“Cloud computing” is a term covering a range of information technology services provided over the Internet that replace applications that a corporation or individual has installed locally. The services eliminate the need for the hardware, applications, and infrastructure a company otherwise would need to buy and integrate. The term comes from the way the Internet is depicted in computer network diagrams, as a stylized cloud. In theory, cloud computing services are easier to use and manage, more adaptable, and potentially less expensive than the traditional on-premises model for application deployment.

The vision driving this cloud model is that computing services should be available on demand, much like a public utility. When companies need electricity, most open an account with a utility and then rely on it to provide the power. In so doing — in arranging to be able to plug a machine into a wall socket when and as needed — they avoid having to think about any of the complex logistics and management necessary to make the electricity available. Cloud computing aims to make accessing business processes that use information technology equally as simple.

To be sure, a healthy dose of skepticism is in order when IT visionaries offer a view of the future that solves all the problems that past IT visionaries helped to create. Proponents paint a picture of a situation in which users assemble computing components like Lego blocks, creating applications on the fly. Perhaps. We expect, though, that cloud computing’s initial impact will be greatest where companies use it as a substitute for commodity IT infrastructure or where people (mainly hobbyists or people in IT departments) assemble relatively simple application components to yield something analogous to the mash-ups that can be found on Web pages today. These Erector-set constructions will deliver some efficiencies, but it will be a while before this sort of assemble-on-the-fly cloud computing will be able to replace any of the major business applications finance departments use today.

Still, there are plenty of here-and-now examples of cloud computing. The definition includes the software-as-a-service, or SaaS: full-blown applications hosted elsewhere and offered by subscription. SaaS is a small but rapidly growing part of the applications software business (see “When to Consider SaaS and Hosting,” Business Finance, July 2007). In addition, companies can use Web-based productivity suites such as Google Docs, which offers word processing, spreadsheets, and presentation software that is compatible with many proprietary file formats. Whether or not you want to use this software as your company standard, if your company has a price list that it wants to have available to potential customers or partners in spreadsheet form, it can upload the list from, say, Microsoft Excel and control who has access to the file. Also available are services that allow organizations to back up their servers or individual computers to off-site storage facilities — a capability once available only to larger companies.

There was a time when security fears kept most companies from considering having their applications or data somewhere other than in company buildings. However, keeping up-to-date copies of critical files and data is a necessary precaution in the event of a fire or flood or some other disaster. Today, companies are increasingly open to hacking if they don’t have dedicated security resources, so many executives have reassessed the relative vulnerability of on- and off-premises data and applications.

The range of IT infrastructure services available in the cloud unquestionably will increase over time. Initially, this is likely to benefit small and midsize businesses more than larger ones because they now will have access to a wider range of more affordable IT capabilities. In addition, they typically have fewer of the systems integration and legacy asset issues that may make large corporations wary of taking advantage of this business model right away.

“Cloud computing” is the current IT buzzword; not surprisingly, some of the claims made for it may be extravagant. But there is reality beyond the buzz. Cloud computing will be a growing part of business computing in the future. People in finance organizations should keep an eye out for — and an open mind about — cloud computing offerings; some may well make good business sense for their company.