Cloud computing has become a standard method of software operation for many businesses. It offers many significant advantages, including potential cost savings. There are, however, some significant risks associated with cloud computing. What are some of the factors that companies and entrepreneurs should be aware of in the cloud computing context?

Cloud computing is a system in which software programs and applications are accessed and used virtually through an Internet connection. The “cloud” actually refers to the Internet. The software is usually hosted on multiple servers in various locations. Normally the user does not know where the software is located and this is irrelevant in any case. Multiple users from the same company can access the software from anywhere that they have an Internet connection. The costs of cloud computing are normally based on a usage model, with payments being charged on a time usage basis or an occurrence basis.


The primary potential advantage of cloud computing is the significantly lower cost required for data processing services when compared with the older model of establishing and maintaining software and its associated hardware on an internal system. The use of a cloud system removes the need for the potentially large capital and operating costs associated with purchasing or leasing such software and hardware and shifts the costs to a usage-based model. This can also substantially simplify a company’s software and hardware structure and the associated costs. A cloud-based system can also substantially increase the mobility and freedom of your employees and consultants, as it no longer matters where they are located. As long as they have an Internet connection and can access the cloud, they can utilize the same software packages and do the same work as if they were all in a physical office location. Obviously the advent of easy access to high speed broadband Internet connections has helped to make cloud computing a viable option.


Cloud computing has its risks and disadvantages, however. Its dislocated nature, which is an advantage in many cases, can also be disadvantageous because the user loses control over the software application and becomes dependent on the provider to maintain, update and manage it. If something goes wrong, the user does not have direct access to the software and must depend on the provider to fix the problem. If the provider is unresponsive or unable to fix the problem quickly, the user can experience significant issues. For example, problems would occur if your company uses a cloud-based payroll software system and that system goes down the night before payroll is due. These problems would quickly become much worse if the provider is unwilling or unable to fix the problem and reliable backup services are not available. Similarly, if your company becomes dependent on a cloud-based software application and the provider is unable or unwilling to continue to provide that application, you will quickly encounter trouble. This trouble would quickly become more serious if the provider was not required to give notice of the cessation of the application in time to allow your business to locate an alternative. In today’s turbulent economic climate, cloud providers may encounter financial problems or bankruptcy, either which could seriously impair or eliminate the provider’s ability to continue to provide the cloud services to your company.  Remember that these financial problems can happen quickly, and you will often have limited recourse in these situations.

Cloud computing can also bring substantial risks in the privacy and confidentiality areas. By using a cloud system, your company’s sensitive data and information will be stored on third-party servers, and you will probably have very limited knowledge or control regarding this information. If the provider has inadequate security or encryption systems or procedures, or if a breach of these systems or procedures occurs for any reason, your company’s private and confidential data may become compromised. This could have devastating effects, and could cause legal problems for your company if third party confidential information (for example, customer information) is compromised.

Entrepreneurs and small companies face special challenges when using cloud systems. Their small size and limited resources makes these companies much more vulnerable to some of the risks associated with cloud use. For example, if a cloud service provider can’t or won’t provide service, the user’s best alternative may be immediate legal action. Many small companies are not able to mobilize their lawyers effectively in this way, and thus they may not be able to quickly cure or mitigate such nonperformance by the provider. This is also true for the privacy and security risks that I mention above – a small company can quickly get into substantial trouble if a security breach occurs from use of cloud-based systems, and they may not have the resources to adequately react to such a situation.

One key item in connection with the use of cloud-based systems is to develop effective contingency plans. These plans should cover all of the various contingencies that you can anticipate and the proposed ways to deal with these contingencies. It’s not easy for most small companies to develop great contingency plans because there often are not a lot of desirable alternatives, but the presence of the best contingency plans that you can develop can be a huge advantage when problems arise.

Business owners should carefully evaluate the use of cloud-based systems. The substantial potential cost savings along with the increased freedom and mobility offered by the cloud can be significant advantages for a growing business. You need to be aware of the potential risks and problems that accompany a cloud-based system, however, and take appropriate steps to reduce and mitigate these problems. While the risks that I mention above will never completely disappear, you can gain some protection by doing good due diligence on the cloud provider, having good, strong documents in place regarding the cloud relationship and having good contingency plans in place.  It’s also critical to get advice and guidance from qualified technology and legal sources in connection with the proposed cloud relationship.

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