Conventional wisdom has it that the invention of the personal computer in the late 1970s was the biggest single change in the way business uses technology. Prepare for conventional wisdom to be turned on its head.

Cloud computing is at the start of a change curve that is set to last for decades, transforming the way businesses buy and deploy IT. At its heart is a simple principle: stop buying computers and servers, and start renting the applications needed to run all or part of your business. Cloud computing is about using the internet to access an IT service provider and paying a monthly charge per user, which might be as little as €10–€20, to use their hardware and software. Crucially for small- and medium-size enterprises (SMEs), it’s a world free of capital expenditure. All the upfront costs, time and headaches of selecting and buying a system – and then maintaining it – are removed. Most providers even offer free trials of their software. Even better, users can be up and running in days or weeks, rather than months or years. In short, it’s cheaper and quicker to get started – two elements which are even more valuable during an economic downturn. Another advantage is its easy ‘scalability’, i.e., the ability to quickly add extra users or remove them according to business needs, while the hassle of software updates is handed over to the service provider. Together, it makes for a powerful argument. A Goldman Sachs survey of SMEs in February described an “unstoppable shift” to cloud computing, finding that 58% of respondents considered renting Software as a Service (SaaS, see box on page 63) before making any procurement decision. The momentum is clearly building.

Mike Spink, a research director at Gartner, has spent 37 years as an IT manager, vendor and now a consultant. He firmly believes that the decade changes from mainframes, to minicomputers and then networked PCs could pale in comparison. “Cloud has the potential to be the most disruptive of all those waves of computing because the others have all focused around the scale of capital acquisition in order to apply IT to business problems,” says Spink. “Cloud computing has the potential to change that, and particularly for SMEs.”

Given the prerequisite of owning large data centres, the list of cloud providers is predictably led by the likes of Google, IBM, Amazon, Microsoft and national telecom operators. Equally predictably, they are even more emphatic than Spink. Adam Selipsky, vice-president of Amazon Web Services (AWS), has no doubts about what’s happening. “It’s a fundamentally different way of doing IT for the world,” he says. “There will come a day when the vast majority of companies, whether they’re tiny or Fortune 500, won’t run their own data centres because it just won’t make economic or operational sense to do so. And that’s a multi-decade transformation. If you thinkabout the switch from running your own electricity to using the national power grid, it didn’t happen in five years, it happened in 10, 20, 40 years. And I think there’s a good chance that there’s that type of fundamental transformation afoot with IT infrastructure.” After four years in business, AWS has “hundreds of thousands” of clients in over 190 countries, while customer files in its data centres rose from 18 billion in quarter one of 2008 to 52 billion in the same quarter in 2009 and to 102 billion this year.

Cloud’s main appeal is in avoiding the two most painful moments of traditional IT: choosing a system that you hope will work and then handing over a fat cheque.

“Most SMEs are used to a traditional cycle of buying software and then the traditional horror stories – a project that goes on for ever, that never delivers, is a black hole for money and doesn’t actually help the business to move on,” says Chris Lindsay, general manager for business applications at BT Business. “With cloud computing, and SaaS in particular, you usually get to use the real application that’s going to be running before you’ve handed over a penny. So you shortcut through that buying process and almost eliminate your commercial risk. When you’ve signed the cheque, you’ve got a good idea of idea of what you’re buying. And it’s not promises; it’s reality and it’s working – that makes a big difference.”

Like all those involved in cloud computing, Lindsay sees a few “hybrid” years ahead when users will mix their own IT with other people’s. “I would imagine every business is going to have some element of cloud architecture in three or four years’ time,” he says. “Is it going to be a dominant model of IT delivery in a seven- to 10-year timeframe? I’d bet on it. We’re at the start of a major transformation in the IT industry, I don’t think there’s any doubt about that.”

Wishful thinking? Not according to Stefan Ried, a senior analyst of cloud computing at Forrester Research. Ried predicts a mixed environment in a similar timeframe and some changes before then: “In two years’ time, in the SME space, nobody will invest in a back-up server. They will back up into the cloud.”

For Ried, the cloud approach appeals to bothends of the corporate scale: “Large companies want to save on their budgets, while very small ones want to avoid owning any infrastructure at all, some of whom are total cloud. They just have a reliable internet connection and local PCs: no server, no email server, no Enterprise Resource Planning [ERP] server for financial data or for order management, and no contact management.”

Like that growth in AWS’s customer files, Ried highlights the rise of cloud computing start-up www.salesforce.com, which has gone from zero to €1bn in revenue in 11 years, as proof of companies’ search for lower costs. “Before, you couldn’t have imagined that two million people would do sales force automation exactly the same way; now, it’s a reality.”

The combination of doing things more effectively and more affordably has won over some notable customers. Rentokil Initial ended up with 40 different email systems across 180 domains and a further 15,000 staff with no company email at all as a result of its growth by acquisition. Rather than build its own worldwide network of servers, licences and support staff, the company last October chose the enterprise webmail offering from Google. All of its 35,000 employees will eventually have access to it – 10,000 already do – at a cost which it rates as being 70% lower than the in-house alternative.

If big companies can make big savings, the draw for smaller ones is to make better use of limited resources. As Selipsky puts it: “For a small company, the two things of most value are investment capital and your time. Spending a few hundred thousand euros on infrastructure that is completely undifferentiated in the eyes of your customer and may or may not ever get fully utilised is not a good proposition. Especially when compared to taking whatever venture capital funding you can get and spending that on engineering talent to develop an application or spending it on sales and marketing to acquire a customer base, because those things are truly differentiating. A lot of small companies have told us that by focusing on what differentiates them, they have cut three to six months off their time to market, which is huge for an entrepreneur looking at cash burn.”

It’s an important point and one that raises a long-standing question about IT and business: which is the more important? It’s one faced a few years ago by Gerry Kerins, financial director of Rococo Chocolates, a specialist chocolatier with three stores in central London and stockists around the UK and abroad. As the firm grew, it became clear that more IT resources would be needed and the choice came down to an inhouse system or cloud-based NetSuite.

“It was a question of whether we wrapped the business around the system, or wrapped the system round the business,” Kerins says. “We wanted flexibility and scalability, rather than the old, fixed-infrastructure route, with hardware and bricks and mortar, which was inflexible and capital intensive for a small business.” Kerins eventually opted for NetSuite and now cannot imagine doing business differently. “The economics stacked up well, with a licence fee that I felt was quite modest compared to the commitments for equipment, office space, wiring and the rest. Not having all that as an issue when you’re focusing on growing the business is also quite liberating. When it comes to IT infrastructure, I feel we’ve been able to sail round that iceberg.”

Hardware vendors are not the only ones, though, who could be put to the test by cloud computing. On-demand is also a challenge to traditional software vendors, whose on-premise customers could be tempted to move their lucrative business into the cloud. The response, from the likes of Oracle and SAP, has been to go with the flow. Oracle, whose founder and CEO Larry Ellison is also majority owner of cloud start-up NetSuite, offers a range of cloud versions of its on-premise software and has a hosting tie-up with AWS, while SAP is rolling out an enhanced version of its cloud-based Business ByDesign in July, targeting the ERP market among 100- to 500-employee companies.

Sven Denecken, a SAP vice-president for on-demand business, says: “We are fully embracing on-demand development; we understand this is a paradigm shift at our customers. For a long time to come, customers will still buy both on-premise and on-demand. But I think the market has already voted, which is why our strategy is two-fold.”

Denecken says SAP was well aware of the potential threat to its traditional, on-premise business model: “We discussed that danger internally.” But he adds: “We see growth opportunities among new customers in the SME market and at large customers where Line of Business makes the investment decision. We see the opportunity to extend our footprint as outweighing the risk of someone shifting from an on-premise to an on-demand world.”

Suppliers are not alone, though, in facing a degree of risk from the rise of cloud computing. Data security for users has long been flagged as an issue and, inevitably, there is a loss of direct control over where information is processed and stored. Gartner’s Spink recommends that customers check the security level being offered and whether providers abide by data protection laws in the countries where their data is stored. Though security clearly has to be investigated, it’s also important to keep a sense of perspective. How many people already use a typical cloud application, such as internet banking, without a second thought? Also, if sensitive data is kept in the cloud, at least it can’t be left on a train or in the back of a taxi. More importantly, the investment in security that can be leveraged by the likes of IBM, Google and Microsoft will be an order of magnitude greater than that available to any individual user.

Faith may indeed be one part of the buying-in process for any business moving to cloud computing. But there is another: Can you really afford not to?

Cloud Categories

Despite its nebulous name, cloud computing falls into three, fairly specific levels of service. Because of the way it’s provided, cloud is often called on-demand, computing as distinct from on-premise systems. Providers use a global network of data centres, which, by providing services to thousands of customers, can undercut in-house IT costs by more efficient use of processing, storage and staff.

1 The most basic type of cloud service is Infrastructure as a Service (IaaS), which allows firms to run their own software on someone else’s hardware, or to simply rent storage space. Typically, it’s a cheaper way of dealing with predictable spikes in processing demand and it has the added benefit to a small business that you only pay for what you use.

2 The next level up is for the provider to offer a full range of software development tools which allow programmers to write applications from scratch or to customise others without the cost of buying or managing the underlying hardware or software. Th is cloud service is called Platform as a Service (PaaS) and, like IaaS, the company only pays for what it uses.

3 The top level, Software as a Service (SaaS), is where the provider offers a ready-to-use suite of application software. Rental is usually per month, per user, and trials are normally free. Popular applications are in sales and marketing, web conferencing and accounting, provided by the likes of Salesforce, NetSuite and cloud versions of packages from major software vendors.