Cloud computing is for the birds

For small companies, hosted software costs can add up fast.

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NEW YORK (CNNMoney.com) -- Thinking of floating your small business on the software-as-a-service cloud? Maybe it's time to step back down to Earth.

Despite the hip factor and small business appeal of paying little or nothing for online office software, the realities of deploying Web-based sales, accounting and other workflow tools is turning out to be more daunting than many small firms expect.

"It is critical to understand that SasS [software-as-a-service] is an important part of your business IT strategy, but it is never going to be the be-all and end-all solution," says Darryl Parker, owner of Parker Web Marketing, a Matthews, N.C.-based Internet marketing and consulting firm.

Parker, whose own business does a bit under $1 million in annual sales serving more than 300 small business clients, says smaller enterprises using cloud computing applications face both the usual-suspect technological hurdles and deeper cultural challenges.

Talk back: What do you think of cloud computing?

"Small businesses struggle to find the resources to get to the knowledge of their own business to make proper software choices," says Parker. "And with so many conflicting cloud computing products on the market, they wind up with problems."

Take Dr. Michael Smith, founder and naturopathic physician for the Carolinas Natural Health Center. This holistic health care provider, with a staff of eight, is based in Boone, N.C. Like many small business owners, Smith uses a smorgasbord of Web-based products. His arsenal includes Constant Contact for Web marketing, Twitter for social networking, GoToWebinar for remote conferencing and Ning for community building. And though overall Smith is happy with how the Web works as a business tool, he points out that he quickly runs up against limits of the technology.

"I have definitely been challenged with the additional time it takes to implement these programs," says Smith. "To understand what's effective, tweak it and make it better."

SaaS out of control

In a report issued earlier this month, international business consulting firm McKinsey & Company threw some cold water on the cloud computing hype, pointing to the technology's limits in terms of cost scalability. McKinsey focused its cautionary advice on big companies, warning that "current cloud computing services are generally not cost effective for larger enterprises."

Even for smaller companies, the fees can stack up fast. Take one typical application popular with small businesses: Basecamp, a project management tool from Chicago software firm 37signals. It starts at $24 a month for a basic package. But any business that gets hooked on Basecamp will likely find itself upgrading to bigger and bigger packages, maxing out at the all-you-can-eat option for $150 a month. That's just under $1,800 a year - and it's not the only code a business needs. Add in customer relationship management tools, content management systems and accounting packages, and you'll end up with an annual software bill that totals thousands.

Cloud computing vendors are quick to say their applications are worth the expense. If a tool can save a business time and money, it justifies its price tag, they point out. "[Buyers] should not look at the $300 software cost, they should be looking at the value of that this service provides," says Erik Asgeirsson, president of CPA2Biz, the New York-based IT and marketing arm for the Association International of Certified Public Accountants. CPA2Biz recently teamed with accounting software maker Intacct to develop new tools available through the cloud to accountants and their clients.

Traditional software gets cheap

What's getting tricky about the cloud computing argument is the effect the downturn is having on the software biz: traditional small business applications, sold in a shrinkwrapped box and run on equipment housed and maintained in your own offices , are getting very inexpensive. To compete with the SaaS crowd, traditional vendors have been forced over the past few years to make their products easier to use while also cutting their price tags. Amazon (AMZN, Fortune 500) routinely offers Intuit's (INTU) QuickBooks as one of its "Deals of the Week," and the discounting is steep. QuickBooks Pro 2009 frequently pops up for 50% off, allowing businesses to snag a powerful accounting package for just $99. It takes a lot of cloud computing to beat that value.

Everyone agrees on cloud computing's biggest virtue: the cost of entry is low. But there's a growing recognition in the IT trenches that any leap onto the cloud-computing bandwagon should be made only after some sober cost-benefit analysis.

"The point is, what cloud computing software does should not dictate what your business does," says Parker. "You have to know what you need and sensibly adopt from there. It has to make sense."

Jonathan Blum is the principal analyst of Blumsday LLC. Jennifer Barraza of Blumsday contributed additional reporting. To top of page

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