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Small companies find relief as they ditch in-house IT for cloud services

Penny prices and a plethora of hosted IT services are drawing small and midsized businesses from in-house IT services to Software as a Service.

Maturing hosted services and pay-as-you-go pricing are proving to be a strong draw for small and midsized businesses. They are cherry picking from a growing selection of cheap, instant-on services to replace in-house IT that either became too costly or didn't come up to par.

"I would never go back to the [traditional] software model. Someone would have to make a very compelling argument for me to even consider it," said Molly Fuller, president of Hands On Gourmet in San Francisco. Fuller said she struggled for a year with an on-premise software suite designed for catering companies before abandoning her investment in Caterease and switching to's hosted customer relationship management (CRM) products.

Fuller said hosted services were attractive because they were available everywhere and because they were maintenance-free. She said she uses to generate menus and logistics for the $1.5 million business, and the online interface allows Hands On Gourmet's roving squads of chef-instructors, who host cooking classes for corporate events, to get instructions fairly easily.

The on-demand pricing made it easy for Hands On Gourmet to switch to, Fuller said. Although she wouldn't go back, Fuller said, she didn't regret her initial use of an in-house product. "I didn't feel burned by it; I just chalked it up to a lesson," she said.

With $35 million in revenue, is an example of the midsized companies that are taking a flyer on new services. Chief Financial Officer Dave Morrison said he needed to reduce the cost of doing business, and he's not alone.

"Capital markets are very tight. Companies that aren't generating surplus cash are looking for ways" to do more with less," he said. Morrison ended up signing up with accountancy outsourcer Corefino, firing his accounting staff of five and cutting his accounting costs in half.

Morrison said he was surprised to be able to outsource so completely, explaining that he had already considered his accounting operations bare-bones. "I actually think it was more difficult for us because we were already very lean," typical of online businesses, he said. "If we were bricks and mortar, we would have [had] a lot more people around."

Morrison said that he can buy the service from Corefino for less than it would cost him to do it in house because it's the company's primary focus. Corefino has an economy of scale and access to a global workforce, he noted. "It's a particular challenge with small companies to acquire and retain the talent in accounting," Morrison said.

Corefino's entire business is in the cloud. CEO Karen Watts said her firm used IBM to host its servers. Corefino's Web portal serves customers in China and employees in India and elsewhere. Watts said that vendors were as eager as her customers to slough off infrastructure costs to hosters and cloud providers. "We have one server [in the company's main offices], and that's just so our remote IT staff can log in and fix things." she said.

"People have seen it work very well on the CRM end," said China Martens, a senior analyst at The 451 Group. She said that's 10-year presence as a Software-as-a-Service (SaaS) provider and people's growing familiarity with personal Web services such as AIM or Gmail are making it easier for many firms to consider other hosted services. She said the on-demand pricing and very low costs for entry-level products also lured firms that might be in a tight squeeze financially. "Salesforce starts at, what $7 a month [per user]?" she said.

Market research firm IDC estimated that SaaS spending will jump more than $1.2 billion in 2009 and predicted that it would be close to $20 billion by 2012. Frank Gens, senior vice president and chief analyst at IDC, said that spending on cloud technologies, primarily SaaS, was rising five times faster than any other IT spending by companies. The recession was "a primary driver of the increase," he said.

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