Hosted IP Telephony: How to calculate the total cost of ownership (TCO) of a hosted IP telephony solution compared to a traditional PBX system?

When organizations are considering acquiring a new business telephony solution, they need to calculate the total cost of ownership (TCO) of a traditional premise-based PBX system in comparison to a hosted IP solution. What factor should be taken under account?

At first glance, one would think that traditional premise-based phone systems, or PBX, are clearly less expensive. This is the case only if you only consider the initial purchase cost of a PBX and compare it to recurring monthly fees of hosted IP telephony solutions.

However, as previously explained, there exists a good number of hidden costs when acquiring premise-based PBX systems. For this exact reason, organizations must calculate their true total cost of ownership (TCO).

Beyond the initial purchase PBX cost, one must consider a number of factors including the cost of operations, maintenance contracts, software maintenance services and upgrade costs.

Cost of operations

Should organizations choose to own their premise-based PBX telephony systems, they must then consider devoting more time and resources to its weekly operations. This role is often pushed onto information technology (IT) personnel. Studies have shown that anywhere between 15% and 20% of efforts and time must be allocated to the tasks of running a premise-based PBX system. As for hosted IP telephony solutions from IP4B, this effort ranges from 5% to barely nothing.

Apart from the real dollar amount paid-for weekly operations, one must take into account the time that the IT personnel will not be able to allot to the strategic IT technologies it must manage for their organization.

Maintenance contracts

It is a fact that hosted IP telephony solutions are mostly priced on a recurring monthly basis. This is not to say that premise-based solutions do not have associated recurring costs as well. For example, it is a common practice in the industry for your telephony company, also known as your interconnect company, to charge a yearly maintenance contract. This represents anything between 5% and 15% of the initial purchase cost.

Hosted IP telephony solutions from IP4B have no maintenance costs.

Software maintenance services

Somewhat related to maintenance costs, PBX manufacturers will charge you additional annual fees known as software warranties, or software maintenance services. These annual fees entitle your organization to receive support services from the manufacturer and grant you to access software upgrades.

Avaya calls these “software subscriptions”, Mitel speaks of “software assurance” while Cisco sells “SMARTnet”. Year over year, these software maintenance services will cost 5% to 20% of the original purchase cost.

Hosted IP telephony solutions from IP4B have no such yearly fees.

Upgrade costs

Although software maintenance services include access to free software upgrades, they do not include the required professional services from your telephony company to complete the work. Some software upgrades may be completed within one hour, others may stretch to two, three hours or more. Beyond the labor cost, one must consider the impact of the downtime on your organization. This is the opportunity cost. It is possible to perform upgrades off hours, however, at a higher hourly rate from your telephony company.

Upgrades on the hosted IP telephony solution from IP4B are done in the background without impacting your telephony operations. They are, of course, free of charge.

Summary (and how to calculate the TCO for your hosted IP telephony solution)

We have listed here some points to consider in order to calculate a total cost of ownership (TCO) including the cost of operations, maintenance contracts, software maintenance services and upgrade costs.

Should you be interested in calculating your true total cost of ownership, please write to us at and we will email you our complimentary TCO Excel tool.