CIO — As the Enterprise 2.0 conference unfolds in Boston this week, the whole software industry will be observing Microsoft's shift to online services, as it responds to the cloud computing model championed by competitors like Salesforce.com, Google and start-up social software vendors.

When Microsoft announced back in November that it would offer an online version of SharePoint, its main collaboration package, and Exchange, the company's popular e-mail system for businesses, it signaled a long-awaited change in strategy from the world's most powerful software company. This represented a concession from Microsoft that businesses want software that is fully online.

To date, the majority of Microsoft's software has come paired with servers and hardware that IT departments run and manage in-house. Now, with online services, Microsoft can manage the software in its own data centers while employees at customer companies around the world access applications through a web browser.

According to Microsoft executives, companies can realize huge cost savings by not hiring staff to manage Exchange servers or reallocate current IT staff to other areas—a refrain software as a service (SaaS) vendors have been pushing for years now.

"IT is dominated by the people cost," says Bob Muglia, president of the Microsoft Server & Tools division. "It's the single largest expense in IT. By leveraging the scale online services can deliver, you can leverage costs and be leaner."

Hosted E-Mail Can Equal Quick Win

Though socially-oriented technologies on display at Enterprise 2.0 have become increasingly important for collaboration efforts, e-mail remains central to most companies communications efforts. Here, many companies can save a pile of cash by moving to the cloud. For large, enterprise businesses, an Exchange server starts at nearly $4,000, and standard licenses cost as much as $67 per user. In stark contrast, the new online version of Exchange can be purchased for around $10 per user per month.

Analysts say the transition will be embraced by companies rather quickly when it comes to e-mail. Because mail contains a static set of features — in other words, it hasn't changed much the past few years and requires less customization — businesses can save a large sum by letting Microsoft or (other SaaS vendors) host it.

"The cost dynamic becomes the biggest factor," says Rob Koplowitz, a principal analyst at Forrester Research. "While there are some security and storage issues, they can do e-mail cheaper in the cloud."

One customer that's made the leap is Ingersoll Rand, a $13 billion industrial company with 60,000 employees that makes everything from golf carts (Club Car) to air conditioners (Trane). According to John Kalka, Ingersoll Rand's VP of technology deployment, the opportunity to move to a cloud-based e-mail arose in 2007, when the company was deciding whether or not to renew its contract with IBM for Lotus Notes.

Ingersoll Rand was running the e-mail system in-house. It had also developed many custom apps on the Lotus Domino server, but the cost was taking its toll, Kalka says. After looking at the on-premise, traditional version of Exchange, Kalka says "the numbers didn't look much better."

Then Microsoft approached him about online version of Exchange. Kalka saw the cheap per user price. Coupled with the fact he didn't need to manage hardware, he decided to sign up.

"That big e-mail cost went away," he says. "We had e-mail servers all around the world. 95 percent are shut down or re-allocated for something else."

SharePoint Online Services: A Trickier Decision

Analysts say the enterprise foray into online services appears more tricky as it concerns SharePoint, Microsoft's mammoth collaboration application that allows workers to manage MS Office documents in a central location and utilize social networking features like wikis, blogs and social networking profiles. The most recent on-premise version of Microsoft SharePoint dates back to 2007, and 18,000 organizations and 100 million users interact with the application in some way. Because SharePoint is also a platform on top of which IT departments and enterprise software developers build custom applications for employees to use at work, they might be hesitant to move to the online version if it doesn't work well with their existing systems.

"If you want to have SharePoint connected to your CRM [customer relationship management] or ERP [Enterprise Resource Planning] systems, those things are not easy to do in the cloud," says Koplowitz.

The standard version of SharePoint online, purchased by itself (without Exchange), boasts fewer features than the on-premise version (it lacks social networking profiles for employees, for instance). But the fact it is a bit more stripped down might not matter for small and medium sized businesses that don't have those integration worries. For them, the economics to move to the cloud for collaboration tools could be even more overwhelming than e-mail. One standard SharePoint 2007 server costs $4,424, with the licenses costing up to $97 a year for each user. In stark contrast, the online SharePoint costs $7.50 per user per month, with (again) no hardware to maintain.

"SharePoint online is good for small firms not wanting to build infrastructure," says Michael Sampson, a collaboration expert who has written a book on SharePoint. "It's also good for some larger firms with multiple small offices."

How Serious is Microsoft About Cloud?

How much Microsoft wants to abandon the on-premise SharePoint business in favor of a software as a service (SaaS)-based version remains to be seen. While Microsoft could eventually make huge amounts of cash by building a high volume, lower margin business with online SharePoint, the product ties in very deeply with Microsoft Office, a cash cow with high volume and high margins. For now, Office can only be installed on user machines.

Microsoft will roll out a fully online version of Officelater this year or early next, but it remains unclear how robust the offering will be in comparison to the installed version.

Microsoft's vocabulary remains adverse to "software as a service." For Microsoft, it's "software plus services" — a choice between installed, more expensive software (and hardware) and cheaper, web-based apps. According to Microsoft executives, the company believes that customers want to be offered a choice for years to come; they'll move some apps to the cloud, and keep some in-house.

"This move won't happen over night," says Ron Markezich, vice president of Microsoft Online Services. "They (customers) can manage the transition based on what their business needs are."

While "software plus services" started largely as a marketing spin to prolong the life of high of desktop software and hardware, Koplowitz says it has resonated with many customers, especially since many have already begun switching some of their systems to Microsoft's online services. According to Microsoft, large enterprises like Coca-Cola and the pharmaceutical company GlaxoSmithKline have had early success with the move.

"The first time I heard of software plus services, to me, it sounded like everyone is exacted about salesforce.com and we need a spin on this phenomenon that helps out our offerings," Koplowitz says. "But I do think Microsoft has begun to execute on it, and we're seeing that in the market."

C.G. Lynch writes about consumer and social technologies, and tracks their migration into the workplace. You can follow him on Twitter: @cglynch.