A Private Branch Exchange (PBX) is a telephone exchange that resides inside a private organization, which provides CO (central office) type features and functions. A PBX will connect CO trunk lines (E1 or T1) and provide intercommunications to a host of internal telephones within the organization. The PBX will automatically route calls between telephones within the organization without going out to the CO. Similarly, it can connect calls to destinations outside of the organization by routing the calls out onto the public telephone network (PSTN) via the CO.
The PBX became a necessary feature in the business organization due to the costs, and impractical nature of having tens, hundreds even thousands of directly connected telephone lines. Instead, by providing the business with its own miniature private telephone exchange a Telecom provider could simply provide a trunk link to the premises to connect their CO to the private branch exchange. The advantages to the organization was that internal calls could be setup automatically using a simple extension and never need to go out onto the PSTN making it easy to use and providing huge cost savings.
Convenience and cost saving were the initial drivers to having a PBX, but other advantages are increased functionality and flexibility that could be provided through a Telecom service providers CO exchange. Later Telecom providers offered a virtual PBX service called Centrex for smaller businesses that simulated many of the features and cost savings of a PBX but without the capital outlay and ongoing maintenance costs.
Today, VoIP makes virtual IP/PBXs a very accessible technology for even the smallest business. VoIP service providers will provide virtual IP/PBX on a SaaS subscription basis utilizing cloud computing. Other services such as virtual telephone systems provide call answering and redirect service for business users on the move, and these are based on the hosted-PBX model.