionality of on-premise IP-PBX and hosted VoIP systems and discuss the features of a hosted VoIP phone system later in this article.

We provide more information on on-premise conventional PBX and IP-PBX systems in our article Guide to PBX business phone systems and cover Multi-line business phone systems in our Guide to Multi-line business telephone systems.

Take up of hosted VoIP phone services has expanded rapidly alongside increasing broadband penetration, the expansion of cloud services, significant public and private investment in advanced telecommunications infrastructure, and the rise of remote working.

Hosted VoIP phone services can offer a range of modern features including softphone capabilities, video conferencing and remote working and allow a business to integrate all of its communication systems, to create a unified communications network (described in more detail later in this article).

IP based telephone systems are becoming particularly important given BT’s decision to shut down all analogue and Integrated Service Digital Network (ISDN) telephone lines by 2025 at which time most business telephone calls will need to be carried out using VoIP technology. We cover this issue in more detail in our article What is a business phone system?

This article provides an overview of how hosted VoIP phone systems operate, their features and components. It explains the concept of unified communications and compares the benefits and limitations of IP-PBX and hosted VoIP phone systems.

Business telephone services are full of acronyms and technical terminology. To help you master the jargon we have provided a glossary of relevant business phone system terms which you can refer to alongside our articles.

In this article

What is VoIP?

VoIP is a communications technology that allows the making and receiving of telephone calls over the internet. Instead of using analogue or ISDN telephone lines to connect to the PSTN (the Public Switched Telephone Network) a business uses VoIP technology and systems to connect to, and use, the internet for voice communications.

In addition to internet connectivity, VoIP phone systems provide an extensive range of sophisticated communications features, such as video conferencing and call analytics, and functionality such as hot desking and remote working. VoIP systems also allow a business to bring together all of its communications functionality into a unified communications network significantly improving employee productivity.

As can be seen from the diagram below, one of the main advantages of a hosted VoIP phone system is that a business does not need to install new hardware. The VoIP hardware is located off-site being owned, operated and maintained by the VoIP supplier at its data centre.

Calls are transmitted over the internet between the business and the VoIP supplier’s data centre which directs all telephone call routing and operates all VoIP services.

Unlike on-premise PBX and IP-PBX business phone systems, there is no investment needed by a business in new telephony hardware (other than possibly in phone handsets), nor does a business need an IT team to carry out complicated installation, configuration, maintenance or upgrade activities. The VoIP supplier can carry out the work to connect and configure its VoIP system to the business’s local area network (LAN). Consequently, there are minimal set up or maintenance costs for a business.

Hosted VoIP phone systems

This infographic shows how hosted VoIP phone systems operate.

Antenna created by AS Design, Server created by Chunk Icons, Telephone created by Georgina Ionescu, Router created by Ralf Schmitzer, Computer created by SELicon, iPhone created by Saeful Muslim, iPad created by Luigi Di Capua IT, Laptop created by Jason Grube, Office created by Aham Brahma, cloud server created by Chris Homan, internet created by agus raharjo, ac unit created by Ben Davis, from Noun Project.

Once the VoIP system has been connected employees can use a range of VoIP enabled devices connected into the business’s LAN. The business will just need to:

  • Buy new VoIP phones.
  • Convert existing analogue or digital phones using ATAs and DTAs (Analogue/Digital Telephone Adapters).
  • Connect analogue phones to its server using FXS (Foreign Exchange Subscriber) modules.
  • Install ‘softphone’ software. This is software that allows computers to make/receive telephone calls) and is usually complemented by headsets to provide employees with privacy when making calls.
  • Install VoIP apps on employee devices so that they can be used to make VoIP calls using an office’s WiFi, or external WiFi networks if an employee is working remotely.

What are unified communications?

One of the major benefits of a VoIP phone system is the ability to connect and integrate communications systems and applications across your whole business creating a ‘unified communications’ network – see diagram below.

Unified communications

This infographic sets out the systems that make up VoIP phone systems unified communications network.

Unified communications can benefit a business in a number of ways:

  • Increased interaction and collaboration between employees.
  • Providing greater data and analysis tools to help managers analyse and improve their business processes.
  • Improving customer service levels as employees can communicate and respond to customer queries quicker and with more detailed information.
  • Improving employee efficiency and productivity.
  • Enhanced employee user experience improving their working life.
  • Reducing costs through system integration and using cloud services.

All of the above improvements to a business’s systems and processes should help it grow revenues and lower costs, increasing profitability.

Comparison of on-premise IP-PBX and hosted VoIP phone systems

We have compared on=premise IP-PBX and hosted VoIP phone systems against the following criteria:

Comparison of on-premise IP-PBX and hosted VoIP phone systems

This table compares on-premise IP-PBX and hosted VoIP phone systems against a range of criteria.
  • Business size: Both IP-PBX and hosted VoIP phone systems can be effectively used by small businesses through to large organisations.
  • Costs:
    • Costs can vary depending on the:
      • Number of users/extensions required.
      • Range of features and functionality required.
      • Any additional (UK or overseas) premises that need to be connected.
      • Anticipated usage/call traffic (international and local).
      • Installation, configuration & maintenance complexity.
    • Hosted VoIP phone systems:
      • These systems require minimal new hardware and no telephone lines resulting in installation, configuration, running and maintenance costs being very low. Often a business will purchase IP handsets but a business could decide to run its telephony using softphone software/VoIP apps.
      • Hosted VoIP systems are charged on a simple monthly subscription basis usually including an amount of inclusive minutes and dependent on the range of features provided. Other features may be charged separately and certain calls (e.g. international) maybe charged on a low per call basis.
      • Subscription fees are competitively priced but as a business grows, it may need additional features and/or a greater number of extensions resulting in increasing monthly fees.
    • On-premise IP-PBX business phone systems:
      • These systems require the business to purchase, install, configure, maintain and upgrade the IP-PBX system, together with any other related hardware, which can be costly.
      • Call costs will depend on the package that the business signs up to with its ITSP/SIP Trunking provider.
      • However, once completely paid for an IP-PBX can prove cost effective for a business in the long term.
    • We have set out below a cost comparison of both business phone systems:
This table compares the costs of on-premise IP-PBX and hosted VoIP phone systems against a range of criteria.
  • Range of features:
    • Both IP-PBX and hosted VoIP phone systems have the potential to offer a business extensive VoIP features such as soft phones, hot desking and remote working), the opportunity to gather more information and monitor facilities and the potential to create a unified communications network.
    • Hosted VoIP features vary between VoIP suppliers and between the different subscription packages that they offer. IP-PBX systems tend to provide a more extensive range of features.
  • Remote working: Both hosted VoIP and IP-PBX business phone systems are ideal for businesses requiring remote working functionality. Telephone numbers are portable across any device and calls can be made, and data accessed, by employees using VoIP enabled devices anywhere that they have an internet connection.
  • Customisation potential: As on-premise IP-PBX are located and controlled within the business’s premises they offer the maximum flexibility to create custom applications, reporting tools and develop bespoke security settings. With hosted VoIP phone systems being operated on the VoIP supplier’s platform there is less potential for customisation.
  • Scalability: Both IP-PBX and hosted VoIP systems allow for significant expansion within a single premise using the business’s LAN but a hosted VoIP system has the added advantage of being highly scalable across office locations without the need for new IP-PBX hardware.
  • Portability: Both on-premise IP-PBX and hosted VoIP handsets connect via the LAN and so devices are highly portable and can be moved wherever there is an ethernet port or can use a business’s WiFi network.
  • Integration with business applications:
    • IP-PBX business phone systems offer extensive opportunities for integrating with other business applications such as CRM systems.
    • Hosted VoIP phone systems, as they operate on the VoIP suppliers platform, offer less scope for business application integration.
  • System upgrades: A hosted VoIP supplier will automatically carry out system upgrades at its own data centre. System upgrades to IP-PBX systems need to be implemented by the business’s in-house IT team or external contractors on a bespoke basis.
  • Reliability, security & control:
    • Poor internet connections or speeds may impact call reliability or quality for all IP based systems, leading to dropped calls, interference or latency issues. However, internet connectivity has improved significantly in recent years although it can still be a real issue for businesses, for instance, in rural areas.
    • Internet connections are more vulnerable to internet piracy and businesses using hosted VoIP phone systems are heavily reliant (in addition to their own security protocols) on the VoIP supplier’s security measures. However, VoIP suppliers have extremely robust security protocols and they regularly update and upgrade their systems.
    • As IP-PBX equipment is located on-premise a business has complete control and security over the system without the need to rely on third-party service providers except for internet access and connectivity where those providers should have robust security measures in place.
  • Disaster resilience:
    • As hosted VoIP phone systems are located ‘in the cloud’ at a VoIP supplier’s data centre, they provide a high degree of resilience if there is a catastrophic event at the business’s premise. Calls can still be made and received by employees using VoIP enabled devices from remote working locations during the period of interruption.
    • On-premise IP-PBX systems can be significantly impacted if there is major disruption at the business’s premises that prevents access to the system and/or it operating normally.
  • Installation, configuration & maintenance:
    • Hosted VoIP phone systems are straightforward to connect, configure and maintain, all of which is usually carried out by the VoIP supplier avoiding the need for the business to have its own IT team or external contractors.
    • An IP-PBX system will be installed, configured and maintained by the business’s in-house IT team, external contractors or in some cases the IP-PBX system supplier.
  • Contract flexibility: Many hosted VoIP suppliers offer pay-as-you-go pricing models. IP-PBX suppliers generally require a contract with annual terms and rates.


  • Hosted VoIP phone systems can be effective for businesses of any scale. They are particularly well suited for small businesses and SMEs with limited or no legacy telephone systems, that are looking for an easy to install, cost-effective and flexible business phone system, a range of modern business telephone features, and are looking to expand in the future. However, as the VoIP industry continues to evolve hosted VoIP systems are also becoming much better value for larger businesses.
  • On-premise IP-PBX business phone systems can be used by businesses of any size but are best suited to businesses requiring a high degree of security and control and/or that want extensive features, customisation and business system integration, at a low monthly cost. More complex IP-PBX systems may come with high upfront and maintenance costs and so tend to be more attractive to larger businesses that can benefit from the economies of scale of investing upfront in the IP-PBX hardware.

We compare on-premise PBX, Hybrid PBX and IP-PBX business phone systems in our article Guide to PBX business phone systems and look at Multi-line business phone systems in our article Guide to Multi-line business telephone systems.

Features of hosted VoIP phone systems

Hosted VoIP phone systems can offer a wide range of features as shown below:

This table shows the features of hosted VoIP phone systems.

The features available to a business will differ between hosted VoIP suppliers and will vary between the subscription packages that they offer.

Read our article Business telephone system features for detailed descriptions of each of these phone system features.

Components of hosted VoIP phone systems

Hosted VoIP phone systems comprise significantly fewer components than other PBX systems. In general, a business will require the following components for a hosted VoIP system:

This table sets out the components of hosted VoIP phone systems.
  • New installed hardware: Little or no additional on-premise hardware should be required in the case of a hosted VoIP phone system. The VoIP system will connect into the existing LAN and will be connected and configured by the VoIP supplier.
  • New cabling: VoIP systems should not require any new cabling as they connect into a business’s existing LAN.
  • Phone handsets: Hosted VoIP systems can use IP phones, analogue or digital phones converted to IP (using ATAs/DTAs) or analogue phones connected to FXS modules added to the server. Handset costs will vary according to the features provided.
  • Softphone software/VoIP apps: In hosted VoIP systems, phones are not necessary and computers and other devices can be used to receive and make telephone calls through the installation of softphone software/VoIP apps.
  • Internet connection: A business is already likely to have a business broadband internet connection with an ISP (Internet Service Provider). It is important to ensure that the internet connection has the appropriate speed, connection strength and security measures.
  • Other service providers: A business will need to sign up with a VoIP supplier which will provide all necessary technical advice, services and support as part of its VoIP service.
  • Installation & configuration: A VoIP business phone system will be installed and configured by the business’s VoIP supplier.

If you are interested in hosted VoIP phone systems then go to our article Guide to UK small business phone systems suppliers.

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