Modern phone systems do more than connect callers. They can increase productivity, cut costs, and improve service.

Used to be if you needed a phone, you bought the standard desktop set from the local phone company representative and had him hook it up. But in the past decade, telephones and telephone service have been revolutionized, thanks to miniaturized electronics and a deregulated telecommunications industry. Today's prospective business buyer faces a bewildering variety of options in building a phone system.

While it might be simpler just to buy a basic system, if you're smart the money you spend can prove a prudent investment rather than just a routine expense. A well-chosen phone system can cut caller waiting time, ensuring fewer hang ups and more sales. It can prevent employees from making unauthorized long-distance calls and automatically perform departmental or client billing, saving money. Often new systems are easy to reconfigure, so as your company grows you won't need to pay a service person to change phone locations. And advanced features can improve productivity by making office communications more efficient.

The cost of modern office phone systems can quickly get out of hand, however, so some study now will save money later. Prices range from $200 to more than $600 per station (a working phone); that includes the phones themselves, wiring for the office, the features you elect for your system, the switch box that connects the system to the phone company, and installation.

Prices are coming down as competition among vendors intensifies, and knowing the sales climate can help you cut the best deal. "For the past two years manufacturers have been embroiled in a price war," says Robert Rosenberg, president of Insight Research Corp., a telecommunications market research firm in Livingston, N.J. "As a consequence, traditional price sheets have been thrown out the window."

Phone System Basics
All office phone systems do the same thing -- allow people at a company to share a group of telephone lines for incoming and outgoing calls. But even the smallest systems now offer a number of standard features, such as the ability to put a caller on hold or to transfer a call from one phone to another.

But before getting wrapped up in features, you'll have to answer a few basic questions. How many people will be on the phone at once? How much can you spend? And how fast do you expect your company to grow? Experts recommend you install at least 25% excess capacity, since a phone system should last five years or more.

Your answers will place you in one of three classes of systems: key systems, hybrids, and private branch exchanges (PBXs) or Centrex (Centrex is a service provided by the phone company that does the same thing as a PBX). Key systems are the smallest; as you move up, hybrids and PBXs will handle more people and will cost more per station. Once you understand the basic capabilities of these systems, you can then decide which features you want.

Key systems These usually can handle up to 60 stations but are recommended for a maximum of only 40. Prices begin at about $200 per station. Most key systems offer many of the features a small business would want but may not provide them all.

The capacity of any phone system is measured in terms of the number of telephone lines coming into your office (outside lines), and the number of internal wires that run to phone stations (extensions). A call comes in over a certain line and is routed to a particular extension. If that extension is busy, the call is moved to another line or to a receptionist.

The capacity is defined by both numbers; for example, a 6-by-18 system has 6 outside lines and 18 extensions. For that system, a maximum of 6 people could be on outside calls, because there are only 6 lines. (And if 6 people are using the phone, a caller will get a busy signal.) While these numbers may sound small, they may be fine for a company with, say, 11 people, only 3 of whom are usually on the phone.

The wires from outside lines and extensions all connect in a small box on your premises called a key service unit (KSU). In a 6-by-18 system, the phone on each employee's desk would have 6 lighted buttons, corresponding to the 6 lines. If the button for line 1 is lit, it is in use. To get an open line for a call, a person would press an unlit button, perhaps line 2. With a key system, a caller manually selects a line.

Because of this requirement, experts recommend you use a key system for no more than 20 outside lines. A phone with more than 20 flashing buttons becomes a bit ridiculous to operate, not to mention expensive to buy.

For small offices, phone companies offer a KSU-less system; the minor electronics needed are in the phones themselves. A KSU-less system may not offer as many features, but it is the least expensive system and you can often install it yourself. KSU-less systems are practical for a maximum of only 10 stations.

Note that with all phone systems, vendors suggest you dedicate an incoming line to a fax machine or modem. That way, if your system crashes, you can still use them. Realize, though, that on a small system with, say, only six lines, a fax and a modem will reduce the number of lines to four, limiting your ability to make or receive calls. One option would be to lease from the phone company an additional line for each device.

Hybrids Hybrid systems are souped-up key systems. They can handle a maximum of 100 stations. Prices start at about $300 per station. The advantage is that hybrids can automatically find an open line when an employee picks up a phone, eliminating the need to select a line. That can save money; simple phones without lighted buttons are cheaper, and if you're buying 20, the savings can offset the higher system cost.

As your company grows, hybrids can be expanded by adding a circuit board to the KSU, whereas most key systems cannot. And since hybrids are more sophisticated electronically, they offer almost any special feature a small or midsize business would want. Also, the internal lines of a key system may not work properly if they get too long; if you need to space out a few phones across a manufacturing floor, get a hybrid.

PBXs These systems are larger and more sophisticated than key systems and hybrids, and their cost makes little sense unless you've got more than 60 or 70 people who will be on the phone. The maximum number of stations is unlimited -- the more you need, the more you pay. Prices begin at around $500 per station.

The configuration of a PBX is completely programmable. Therefore, a PBX's capacity is not measured by lines and extensions but in terms of ports, the total number of wires it can connect. A hybrid measuring 32-by-64, for example, could have a maximum of 32 lines and 64 extensions; an equivalent PBX would have 96 ports (32 plus 64), which could consist of any combination of lines and extensions. PBXs can support the most complex special features.

The expense of a PBX makes sense only for large companies or for businesses that depend heavily on telecommunications.

Centrex Centrex is a service leased from your local phone company that provides the functions of a PBX (you'll still have to purchase phones). Rates vary considerably from region to region, but Centrex costs are comparable with those of PBXs, from $400 to $800 a station. The real trade-off is financial: Should you buy equipment or lease a service?

Centrex does offer one physical advantage; because it is run from the phone company, it can link any number of offices you may have spread around town. Though it can be done, it is difficult to link disparate locations using a PBX. On the other hand, if you are at one location and want to reconfigure your system as you add employees, you'll have to pay the phone company to do it. Still, like a PBX system, Centrex will likely be too costly for the vast majority of small businesses.

Phones and wiring

Common to all these systems are phones and wiring. A vendor will present you with a choice of phones and will probably tell you that you should rewire the building. A few notes on each.

The actual phone on a person's desk (the station set, in industry lingo) should be easy to use, durable, and aesthetic, since it is what your employees will have to deal with every time they make or take a call. Phones vary wildly, from a gray box with a keypad and traditional handset to an all-digital console. Prices for the former start as low as $30; stripped-down "feature phones" begin at about $60, but quickly rise to $200 if they come with a liquid-crystal display that shows the number you're calling and programmable keys that automatically call frequently dialed numbers and such. Station sets account for a hefty chunk of the final system price -- from 25% to 60% -- and should be chosen carefully.

Consider simple digital phones if you are buying more than a basic key system. They will be more versatile as you add features. Also, phone companies are starting to offer more complex services, many of which require digital phones.

Wiring can also make up a major portion of your purchase, from 20% to 50%. Naturally phone companies may suggest rewiring, because they can make a bundle on it; the wire itself is cheap, but the labor to install it isn't. If there is existing phone wire in your building that is up to code, it can probably handle a new key system or hybrid.

If you decide you have to rewire because you are changing the layout of the office or expect to add people, then go all the way. Run extra wires to handle extensions that will be needed as your company grows. Put in extra phone jacks, so if you renovate later you won't have to rewire. And if you have any intention of buying computers, run high-grade wiring that can accommodate data communications alongside the phone wires. Once you've opened up the walls and are paying people to crawl through basements and ceilings, it is most cost-effective to do it all at once.


Many features that a business would want come standard even on basic key systems. However, the set of features offered may differ slightly from one vendor to the next, so you have to know which ones you need. Some advanced features do cost extra.

As a result of competition, manufacturers have added more and more features. The utility of many of these is questionable. The features explained below should be more than adequate for most businesses. If your vendor offers others for no additional charge, fine, but it is unlikely you would want to pay extra for them.

Hold, Transfer These are basic necessities found on every system. They allow you to put a caller on hold or transfer the call to another extension.

Conferencing This feature allows three or more people from different extensions to speak over the same phone line. While it's universal now, the clarity of voices on some systems degrades as more people get on the line, so try it out.

Intercom, Speakerphone An intercom allows you to talk to another person in the office without picking up the phone, by speaking toward a microphone built in to the phone. With speakerphone, you can hear and talk to a caller without holding the handset, freeing you up to use your hands or walk around the room. For either, get a demonstration to make sure the voice coming over the speaker is clear.

While virtually any system can accommodate intercoms and speakerphones, you will have to buy phones with mikes and speakers. These will add $20 to $60 to each set.

Toll restriction This circuitry prohibits certain outgoing calls. Systems differ in the degree to which an owner can program them. Some simply block all long-distance calls; others block calls to specific area codes, such as 900 numbers, and even local exchanges like 976 numbers on which you can hear jokes or get sports scores. This feature can cut phone charges that are clearly not business related.

Station Message Detailed Recording (SMDR) This software tracks outgoing calls. It is available standard on some large key systems and many hybrids and PBXs. For each call, SMDR will list the number called, the duration of the call, the extension the call was made from, and the date and time of the call. Company managers report that long-distance phone bills drop 20% after it is announced that SMDR is on the premises, because employees stop making personal long-distance calls.

SMDR can be used in less surreptitious ways, too. Because calls are logged by extension, you can automatically divide phone bills by department. And most systems allow you to attach accounting codes to specified phone numbers, so calls to particular vendors can be grouped and a bill generated directly.

SMDR can work with a personal computer, which stores the data. If not a standard feature, SMDR will cost about $1,000. If you don't have a computer, you can buy a standalone SMDR system for $2,000. In either case, you'll need a printer.

Least-cost routing This software automatically selects the cheapest long-distance carrier for each call, based on a database of rate schedules. Route selection is usually standard on PBXs and is usually not available on key and hybrid systems. It makes no sense unless you make many long-distance calls, since maintaining the database will entail time and effort.

Voice mail You've heard it: "Hi. This is Tom Terrific. I'm not at my desk. If you want to leave a message, press 1, then wait for the beep. If you want to speak to an operator, press 0."

Many people are passionate about voice mail, in essence a company-wide answering machine that automatically directs messages to each employee. Phone companies say it will save any business thousands of dollars a year by improving efficiency. Critics say it alienates customers.

Many companies buy voice mail as a service from the phone company or a third party and pay a monthly charge, which usually starts at about $7 per month per phone station. Alternatively, you can buy a standalone system; prices vary widely, but divide a price by the number of employees and compare it with the $7 figure. You may end up paying more to buy a system, but you'll be able to reprogram it without involving the phone company.

Automatic attendant This feature directs calls to different employees and provides information without anyone answering a phone. Callers are greeted with a recorded message and are instructed to do various things, such as dial an extension or enter an account number to access information. This reduces employee phone time. A limited system may come standard on larger hybrids and many PBXs. If not offered, it will cost anywhere from $1,000 to $5,000.

Automatic call distribution This feature pays only for companies handling lots of calls, like mail-order firms. Incoming calls are distributed among pools of operators; if all are busy, the calls are stacked and sent to operators as they become free. A system can cost $10,000 to $20,000 but could be worth it for a telemarketing firm with a few dozen people, because efficiency gains might allow you to get away with one less employee.

Choosing a vendor

Choosing the right vendor is as critical as choosing a system. Buying an average system from an excellent vendor is better than buying the best system from a poor vendor.

You've got two choices of suppliers: the phone company or a dealer. With either, do more than compare initial price; take into account which system is less expensive over its useful life, which should be at least five years. This is driven by the terms of the service contract and the reliability of the product and its maker.

Standard service contracts range from $5 to $7 per month per station. On-site service the same day that you call is an industry standard and should be part of the service contract at no extra charge. Also factor in room for expansion; some vendors charge much more than others do to reconfigure systems or add phone lines.

The reliability of the system is reflected in the reputation of the vendor. "We think some significant bias toward larger companies is warranted," says Bill Schwartz, president of Xtend Communications, a consulting firm in New York City. "There is nothing as useless as a key system from a manufacturer that has closed its doors."

There are several ways to test the quality of potential suppliers. The obvious one is to get references from end-users. You can also separate the good supplier from the mediocre by asking about certain attributes. A good vendor, for example, will offer advice during the design of your system if you are unsure of exactly how many phones or lines you may need. Such a vendor will configure the initial system after it is installed (program extensions, fine-tune features, and so forth) and train your employees in using the system, at no extra charge.

Buyers should also "look for a company that will talk to them about how their business works and how equipment can help them solve business problems," says Keith McDonald, director of marketing at Comdial, a manufacturer in Charlottesville, Va. If the system is not tailored and programmed to your special needs, or if your employees aren't trained in its individual functions, many of its best attributes will go unused.

Once you've narrowed your choice, negotiate. You should be able to get a discount off the price you are quoted. You can probably get other concessions, too, such as an extended warranty (typically, warranties last one year) and four-hour service instead of same-day service.

If a prospective vendor balks at such demands, tell him you'll just pick up the phone and call another.

Jeffrey Ubois is a freelance writer in Arlington, Va.


Allow for at least 25% excess capacity -- phones and phone lines -- when installing a new system, since it should last at least five years. If you plan on growing faster, purchase even more capacity up front.

A key or hybrid system should provide most of the features a business would want, now and in the next few years. A PBX or Centrex system is simply too costly unless you are doing telemarketing or mail-order.

Vendors will probably say you should rewire your building. But unless it is old, the existing wiring is usually sufficient. If you do run new wire, string computer cables at the same time to save money.


A basic feature of the 1990s. If you run into a problem when you're on a call, you can bring in another person, or several, to help.

Toll restriction

If too many employees are calling dial-a joke, or Las Vegas for the latest football odds, you can block their calls with toll restriction.


You can cut employees' personal long-distance calls with station message detailed recording, which lists every number called, who called it, and when. SMDR will also sort phone bills by department, vendor, or any other group.

Speakerphone, Intercom

A speakerphone will free up both your hands, so you can do work when someone's boring you on the phone. An intercom lets you reach another employee without tying up your phone.

Automatic attendants

This system greets callers with a recorded message, and instructs them to enter various numbers from their phone to get information or to be connected to different departments. That cuts the time your people spend on the phone.

Reception, Voicemail

Most companies will route calls through a receptionist or operator. A voice-mail system will lighten the load, taking messages automatically and routing them to employees.

Busy lights

When lit, these indicate that someone is using a phone line.


This box, mounted somewhere within your company, is the brains of your phone system. It switches all incoming and outgoing calls to the right phones and lines.

Hold, Transfer

Basic necessities. No phone should be without them.

Central office

The "phone company." Outside calls, regardless of the system you use, are routed through the central office en route to their destination.

Feature phone

More than a simple push-button set, it offers keys that can be programmed with frequently dialed numbers and displays the phone numbers called and duration of calls, so you don't run up your bill.


Capacity The number of employees and outside phone lines determines the class of system you'll need. Key systems are recommended for up to 40 phones, but only 20 outside lines. They may not be reliable over large physical areas, such as a factory floor. Hybrid systems are good for 70 to 100 phones and as many lines. PBXs have unlimited capacity, but are overkill unless you're doing heavy telemarketing or mail-order. The same goes for Centrex; it is useful, however, for linking distant buildings, such as retail outlets.

Phones Basic push-button phones are sufficient for most businesses. If you want programmable keys that store frequently called numbers and such, you'll need a "feature phone."

Hold, transfer; conferencing All are basic necessities in the 1990s; be sure to get them.

Intercom, speakerphone If employees talk to one another often, an intercom frees up internal phone lines. If they need their hands free while on a call, get a speakerphone. For both, you'll need phones that have a speaker and microphone.

SMDR If you divide phone bills by department or vendor, SMDR will do it for you automatically. If not, consider SMDR only if employees make a lot of personal calls; because it lists the maker of each call, its presence will curtail such activity.

Least-cost routing Automatically chooses the cheapest long-distance carrier for a call. Worth the cost only if many employees call extensively. Usually not available on key or hybrid systems.

Voice mail If employees are frequently out of the office, this will simplify message taking. If not, it's an unnecessary expense.

Automatic attendant If you get many calls, this will automatically route them to specific extensions, reducing the burden on a receptionist or perhaps eliminating the need for more than one. May not be available on key systems.

Automatic call distribution Queues and distributes calls to pools of operators. Useful only for heavy phone answering, as done in telemarketing or mail-order firms.