04.01.2011 | Kristy J. O'Hara

If someone told you that you could drop your operating costs by 40 percent, would you listen? If that same person said you could you save between $70 and $150 per user per year in energy savings alone if you tried something new, would you try it?

A lot of companies are listening, and those same businesses are trying something new — cloud computing and software as a service (SaaS) — and reaping the many benefits, which start with the aforementioned cost savings.

“If you don’t have the money to invest in IT, in hardware, in software, in upgrades or you don’t have the expertise, then the cloud offerings are compelling,” says Philip Lieberman, founder, president and CEO of Lieberman Software Corp., which provides solutions used by large national defense and large corporations.

Jeff McNaught, chief marketing officer at Wyse Technology says that 80 percent of an IT budget, in many cases, is spent just to keep the lights on.

“It’s about saving money, and there’s a tremendous amount of money to be saved,” McNaught says.

McNaught’s company builds a device that replaces the PC, uses one-tenth the energy of a PC and connects you to the cloud. The device doesn’t make a lot of noise, but more importantly, it doesn’t cost a lot of money.

“When you look at cloud computing, operating expenses can drop by about 40 percent a year, and that’s real money,” McNaught says. “These devices use one-tenth of the energy of the PCs. Now you’re really talking about saving real money.”

How cloud works

So the idea of saving that much money has caught your attention, and now you may be asking, “What exactly is this whole cloud computing thing anyway?”

“The idea behind it is other companies would be able to achieve economies of scale by providing the services and capabilities that you would normally host in your own organization within your infrastructure,” Lieberman says. … “You’re outsourcing to another company some of the more fundamental things that may be better off done externally.”

Dave Hitz is the co-founder and executive vice president of NetApp, a company that sells enormous amounts of storage to people that need it. For example, Yahoo stores all of its e-mail accounts on his equipment, and the special effects for “Avatar” were stored on his equipment, as well. His company doesn’t offer cloud services, but many cloud environments are built on top of his storage. From his perspective, Hitz sees two different definitions of cloud computing.

“Definition No. 1 of cloud computing is you no longer buy a computer,” Hitz says. “You access computing service over the Internet to somebody else’s data centers, and they spend the capital and they hire the people to build them and they do everything, and all you do is pay a monthly bill and access the service over the Internet. Style No. 2 of cloud computing is a completely technical definition (that) has to do with if you’re going to build a data center, what does the architecture look like? And if the architecture has a lot of shared infrastructure, then people tend to call that kind of environment a cloud computing environment.”

His first definition is another benefit to cloud because it eliminates many IT headaches because, being honest, how often do you have an overly positive IT experience?

“I imagine people would say they’re experience with IT has been less than optimum,” says John Dillon, CEO of Engine Yard Inc., a company that delivers an environment for software developers to write programs that run inside the cloud. “The reason is you spend so much money building all this infrastructure, that going the last mile, which is where you write the application that interfaces with the human, the user, doesn’t get the attention, doesn’t get the money and doesn’t get the investment.”

The idea of the cloud is essentially that you plug into the wall, and you get a whole data center.

“It’s IT as a service, just as you get electricity or water,” Dillon says. “In business, you, in most cases, don’t have your own power plant, you didn’t dig your own well, you didn’t build your own building, you don’t have your own fire department or police department. So why on earth do we basically give power to a group to build something that has been built before in-house, and then hope it works?”

Dillon also points out that in the United States, capital expenditures are a huge expense. In fact, about 50 percent of capital expenditures in America are information technology.

“Unbelievable,” Dillon says. “How many people are getting the ROI on this? What’s happening with the cloud is some big companies are saying, ‘Look, I’ll build the data center.’ It’s changing who buys, why it’s bought, and it changes the capacity and the economic decision-making process around IT.”

Moving to cloud technologies can take some of the capital expenditures and turn them into operational expenditures instead.

“The advantages are no software loaded, the data is backed up automatically, when there are upgrades, the vendor does the upgrade,” Lieberman says. “It becomes less of what would be a (capital expenditure) and becomes a monthly (operating expenditure), so the cost is known, fixed and predictable, whereas the upgrade cycle of equipment and software and hiring IT can be significant and unpredictable.”

When you look at how much money most organizations spend on their IT systems, these cost savings are a big driver and will, ultimately, be a game changer for business.

“Amazon, who is a leader in cloud technology, told me that they think it’s a $1 trillion a year potential business,” Dillon says. “So if there’s a trillion dollars at stake, that means every company within 50 miles of here is going to make a really big bet, and it’s so disruptive because the buyers are going to change and the sellers are going to change.”

The other benefit aside from cost is that everything that is on your PC is now in one location that can be accessed from anywhere — not just from the PC itself — and that comes with numerous benefits.

“When you take your software and your applications and your data and you move it to the cloud, something’s happened,” McNaught says. “First off, the cloud is the data center of your company and you can always get to it. You’re connected to the Internet, so you can get there from home, from the conference center, from the airport. And guess what? Because it’s not on a PC with a hard drive failing and memory getting filled up, it’s protected. It’s backed up. It’s secure. So the cloud provides this real opportunity to take the things that make up our work life, and within five years our home life, as well, and move them to this one place where we can always find our stuff.”

Questions to ask when considering cloud

Now that the technologies have changed, and many of the previous issues have largely been addressed, it’s easy to jump right into the cloud, but Lieberman says you still have to ask smart questions when considering your options.

First, it’s important to carefully consider the security approach that a cloud provider takes before you sign on with them.

“The quality of security varies widely from one vendor to another,” he says. “Most of what they do is opaque. They don’t explain much other than they just say, ‘Trust us — we’re insert your name — Amazon, Microsoft, Google — and we know about security, so trust us.’ When it comes down to the gory details, it’s not as transparent as would be available for a large enterprise.”

Lieberman says you should ask a provider how its  security actually works and request a copy of its SAS 70 report and be willing to sign a nondisclosure agreement so you can look at how the security actually works.

“By God, you should actually read it and compare them from one company to another or find someone with a long attention span and a lot of coffee and expertise in understanding how to read it to read it and understand if you want to go all-in with this provider,” Lieberman says.

He also says to make sure that you are comparing services and don’t go with the first cloud provider you come across.

“The fundamental mistake that most small and medium-size businesses make when they outsource to cloud providers is they don’t read contracts,” Lieberman says. “They do not negotiate. They don’t try to get competitive bids. They simply take the first thing they see and do it.”

He says you can’t take this approach because some of the largest companies may not best fit your needs, and some of the smallest companies may not have the security you need — small and large businesses alike have been known to go under.

“You have to be careful, and you really have to have your eyes open,” Lieberman says. “It may, in fact, be a good idea to engage somebody in IT or with expertise who can help you get competitive bids and guide a better decision.”

Along that vein, if you decide to start using cloud technologies, you also have to recognize that you can’t rid all of your IT staff in doing so.

“Even if you have the cloud, you have to have someone to interface with them because they will ask technical questions, so you can’t rid of all your IT, but you will need someone to assist you with making this happen,” Lieberman says.

It’s also important that you don’t become so reliant on your cloud technology that you haven’t thought about what to do in case your provider doesn’t work out.

“What’s your Plan B if this doesn’t work out?” he asks. “You better have a Plan B. Always have a Plan B when it comes to this. Even if you’re going to host it yourself, what happens when that hard disk crashes? You have to have a Plan B — not, ‘Let’s call the IT guy.’”

Lastly, Lieberman says you ultimately have to make a decision based on your business and not on what’s cool. He uses the example of buying an iPad versus buying a laptop — the iPad may look really cool, but your needs may actually require you have a laptop.

“Sometimes cloud, in many technological solutions, are fashion decisions rather than business decisions meaning that you may pick technology that sounds sexy and compelling, but you really haven’t thought it through from your own business perspective,” he says.

How cloud can affect you

While Lieberman provided a lot of points to really ponder that some could view as negatives, it’s important to remember that cloud does have far more positive benefits.

“Cloud isn’t the solution to all problems,” he says. “It does represent a unique opportunity for small and medium-size shops that don’t have dedicated IT, in which case, they would find that the cloud solution providers can provide a compelling Op-X opportunity to offload many of the things that they have.”

Experts also agree that cloud technology is the way business of the future is moving, and that it really does need to be embraced on some level.

“I’ve had the opportunity to ask a lot of CIOs, ‘How is cloud computing affecting your business? How much cloud computing are you using?’” Hitz says. “The most common answer I get is, ‘It doesn’t affect our business at all yet, and we’re not using it at all yet.’ I will tell you that almost all those CIOs are wrong. They’re already using it but not thinking right.”

Hitz says that CIOs need to think differently and brings up the early days of the transition from the mainframe to the PC as an example. In those days, if you asked a CIO if he or she had a PC strategy, many said, “Oh no, that’s not part of what we’re doing,” but half the employees had PCs.

“When data started leaking out the door because somebody lost their PC, who do you think the CEO went to beat up?” Hitz says. “The CIO, and the CIO said, ‘Well, PCs aren’t really IT.’ Those are the CIOs that are gone. I predict the exact same thing is going to happen to the CIOs who think that cloud computing isn’t happening in their business. … There’s an enormous amount of work that CIOs need to start thinking about — how do I get my arms around all the cloud contracts that are being found in little places scattered around.

“It’s affecting a lot more than people are realizing because they’re not defining it broadly enough. If they look at that broader definition, the stuff they’re already sort of doing or in denial about, that stuff is a pretty good road map to where the future is headed, just more.”

Not only is it affecting how your business will run, but it’s also going to change the game for how new companies enter the market. Brian Jacobs is the founder and general partner of Emergence Capital Partners, a Silicon Valley-based venture capital firm.

“Silicon Valley is very much a startup culture — there’s always something starting up here, and it’s important to note that cloud computing also changes the economics of a startup,” Jacobs says. “A startup today doesn’t need as much capital to get going because of cloud computing. A developer, who could be an independent contractor, an engineer who’s working at a day job and at night has a new product he wants to develop — he can log in to a platform as a service like Engine Yard, and they can start developing their product without a single dollar of investment. They can work for free developing the product until they’re at the point they can introduce it to the market.”

As a result, the venture capital industry is much different than it was 20 years ago. In fact, Jacobs’ company started in 2003 with the idea that more and more technology would be delivered as a service as opposed to built by companies within their four walls.

“Cloud computing and software service has really hit technology like a giant wave and all of these business models are service providers — companies that are building technologies and not selling to their customers but operating it on behalf of their customers and charging their customers a monthly fee in exchange for that service,” he says. “That’s a different kind of venture capital and that’s the focus of Emergence Capital.”

Aside from all the ways that cloud computing will change business, it’s also changing how employees approach their jobs. While people can work from home in their pajamas, it’s often difficult, and in many cases, employees don’t have access to everything that they could if they were on their PC actually in the office.

“Cloud computing lets you access your work environment, and you’re on your couch — maybe in your pajamas — and you’re doing real e-mail and doing real work, and yeah, maybe your boss is getting a little more work out of you, but you’re doing it, quite honestly, voluntarily because you get to work in your environment, you’re not in the office, you’re not sitting in front of the computer in the office and you probably have better TV shows on,” McNaught says. “The technology that cloud computing provides is about saving cost and delivering additional benefits.”

To give you a real example, Hilton Hotels decided to close its physical reservation centers and send all of its reservationists home with these devices that connected them securely to the Hilton system.

“What Hilton found was they could close all those buildings and save those costs of real estate, and they saved all the energy costs of running the PCs in the buildings, and they found the employees were happier because they were working from home — maybe in their pajamas but nobody could tell, and they were working over secure devices, so Hilton didn’t lose any data, and they were working over a device that didn’t have the complexity of the PC, so they weren’t calling the IT staff out to their homes to fix this,” McNaught says. “Cloud computing allowed Hilton to save money in so many ways that satisfaction increased, and they found that people working at home would take a lower pay. They saved on all sorts of fronts. Cloud computing has a transformative effect on all kinds of business.”

Cloud computing is changing the way businesses start and operate, and if you recognize and embrace that, it can make all the difference in how successful your organization can be.

“The reality is, as companies try to find ways to grow and compete in an ever more challenging economy, you have to do something different to be different than your competitor,” McNaught says. “If everyone is using the same old client server architecture — the PC connecting to the server — you really don’t have many opportunities to compete.”