How Does A Business Phone System Work?

When you are starting a business, you have to communicate with your customers over phone calls. However, from an array of business phone systems available, which one is ideal for you? and how those business phone systems works? You maybe lack of ideas… This article will show you how to select the best one for your business suiting its needs.

Fundamentally, there are four different types of business phone systems that you can use to communicate with your customers. Here is a list of them:

I will not cover all types of business phone systems as the list is quite long. But I’ll be illustrating the pros and cons of each type of phone system listed above, and how much you may be spending on each. Furthermore, I will also cover how every single one works. So if you are eager to pick out the perfect phone system for your business and assess the various types, read along to find out!

Legacy PBX Phone system (maybe from the 1980s – 2000s)

Legacy PBX phone systems are the earliest form of phone systems made available to people. From then on, communication technology has taken huge leaps forward but this is where it all started. They had been in use for a very long time too – approximately 20 years from 1980 to 2000. When industries and offices started to flourish, companies needed more employees to run and thus more efficient means of communication.

With multiple people in the workforce, companies had to find an efficient way to communicate both internally and externally. That is when legacy PBX or the earliest form of Private Branch Exchange phone systems came into existence.

How it works

In technical terms, the basic function of a PBX phone system is to be a medium that connects a business’s internal and external communication network. It does this by routing calls to multiple extensions or handsets in the office. PBX phone systems also connect Public Switched Telephone Network (PSTN), SIP trunks and VoIP providers.

A PBX system requires both hardware and software and consists of a telephone trunk, a computer with memory, a network of lines and a console or switchboard. Together, integrating all these pieces, an efficient communication system came into being. Legacy PBX is landline based and the functionality relies on a physical hardware box. This is most suitable for offices that have more than fifty employees.


  • Affordable: Industrial revolution was a huge contributor to the rise of efficient means of communication. Businesses looked for ways to reduce costs in any way possible and PBX phone systems did just that. With the elimination of major hardware and components to run, these have adequately reduced the call and operational costs. Furthermore, it provides free internal communication within the company.
  • Features: Many features are available with legacy PBX phone systems. These include call transfers to multiple lines in the office, multiple voicemail boxes, ACD queues, ring groups, call waiting, call forwarding, call recording and call hold. Although some of these features are very common now, back in the time these were noteworthy.
  • Handling: PBX phone systems gave scope to the easy handling of calls. If operated manually, a receptionist would typically receive the call and then transfer it to the requested person or department. However, options such as Automated Attendant or Interactive Voice Response (IVR) made the use of manual interaction redundant. With these features, callers are given an extension menu from where they can select themselves where to transfer the call.  


  • Downtime: The scariest drawback of legacy PBX phone system is the downtime. It is often known as the single point of failure. If one part fails, then the entire communication infrastructure is at risk of failure. What is worse is that you have to wait for the vendor and technician to come and fix the issue. This will halt the entire procedure.
  • Diminishing value: A rather obvious disadvantage is that new technology is replacing legacy PBX phone systems. They no longer have value to invest and people are moving on to a more better and efficient means of communication infrastructure.

Although it has certain benefits, newer systems have outdone these and fended off the drawbacks too. The further technology evolves, better options are available to people and businesses.

IP Based business phone system (1995s – present)

With gradual improvement in technology came new versions of phone systems. The improvements made to legacy PBX phone systems lead to the onset of IP based business phone systems. IP stands for “internet protocol”. Essentially, this uses the internet to create an effective and efficient communication system.

Although introduced during the period of 1995, they are still vastly in use even today. Some common manufacturers of IP based business phone systems that provide the best services in the market are Cisco, Avaya, and Grandstream.

How it works

IP PBX makes use of VoIP technology and IP networks such as the internet to make calls. IP technology uses little packets of digitized information and sends them over the internet. One major difference between this and legacy PBX systems is that instead of a switchboard IP PBX uses a central server.

The process of data transmission in IP based phone systems is known as packet switching or “packetization”. First, analog signal is converted into digital signal using an ATA (Analog Telephone Adapter) or IP phone. Then, data is converted to individual data packets, sent over the internet and converted back to analog signals.

This is done using methods of encoding and encoding. After that, the computer records the audio and compresses them into small samples, which are collected in large groups and placed into data packets. Finally, these are transmitted over the communication network. 

IP telephone systems mainly consist of a VoIP private branch exchange (an IP PBX) and desktop VoIP phones (IP Phones) that connect to a VoIP service provider via a Local Area Network (LAN). With this simple hardware, any business is ready to put up a good communication infrastructure.


  • Wireless: With a legacy PBX system, each desk in the company workplace would have wires attached to it for every individual telephone line. This makes the workplace look unorganized and cluttered no matter how neat or clean one maintained it. Nevertheless, with IP based business phone systems, there is practically no need for such a mess! As the system functions over the internet, wires are not required at all.
  • Cheaper: If the introduction of legacy PBX systems made business communication cheaper, then IP PBX systems augmented it ten folds. With an IP PBX system, you can not only make internal calls freely, but you can also make external and international calls for almost free of cost. Other than the miscellaneous costs that are associated with all regular calls, business calls are technically free!
  • Multiple calls: As mentioned earlier, in a legacy PBX system, each desk required its own desk phone and number. Such is not the case with IP PBX system. With IP telephony, you can make multiple calls at once, each with a different user. Additional lines, equipment or wires are not required for additional phone lines.


  • Switching Costs: The only notable drawback of an IP based business phone system is the switching costs involved. These include buying hardware, installation and later require maintenance cost. Furthermore, moving is becoming a headache. However, albeit all these costs involved initially, it all pays off later because IP based business phone systems are technically free.
  • Dependency: This is another major setback when it comes to IP based business phone systems. As this phone system is reliant on the internet, the entire process is heavily dependent on your Internet Service Provider (ISP). Therefore, if anything goes wrong with your ISP, you will also face bad aftermath.

This might even put a temporary halt to the entire communication system! It is a good idea to stay safe and double check beforehand and maintain a good relationship with your service provider at all times.

Hosted business phone system (2010 – present)

After the introduction of IP telephony, businesses were satisfied. However, as they say, there is always room for improvement. People wanted to cut down costs even further and be more efficient. With this in mind, an entire service business began to pop up. Independent companies started to provide communication services to other businesses who needed them. In this case, service is the key differentiator. Telecommunication businesses started mushrooming, they were trying to provide and set up business communication infrastructure for other companies who needed them, big and small alike.

How it works

The terminology “hosted” business phone system is self-explanatory. This indicates that a service company will host this for you. An independent company will deliver this service to a business organization, while the business can still use features such as voicemail, faxing, automated greetings, touchtone menus, conference calling, call auditing and calling logs, and more.

A hosted phone system is usually run by the internet and the base is not set in the office premises but rather at a data center. The functionality of a hosted phone system is very simple. Your phone system is located in a server data center off-site. You subscribe to the provider and get access to an efficient communication system for a monthly fee.

Then all you have to do in your premise is get desk phones and plug them in, and you are good to start operating. The system is designed in such a way that it will automatically start functioning from off-site when connected.   


  • Delegated responsibility: Both big and small firms can benefit from this one. For big firms, it can be being too busy as to not be able to concentrate on maintaining a communication infrastructure internally. As for small firms, being inexperienced enough not to be able to handle their own communication system, they could definitely benefit from this. Either way, a sole company takes on the responsibility and thus, the task is outsourced and delegated elsewhere. This also brings about technical advice and expert handling and management of the communication system.
  • More concentration on internal tasks: With an expert team that handles the business communication network, you can now concentrate on other core areas of your organization. For instance, you can put more focus on its customers, research and development department, improve circulation of finances, operational tasks and training employees. The supplier can take care of the entire communication system including hardware, software, training, network, call routing or switching, maintenance and repair.
  • Costs: This is one of the biggest reasons why businesses opt for a hosted PBX system. Cost cutting is the main benefit for all sort of PBX phone systems. However, despite that, most PBX phone systems still require some sort of installation, maintenance and training costs.

This is the case with own operations, but this is not the case for hosted PBX! With hosted business phone systems, you only have to pay a monthly subscription fee and that is it! Your company may or may not provide hardware such as desk phones, but either way, the costs are substantially cut down.


  • Security concerns: Although hosted PBX phone systems are easy to manage and save up on many costs, another company essentially hosts them. Thus, it is normal for security concerns to arise in a subscriber’s mind. Is the line safe? Is my phone line being tapped or hacked? Can my service provider access my calls and data? This is a matter of concern and so it is very important that you choose a reliable and trustworthy source of provision.
  • Dependability: In terms of drawbacks, hosted PBX system has one similarity with cloud-based PBX systems, which is dependability. It is notable that the hosting company does much of the work to keep your communication system running, but you should also consider the fact that you are heavily dependent on them in order to function. If they have a setback, it will adversely affect you and your business as well.

Cloud-based business phone system (2015 – present)

This is the latest installation in the PBX phone system. With internet based PBX and vendors already in the scene, users wanted something more and better. That is when cloud-based business phone systems came into play. Cloud-based business phone system consists of two parts, it is one part of cloud computing and one part PBX. This is similar to IP telephony and is a phone system based over the internet. Often times it is also referred to as VoIP or Voice over Internet Protocol.   

How it works

You can consider cloud-based PBX phone systems as a hybrid of IP based and hosted business phone systems. Here, data is stored in the cloud, or on the internet. You have technically zero hardware costs on premises. All you have to do is contact a reliable service provider and subscribe for a monthly fee.

You can use this service with mobile phones, VoIP phones, landlines or softphones. Think of this as calling someone on skype. You are using your smartphone or monitor to communicate with someone on the other side with the same medium of communication, using the internet.


  • Scalability: Cloud-based business phone systems provide scope for scalability. Often, when you subscribe for a service, you are not sure of the length of its use and if you will ever need to change it. As your business grows, you may consider adding more telephone lines and this is something you should plan beforehand. With cloud-based business phone systems, you have the added advantage of scalability. This means it offers the option of growing as your business grows. With more clients, you will require more lines. So when required, you can add more lines to your business phone system easily and free of cost.  
  • Versatility: this sort of phone system is very versatile. This means that you can use it with a variety of devices. Such as, cloud-based business phone systems can be used with anything that has an internet connection. This includes your smartphone, your laptop, IP phones or handsets, and softphones. Softphones are not literal phones in its truest sense, but it is an application installed in a device. This application then allows you to use that particular device as a cloud-based phone system. For a clearer understanding, refer back to the example of Skype; it is an application after all. 
  • Portability: With the elimination of wires and even desk phones, cloud-based business phone systems offer great scope for portability among employees. In this way, it will be easy for remote employees to work and the firm will be able to spread out its workers easily. With the communication system functioning over the cloud, workers can also work from home using a cloud-enabled device. Enabling any device to function this way requires only a few easy steps.


  • Implementing change: Despite the fact that switching to a cloud-based PBX system seems to solve many problems, first, you have to switch successfully in order to reach there. Initially, there will be some training and other costs involved. You may have to get additional hardware, phones for your employees, or design an application or software that will enable your internal workforce to communicate seamlessly. Implementing the change may be tough on employees especially when they have been accustomed to a certain type of communication for a long time. This will also bring about training costs.
  • External disruptions: As cloud-based business phone systems are based on the internet entirely for its functionality, any disruption in the internet line will cause disruptions in your communication services too. This can be external conditions such as bad weather or problems in the main line. It can also be a fault of your provider. Either way, you will have to face the dire consequences if you do not have a proper backup. The brand image of your business is highly volatile and reliant on this in this situation.    

Frequency Asked Questions.

Q: How does an IP phone system work?

The first step in IP telephony is the conversion of an analog signal into a digital signal. This is done by an ATA (Analog Telephone Adapter) or IP phone. Then, it is converted to data packets and sent over the internet to a location close to the destination. After that, the data is converted back to an analog signal for the remaining distance, which is done over a traditional circuit switch (PSTN).

However, if the transmission is from VoIP to VoIP, this is not necessary. Once the computer records the audio and compresses them into small samples, they are collected in large groups and placed into data packets. These are transmitted over the communication network, which is also known as the IP network. The whole process is known as packetization.

Q: How to design a prompted IVR?

Interactive Voice Response (IVR) is a useful telephony menu system. This allows for identification, segmentation, and routing of callers to the most appropriate member of your team. IVR also makes things easier for the customer. By creating personalized greetings, your customers will have a good remark regarding the company.

Furthermore, with the correct information, customers can solve their own problems without having to consult an agent. you can check our another article regarding how to design a good IVR menu for your office. Creating an IVR is easy by following these steps:

  • First, log into your GenVoice account as an administrator and select the “Admin” section.
  • Next, click on the “Numbers” tab and click the phone number for which you would like to configure an IVR.
  • Then select the “IVR” tab.
  • Finally, you can choose an already existing message from the drop-down menu or create a new message by clicking the “Add New Message” link next to “IVR Message“.

Q: How long will my business phone system last?

This depends on many factors some of which are your plans for your business and the progress of telecom infrastructure. If you want scalability, then you should choose your PBX system accordingly. However, as mentioned earlier, this sector has been taking leaps and bounds so naturally, you will have to upgrade sooner or later.