Wait a second. Why can't I get around the IT guys altogether and outsource all of our applications to the cloud? That way I can keep all of my company's software databases, have someone else host it for me, and only pay a monthly fee for the server I put it on, right?

I've been asked that question by no less than 30 of my small-business clients in the past six months. All of them had older servers and expensive tech guys who they wanted to replace. All of them had heard of the cloud and wanted to know more about it. All of them, being small-business owners, wanted to save money and be more productive.

So we went over the options. The pros and cons. And the costs. And guess what? In the end, not one of them went to the cloud.

Really? Isn't this the era of the cloud? Aren't we all supposed to be swept away by the golden promises of companies without servers, without viruses and security issues, and without all the other disruptions caused by our internal networks?

Unfortunately, not yet. In 2012, the cloud is not yet a viable option for most small businesses. The rent is still too d#*n high!

Not that I'm a disbeliever in cloud-based computing. My company offers a few excellent cloud applications. Last summer I got rid of my main server and transferred my accounting, customer relationship management and other databases, along with our Office files, to a server hosted by a great cloud infrastructure firm. And the experience has been excellent.

Although we've suffered a little in performance (curse you, Comcast!), the benefits have significantly outweighed the cost. No longer do I have to worry about how my people will connect - they do so using remote desktop tools right from their browser (any browser, from any device, including a smartphone). I don't have to worry about backing up my data. I don't have to worry about security. I don't have to worry about viruses or malware. I don't have to worry about running the latest and greatest versions of Windows or Exchange or other core products. That's all part of the service.

 

COSTLY MATTERS

But here's the rub: I also don't have to worry about cost. That's because the company that hosts my systems and server is a long-time partner and my cost is significantly discounted. If this weren't the case, then I, like many other small businesses, would be in a different situation altogether.

Because the cost of a cloud solution like the one I have is still too d#*n high for most small businesses like mine! The set-up I have would normally run me about $100 per user per month. Which means that a typical small business with a 10-user network would be paying $12,000 per year. Yes, you read that right. It's a great service. But is it worth that much? Not to my clients - all 30 of them who considered this option turned it down. At least for now.

Why? Because you can buy a Dell PowerEdge T410 server right now for about $4,000 and have an IT guy get it all set up on your network with the same remote desktop technology for another grand. And maybe you'd want the IT guy to visit once or twice a quarter to clean stuff up for another $1,000 each time. You wouldn't be getting all the benefits that a cloud infrastructure company could provide. But over just a four-year period you'd have paid about $20,000 for the internal server (including the quarterly visit) as compared to $48,000 to have it all hosted.

Can Amazon or RackSpace - two of the leaders in cloud desktop services - provide a better answer? They're certainly less expensive, but not cheap enough. A 10-user company wanting to rent a server from Amazon might pay only $5,000 or so a year. And even for that price you're only getting the server. When it comes to the operating software, applications, set-up, implementation, configuration, security and support, you're on your own. Most of us don't have a resource to do all of this.

OK, forget the whole cloud infrastructure thing. How about just cloud-based software delivered as a service instead?

Salesforce.com, arguably the leader in hosted CRM applications, ranges in cost from between $60 and $125 per user per month, depending on the desired features. Microsoft Dynamics CRM, a competing product (and one that my company sells) is $44 per user per month. Another popular CRM product that my company sells is ZohoCRM, which costs $25 per user per month. A typical small-business client of mine usually needs licenses for between five and 15 users.

 

COMPARISON SHOPPING

A typical CRM system would have a lifespan of at least five years. So for a 10-user system, the five-year cost of these products, excluding the cost of services and support, would be $36,000 (Salesforce), $26,400 (Microsoft Dynamics CRM) and $15,000 (ZohoCRM).

By comparison, the five-year cost of a 10-user on-premise version of popular (albeit older) options like ACT!, GoldMine (a product we sell), SalesLogix or Maximizer would be much lower. ACT!, GoldMine and Maximizer would cost about $10,000 and SalesLogix would cost about $15,000. These are not recurring costs, just a one-time purchase. I'm ignoring annual maintenance of these products, which is about 20 percent of the software cost. Annual maintenance is optional, and many of my small-business clients elect not to purchase it because they can get support cheaper from a partner when they need it and the features offered by upgrades are usually not worth the money.

This trend doesn't end with CRM applications. It's the same for accounting applications, too. Many of my clients have inquired over the past year into getting a fully hosted accounting application, and then ran away in terror once they saw the numbers. I'm not talking about people who just want a simple bookkeeping or invoicing application. For those companies, there are many excellent services, such as QuickBooks Online and Invoice Bubble. Zoho also offers a good hosted invoicing application.

I'm referring to those clients that need something more sophisticated. They want to create sales and work orders, invoices, and purchase orders. They want advanced inventory management, time and billing, and job-cost profitability. These types of features are not available in the hosted bookkeeping applications I previously mentioned. For this, you must go to the leaders in hosted ERP/accounting like NetSuite and Intacct.

Both provide excellent options for advanced systems delivered as a service. But a five-user version of either, with all the bells and whistles, will likely set a company back between $10,000 and $20,000 per year.

Meanwhile, a five-user QuickBooks Enterprise, installed on-premise, requires a one-time fee of $3,500 (my company also sells QuickBooks products). A similar on-premise version of DynamicsGP or Sage's MAS 200 would cost about $20,000 - one time. Are the features in NetSuite and Intacct worth the additional cost? Many think they are. That's up to you.

 

RENTALS AVAILABLE

For sure, there are a number of good reasons to rent a software application.

They're quicker to get up and running. As long as you're paying the monthly fees, you'll get the latest and greatest features without having to endure an upgrade process. You don't have to set up internal infrastructure to access your programs from anywhere. The security is not worse ... it's better. Sure, you're relying on an outside party to take care of your company's most important financial information. Although not bulletproof, these companies are reputable and do a much better job securing this information then most small businesses could.

Another big advantage of hosted application is that you can oftentimes avoid your internal tech guys altogether. With an on-premise solution, you've got to rely on them to get a server set up and supported. Which makes them deeply involved in the decision-making process. Which can be frustrating. Using a cloud-based application, many of my clients have found that they can skirt around their IT group because there's no physical imprint on their own servers.

And then there are certain features that only a specific cloud-based application can provide. Salesforce has fantastic tools for building a cloud-based platform and integrating it with your Web site and other systems. Microsoft Dynamics CRM is extremely popular because users access it through Microsoft Outlook - plus it plays nicely with other Microsoft applications, like Office and SharePoint. Sage CRM is a great cloud-based application with advanced sales management features and integration with Sage's other products. These are all valid reasons why companies both big and small have chosen these products.

But this still doesn't make up for the significant difference in price. And for small-business owners, it's all about the price. Sure, we'll pay more for something. If it's worth it. But many small companies use 20 percent to 30 percent of the features offered by their CRM and accounting applications. (Admit it: How many features of Microsoft Word or Excel do you really use in the end?) Most of my small-business clients don't really take advantage of the advanced features that are offered in a hosted option.

Will this change? Yes, when the cloud begins to scale. When the major Internet service providers and software companies start signing up users by the millions. And then the cost per user declines. This will take time, investment and patience by everyone in the cloud community. It will also result in consolidation and partnerships.

Everyone knows that this is the direction we're heading. But we're just not there yet. I think it's another three-to-five years. And in the meantime, small businesses, which are most of my clients, are still reluctant to fully invest in the cloud.

 

 

Gene Marks, CPA, is the owner of the Marks Group, which sells customer relationship, service, and financial management tools to small and midsized businesses.

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