Corporate Law Newsletter Winter 2010: Cloud Computing

Cloud Computing, Part I

This article is the first in a series about cloud computing. Read parts two and three to get the full story.

On October 29, 2009, the City of Los Angeles announced that it is outsourcing its e-mail services to Google, becoming the largest governmental body to outsource such a key computer function to an Internet-based provider. Before and since, companies large and small have elected to move key entity functions to services that are accessed through the Internet. This growing trend toward Internet-based computing services – commonly referred to as “cloud computing” – is one of the most significant developments in computing services. This is the first of a series of articles that will examine cloud computing as it impacts users of those services. This article will define cloud computing and discuss some of its benefits; future articles will review the business and strategic challenges of cloud computing, the legal challenges, and tips for addressing those challenges.

What is Cloud Computing?
While there are many concepts of cloud computing, it generally refers to delivering computing services – whether software, storage capacity or other products and services — over the Internet. Cloud computing makes documents, e-mails and other data accessible from any personal computer or mobile device with access to the Internet. This is not really a new development — many things work this way already, from online search engines to e-mail and photo albums to calendars and shared documents. Most of us use the cloud every day, by accessing search engines, social networks and e-mail. Cloud computing, however, is different because companies use it to transfer essential business functions from in-house operations to Internet-based services.

Benefits of Cloud Computing
Users find cloud computing is attractive because of some clear benefits:

Cost Savings
First and foremost, promoters and adherents of cloud computing argue that it is less expensive than providing the same computing services in-house. While the per-unit costs of computer hardware and software — computers, servers, routers, operating systems and computer programs — have fallen over the years, it is still expensive to establish and maintain extensive computer systems that are necessary for businesses. Many users find that moving computing services onto the Internet moves those data center costs from the customer to the cloud computing vendor, including software and hardware acquisition, operating and maintenance costs. Even if the hardware and the software is no less expensive, outsourcing computer services allows companies to reduce real estate costs (through reduction in operating space), payroll, benefits and insurance costs. Many companies find the savings to be compelling.

Economies of Scale
These savings are achieved in large part because of economies of scale – a vendor can offer the service for less than similar services on an in-house standalone basis. Cloud computing vendors can choose the most efficient locations for services, and share resources among multiple clients that would otherwise have to be replicated by each individual client. Vendors can also focus on utilizing their resources more efficiently. Inherent in this thought is that companies that limit their services to providing computing resources are experts; companies that use computers to support their core businesses cannot focus as clearly on a support service.

Reductions in Personal Staff
Along with economies of scale, customers of cloud services are able to reduce their technical staff. The technical personnel required to maintain the data center move from the customer to the vendor, and while customers may still need desktop technical support, cloud computing vendors reduce this cost through remote tools, allowing the vendor to access workstations on-site to diagnose and resolve issues. It should be noted that reductions in personnel (without, presumably, a reduction in service) not only reduce direct personnel costs for salaries, benefits, office space and the like; the personnel issues related to having a data center move from the customer to the vendor can shift potential liability associated with a workforce.

Scalability
Particularly important in uncertain economic times, cloud computing is typically scalable. Customers can, with relative ease and speed, increase or decrease resources to reflect their needs. The cost of the cloud service typically fluctuates with the increases and decreases, subject to contract restrictions. As a result, a customer does not have to maintain unused resources to meet fluctuating demands or to anticipate growth, and can eliminate unnecessary resources if business declines; cloud computing services can be contracted on an as-needed, when-needed basis, without requiring the client to create substantial infrastructure which may not be needed. And as companies grow, they can quickly add resources which allow them to take advantage of business opportunities and secure additional revenue, often at a marginally additional cost.

Mobile Workforce
Cloud computing accommodates mobile users and mobile applications quite effectively because it is accessible through the Internet, a factor that is particularly important as a workforce becomes more mobile. While much of the evidence is anecdotal, as companies seek ways to reduce costs, reducing their real estate footprint becomes desirable, and one way to achieve that is through a mobile workforce. Since cloud services are accessed through the Internet, there is no appreciable difference or advantaged gained by having a localized workforce. Just as importantly, workers more often seek a mobile platform that can be accessed from multiple locations. Using cloud computing can be part of a plan to attract and retain key, motivated personnel.

Quality and Responsiveness
Vendors of cloud computing services also argue that the quality of technical services will increase. Cloud computing services are commonly focused on a small number of specialized programs or services – for example, customer relationship management, or data storage. With this kind of focus, vendors can develop a level of expertise and redundancy that cannot be expected by typical technical staff, particularly for small and mid-sized companies. Again, by making the service or product a core function of a company, rather than an expensive support mechanism, customers seek to gain a benefit not just in cost, but in quality. Since the cloud vendor spreads the costs of these expensive resources across a group of customers, it can afford to retain the highest quality personnel and the per-unit cost can be less than the cost for comparable resources on an individual customer basis.

Disaster Recovery and Business Continuation
An added benefit of cloud computing is its dual purpose as both a current, functioning service and a business continuation and disaster recovery service. Internet-provided services have this capability because, unlike an in-house data center, they are by definition off-site and not bound to any location. Moreover, a customer of a cloud computing service can require that the service maintain a disaster recovery system – this is, again, a potentially expensive and difficult undertaking for the customer, but part of the essential, core competency of a cloud computing vendor.

Information Security
Cloud computing vendors also argue that they have more robust, state of the art information security systems, incorporating the most developed firewalls, encryption, physical security and other steps which cannot be effectively implemented by most individual companies. Cloud vendors can also keep not only information technology, but security personnel, on staff to maintain the security of the system; typically, a customer would have the information technology personnel serve double duty in this area.

Regulatory compliance
Finally, cloud computing vendors can provide services which meet various legal and regulatory requirements of clients that are outside the clients’ core competency, most commonly auditing standards (particularly SAS 70) and Sarbanes-Oxley Act requirements, both of which require assessment of the internal controls of a service organization. Cloud computing services can assist and streamline auditors’ opinions on internal controls by providing services which are designed with compliance in mind.

All these factors can make cloud computing services attractive to a variety of companies. As we will discuss in the next issue, however, cloud computing services also come with drawbacks and concerns.

Robert Braun is a Partner at Jeffer Mangels Butler and Marmaro LLP in the Firm’s Corporate Department. Bob’s practice, spanning more than 20 years, focuses on corporate, finance, and securities law with an emphasis on emerging technologies, hospitality and business transactions. For more information, contact Bob at 310.785.5331 or RBraun@JMBM.com.

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