Corporate Law Newsletter 2010: Cloud Computing, Part II

Cloud Computing, Part II

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

In our winter edition of the JMBM Corporate Law Newsletter, we discussed some of the benefits of cloud computing. While there are a number of advantages which make cloud computing attractive, there are also a number of business and strategic challenges of cloud computing which need to be considered. While these challenges are not unique to cloud computing, the qualities of accessing software and data through the Internet does raise concerns that need to be addressed by users. This article briefly reviews some of those challenges, and will conclude in the next edition of the JMBM Corporate Law Newsletter with legal considerations and resolutions to these challenges.

What is Cloud Computing?
“Cloud computing” commonly refers to delivering computing services – software, storage capacity or other products and services – over the Internet. We use these products and services regularly, including off-site data storage (such as Internet-based automatic file backup), online banking, Gmail, online search engines and online photo albums. Most of us use the cloud every day, by accessing search engines, social networks and email.

Cloud computing, however, is different. While most of these functions are for convenience, businesses using cloud computing may transfer essential functions from in-house operations to Internet-based services.

Challenges of Cloud Computing
In our last edition, we discussed some of the advantages of cloud computing, including cost savings, staffing benefits, scalability, mobility, information security and regulatory compliance. However, cloud computing also raises some concerns for business:

Is Cloud Computing Cheaper in the Long Run? Because cloud computing negates the need to purchase hardware and operating software, the initial costs are almost always less than setting up a proprietary equivalent from scratch, and lower cost is one of the key drivers to cloud computing, particularly for companies with limited resources. Over time, however, companies may find that their costs may be less or more than an in-house system, particularly since the customer of a cloud provider has little, if any, leverage on fees. That lack of leverage is magnified since, as described below, transferring from a cloud provider may be so difficult or expensive that it is possible to be handcuffed to a particular vendor.

Flexibility and Termination. Probably the last thing a potential cloud computing convert thinks of when considering a new provider is what will happen when it’s time to end the relationship. Most software users know that it is difficult and expensive to change systems, often requiring operating multiple systems for testing, retraining personnel, and dealing with inevitable problems. However, cloud computing adds an additional complication, since the software and data is in a third party’s hands, and remote – often very remote – from the user. The very things that make cloud computing attractive and solution-oriented are the factors that will create complications on termination. This is the case especially if the cloud provider is unable to meet its commitments generally. Consequently, users of cloud computing systems may be handcuffed to their programs.

Is Cloud Computing More Secure? Cloud vendors argue that their systems are more secure than in-house systems, since their entire focus is on providing software or data storage services to customers, while a customer’s system is not a core competency. Cloud vendors often have full-time security analysts and can spread the cost of state-of-the-art security measures over a variety of clients. However, cloud providers are also more attractive targets than their individual clients, since they have so much more information. To put it another way, a data thief may prefer the challenge of stealing the information equivalent of the Hope Diamond instead of a handful of ½ carat gems because the payoff is so much greater. Moreover, since the cloud vendor is operating a ‘utility,’ there is always the concern that over time the vendor’s commitment to security may decrease, and customers have no way of knowing that standards have dropped.

Technological Edge. Clients look to a cloud vendor because they seek access to higher quality technical resources than would otherwise be the case – cloud vendors help level the playing field, particularly for smaller clients. Maintaining the edge is difficult and expensive, and there is no guarantee that cloud providers will continue to upgrade and advance the product and provide the same degree of advantage. Similarly, one of the benefits of cloud computing, to the user, is its scalability; however, if a cloud provider loses its commitment to responsiveness and capacity, the cloud user may not be able to take advantage of this key benefit.

Disaster Recovery. One added benefit of cloud computing is enhanced disaster recovery. An effective disaster recovery program is an important part of virtually any business (and for financial institutions and certain other firms, an obligation); creating and maintaining a disaster recovery program is complicated and expensive. Since data retention is a core function of cloud computing companies, cloud vendors can focus on this portion of their services. However, it is also difficult to verify the existence and effectiveness of a system that may exist thousands of miles from the client. Even cloud providers may not create a meaningful system: in one case, a cloud provided substantial protections for its mainframe computers but, when audited, the racks of individual personal computers used by many customers were not similarly protected, despite representations to
the contrary.

Conclusion
Accessing software, storage capacity and other products and services over the Internet bears the promise of achieving benefits key to many companies. At the same time, cloud computing customers need to understand what can stand in the way of those benefits. In our next issue, we’ll discuss how some of these challenges can be addressed.

To view a PDF of this article, click here.
To view the complete Corporate Law Newsletter Spring 2010, click here.