Cloud Computing Decision Needs Solid Basis

CHICAGO ( TheStreet) -- The term "cloud computing" has a peaceful -- even dreamy -- sound. But the phenomenon may be causing stress-induced nightmares in IT departments across corporate America. It represents a dramatic shift in the way computer programs and data are saved. Many small businesses are wondering if and how the cloud applies to them.

The good news: There's no reason to panic. While cloud computing has big advantages for certain industries, it's by no means a magic solution for everyone.

If you're not in the tech business, you might not even be sure what cloud computing is. At the most basic level, it means storing your computer programs and files on the servers of a third-party provider, rather than on your own hardware. (Think of all that data forming "clouds" of information that float from office to office.) You pay a monthly fee to access particular computer programs, back up your systems or store records that would otherwise overload your own servers.

Many small businesses have already begun using this kind of a subscription model for software. In the old days (a whole decade ago!), trying out a computer program meant buying a disk, installing the program on your computer, then accessing it by clicking a desktop icon.

Now, more and more software is available through the Internet and bought on a subscription basis. You sign up through a website, log on to the program through the Internet and pay a certain price per month according to your usage; nothing is installed on your computer. GoToMeeting.com (for web conferencing) and Salesforce.com ( CRM) (collaboration relationship management systems) are examples of this trend.

This element of cloud computing, known by the acronym SaaS ("Software as a Service") has many pluses for small businesses. You can try out different programs relatively cheaply, without making a costly investment in software. You also don't need to pay an IT guy to install them.

But adopting cloud computing throughout your company is a much bolder step. Does moving all your data and applications to another location make sense? For certain companies, there are advantages:

Low entry costs: If you want to experiment with lots of different software possibilities, cloud computing allows you to try out all your options without big up-front expenses. It's also good for those lucky companies that expect unpredictable growth and can't predict what kind of server or storage space they'll need in six months.

Adaptable capacity: The biggest cost benefit to cloud computing is that you pay only for the capacity you need at any given time. If your business cycle has large ups and downs in computer usage, you can pay accordingly -- without having to make a big investment in servers that won't operate at capacity most of the time.

Minimal hardware: For startups made up of employees who work remotely, a cloud system allows everyone to link in together from their home, rather than through a central office's network. You don't even need a central office if everyone works through the cloud.

If you do decide to explore the cloud, you'll have no shortage of possible providers, from major players such as Google ( GOOG) and Amazon ( AMZN) to smaller, independent companies such as Rackspace ( RAX) and HyperStratus.

The vast majority of small businesses, however, won't see any real cost savings from switching to cloud computing. Here are some reasons why it makes sense to stick with your current computer setup:

Minimal storage concerns: If you regularly use only a few computer programs and backing up your files is relatively straightforward, switching over won't make much of a difference in your expenses. Using cloud computing doesn't mean you'll be free of all IT spending; after all, computers still freeze up and printers still break down, whether you're working in the cloud or not.

Changeover costs: Any big shift in how you run your business comes with its own costs in lost time and productivity. If it doesn't save a significant amount of money, why do it?

Privacy and security issues: If you deal with sensitive personal and financial information, you may be wary of allowing another company access to your records. Your customers might not be pleased about it, either.

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Elizabeth Blackwell is a freelance writer based in Chicago. She is the author of Frommer's Chicago guidebook and writes for The Wall Street Journal, Chicago and other national magazines.