Head in the clouds: Is it right for your business?

(Editor’s note: This is the first of two parts.)

As the economy continues to rebuild, enterprises are looking to rebuild. Given the choice between growing and being left by the wayside, the choice must be growth, and growth in any modern company means updating your technology.

The Gartner technology research group recently identified its top 10 trends for 2010, and sitting on top of the list was cloud computing. Cloud computing is of such high interest to business owners because, among other things, it can increase efficiency and allow for growth without the traditional major expense of ramping up the IT department.

While cloud computing might not be for everyone, it is clearly the choice of many. One recent Gartner study showed that spending on cloud computing would represent 10 percent of the external service provider market. One form of cloud computing, Software-as-a-Service (“SaaS”), will grow from $12 billion to $20 billion from 2009 to 2012, according to a forecast by the technology research firm IDC. Many of the big players in the industry – Microsoft, Oracle and SAP- are getting into it and believe it is the future of IT. Other companies, such as SalesForce.com and NetSuite, have provided leadership in this industry over the years.

You might hear a lot of uses for the term, but cloud computing is essentially any computing done over the Internet using a browser. It usually involves shared servers that provide resources, software, and data to computers and other devices on demand.

If you are a business owner or executive who is curious about cloud computing, here’s the first reason to consider it, especially as we exit this last recession

1) Lower cost. Initially, cloud computing requires less investment because you don’t have to buy large servers and software. In addition, the traditional implementation and programming costs are lower because most cloud systems are fully integrated. It all leads to less need for borrowing during times of tight credit. A study by Pepperdine University showed that while 79 percent of businesses surveyed predicted opportunity for growth, less than 5 percent of banks plan to loosen their lending standards during the next year.

Costs are also lower in terms of ongoing total cost of ownership. Hurtwitz & Associates, in a study sponsored by cloud computing firm NetSuite, compared NetSuite’s solution to that of implementing Microsoft Dynamics GP/CRM computing over four years for three different levels of users in a company. Two smaller user groups cost about 50 percent less than the on-site system and a 200-user scenario cost 35 percent less.

Here are some of the reasons for ongoing savings. In the cloud, system updates are regularly scheduled and requires less cost than an on-premise system. Cloud computing, because it doesn’t require large clean rooms, cooling systems and dedicated T-1 lines, is more energy efficient and saves on office space. You also don’t need the associated technical staff to keep your computers running. A Gartner study showed that 63 percent of the typical IT budget is consumed by administration and support. Operating costs of the cloud provider are lower because they can be spread across all customers and included in the monthly licensing fee. Finally, because cloud computing is licensed and represents a steady expenditure of a lesser amount of cash, the cost of capital is less without the costs associated with large capital loans.

The cost argument over the cloud versus on-premise computing rages on. I counsel clients that if you operate your on-premise system for a decade or so, the overall costs can be about the same. The problem is that most on-premise systems needed to be upgraded every three or five years. So the cloud wins the cost battle on a practical level.
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