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With tougher economic times, companies are reducing IT budgets but are still finding the need to replace legacy systems. Because of this, claims a Gartner report released earlier this year, many CIOs have turned to cloud computing as a way to save on IT costs.

Cloud computing, for all of its recent publicity, is not new. In the decades before PCs, companies purchased computing resources on mini-mainframes that were accessed through end-user terminals. Cloud computing’s recent re-emergence is a result of companies again considering the cost savings of having someone outside the company handle IT infrastructure and maintenance.

But the companies that have arguably the most to gain from cloud computing, small and medium sized businesses (SMBs), are still unconvinced. According to a recent Newtek survey, 48% of small businesses owners do not see a switch to the cloud as a cost-reducing move.

But of the SMBs that have adopted cloud computing in some form, fully 97% report that the change saved them money and offered them greater flexibility, according to research by CompTIA. In addition, the federal government, in their Cloud First policy, has also required that every government agency move three services to the cloud by mid-2012.

So clearly the benefits, for some at least, are there to be enjoyed. But what are the advantages and disadvantages of switching to the cloud?

GFI, in a recent white paper, laid out the pros and cons of cloud computing migration. One of the well-known benefits is that you don’t have to pay for in-house IT infrastructure and maintenance. Third parties are taking care of upgrading the hardware and software, as well as handling technical failures, allowing you to focus on your organization’s objectives.

As far as cost savings, you don’t have to pay for servers (and other hardware) or software licenses. Instead of expensive licenses, cloud providers typically charge subscription rates that are correlated to how much your organization uses the hosted applications. This pay-per-usage model is cheaper – especially in the short term – for many organizations.

Since many SaaS providers are experts in their software, an added advantage is that deployments and upgrades can happen much faster with a cloud hosted solution than with a nascent in-house IT department.

For these reasons, a partnership with one or several companies offering cloud computing services can be very advantageous, but there are risks and disadvantages.

The most often cited concern of cloud hosted solutions is security. If your organization’s private information is stored on others’ servers, it is subject to your cloud provider’s security standards (or lack thereof). To mitigate this risk, it is worth considering hosting some of your applications in the cloud and others on-premise (more on this later).

In-house IT resources also give your greater control over your applications and data. If problems arise, you have the flexibility to deal with them using your own resources, rather than haggling with a service provider to prioritize your needs above others.

Likewise, if you will require software development or custom integration between systems, hosted applications may not be robust enough to cater to this. Think ahead about your future application needs.

In terms of mitigating subscription costs, details matter. Consider how a subscription will scale over time with the growth of your organization. If you expect your usage of a cloud application to increase twofold or more in the near future, see if the cloud solution will still save you money. Subscriptions can be more expensive in the long term than software licenses.

On-premise solutions, as the GFI white paper notes, are more expensive initially but can pay off in the long run. The important point is to consider your organization’s needs one, two, five, or even ten years from now. Cloud computing services remove the burden of IT management but increase security and possibly legal risks. But more on this in a future post.