Roger Cheng, Wall Street Journal

For a lot of small-business owners, “cloud computing” is the latest IT buzzword to leave them scratching their heads. To demystify things, here’s a primer for companies looking to wade into cloud services for the first time.
Broadly speaking, any service or program sent over an Internet connection can be considered a cloud service. An outside vendor runs the servers and software, so the buyer doesn’t have to worry about the technical issues in-house—and can focus on its own business.

The services come in a number of forms. Many businesses are already familiar with one aspect of cloud computing: software delivered over the Web. Along with email services like Google Inc.’s Gmail, there are programs that help salespeople keep track of customer information, such as Salesforce.com Inc.’s software, and backup data-storage services from providers such as Amazon.com Inc.

Some businesses don’t just use software services, they buy computing power from vendors such as Verizon Communications Inc.—much like buying power from a utility. Let’s say a retailer expects lots of additional business during the holidays, and its in-house servers can’t handle the load of customer orders. The company might pay a vendor for the use of its servers, to shoulder part of the computing work as the need arises.

Other companies, meanwhile, might buy computing power on a regular basis. They might drop one or more in-house servers entirely—or not buy the hardware in the first place—and let a vendor run their vital programs on its machines. Once again, the buyer would pay a fee based on how much computing power it used.

How much will they cost?

Unlike traditional applications, which require hardware such as servers and IT staff for maintenance, cloud services don’t carry many upfront costs.

Consider software. Salesforce.com’s offering for businesses costs between $5 and $25 per user each month. Google offers a host of programs including email, a word processor, video and a hosted Web site for an annual fee of $50 per user. For small businesses that have more-extensive computing needs, such as drug laboratories with extensive software, cloud services could cost more than $1,000 a month.

As for buying computing power, some providers charge for a certain amount of memory and computing configuration. Terremark Worldwide Inc., for example, charges six cents an hour for one gigabyte of RAM and the equivalent of one processor.

One caveat that might bump up costs a bit: If you’re going to rely on the Internet for your services, you will need a solid connection. While some believe a business-class DSL connection is sufficient, many industry observers and consultants recommend getting a faster line, such as a T1.

How much will this save me?

The primary savings come from the lack of capital expenditure to buy a program or equipment. Servers, for instance, run between $2,000 and $6,000, and companies might need to add multiple machines as demands on their IT system grow. There are other benefits, as well. “The real cost savings doesn’t start and end at the physical server,” says Mark White, chief technology officer for consulting firm Deloitte. “You’re saving on systems administrators.”

Two years ago, HotSchedules Inc., of Austin, Texas, a privately held provider of online work-force-management software for restaurants, moved to sales-force software provided over the Internet by NetSuite Inc. President Ray Pawlikowski estimated that it would reduce costs by roughly 20% over the next five years after factoring in software, hardware, personnel and training expenses. The result was steady costs despite the company tripling its business, according to Mr. Pawlikowski. “For a small business where every penny counts, you have to look at this seriously,” he says.

Are these services reliable?

Yes. “The performance in the cloud is better than a solution found in a small or medium business,” says Steve Hilton, an analyst at U.K.-based research firm Analysys Mason Ltd. “There’s no arguing it.”

This is a big sticking point for many businesses. Many managers are reluctant to let their valuable data flow outside of their internal firewalls. And big-name vendors make more attractive targets for hackers. For instance, wide-scale denial-of-service attacks hit AT&T Inc.’s and Google’s Web sites last year.

Yet big vendors usually also have expansive IT staffs to handle problems and more resources to invest in backup measures and security. While the problems at, say, Google often get a lot of attention, they occur less frequently than glitches at a small company, analysts say.

What should I be looking out for?

While cloud computing is gaining popularity, there remains some psychological resistance. Companies need to carefully consider the ramifications of outsourcing their IT.

For instance: Even if a business is comfortable letting a third party handle its data, are its customers? Or, if the business is in the health field, do the services conform to government rules dealing with personal medical information?

What’s more, in some cases buying equipment may turn out to be cheaper than paying a monthly fee. IT managers compare the difference to leasing a car versus buying one. “Do your diligence,” says Mr. Pawlikowski. “Make sure you know what you’re getting into in terms of overall costs.”

Managers should also realize they have options for boosting computing performance even if they want to keep their IT services in-house. Consider virtualization. Within a typical IT setup, companies have servers that are dedicated to one specific task, whether that is email or customer-service software, and run at only 10% of capacity. Virtualization allows companies to run their equipment more efficiently by using that excess resource to handle multiple tasks, reducing the need for more costly servers. There are a number of companies that offer services to help make the switch to virtual machines, including VMware Inc. (One caveat, though: Older servers usually aren’t compatible with virtualization software.)

Finally, companies should know that they can kick the tires before they sign on for cloud services. Most providers, such as Salesforce.com, offer their service free on a trial basis.

Vendors have pushed cloud storage as a solution to help IT departments in a tight economy — storage needs are growing by about 30% to 40% a year, according to most estimates, while budgets are staying flat.

But just 3% of companies have implemented cloud storage, according to a recent survey by Forrester. And most companies have no plans to start.

Forrester polled 1,272 IT decision makers at small- to mid-sized businesses. When asked about their plans for cloud computing:

• 43% said they aren’t interested in cloud storage
• another 43% said they’re interested, but have no plans to adopt
• 3% plan to adopt cloud storage this year
• 5% plan to do so a year from now or later
• 3% have already implemented cloud storage, and
• 1% are expanding an existing implementation.

The biggest reason for the reluctance: security and privacy concerns, according to 51% of IT execs. Businesses don’t want important data on another company’s servers.

There are also worries that information will be lost. In 2008 and 2009, two online storage providers, The Linkup and Carbonite,  made the news when they lost data and couldn’t recover it for some customers.

Does this mean businesses will continue to shy away from cloud computing? Not necessarily, say most experts, as cloud vendors are getting better and IT’s needs are increasing.

To ensure security when putting data in the cloud, Gartner recommends businesses:

1. Evaluate the vendor’s security practices
2. Make sure your contract demands regular security checks and immediate notification of any security issues
3. Find out how the vendor protects against insider theft (for example, review employee background check policies), and
4. Know what other businesses use the same vendor — they may bring added risk to the network.

Has your organization considered moving to cloud storage? Why or why not? Let us know in the comments section below.