Companies are using the pay-as-you-go cloud model to cut IT costs and reinvest in product innovation, according to research.

The study, by hosting company Rackspace and Manchester Business School, said that 58 percent of the UK businesses they surveyed had been able to reduce their IT costs by replacing their in-house hardware with a cloud solution.

The average annual cost saving being achieved by the 1300 businesses using the cloud is £316,000, according to the research, with some businesses saving more than £5m.

The survey claimed 46 percent of businesses included in the study save more than £16,000 per year by using cloud, while 31 percent save more than £31,000 per year.

Because it is effectively a rental model, cloud computing shifts IT costs from upfront to a subscription model. In some cases this can work out more costly over the long-term and the researchers said for some larger companies this had lead them to chose a hybrid approach – the cloud for some services while retaining in-house infrastructure for others.

But for SMEs the lure of the cloud is particularly strong because they are able to compete with bigger companies at a fraction of the upfront IT cost in terms of buying infrastructure or hiring specialist staff.

Half of respondents said they are using the money saved to fund product and service, while 15 percent of respondents said they were creating new positions as a result of their cloud investments.

Speaking at the launch of the report, Dr Brian Nicholson of Manchester Business School, said the thing that stood out in the results was the willingness in the US to adopt the cloud. “There was a big contrast with the US where the sample was saving more, reinvesting more and making more profits,” he said.

But companies still need to tread carefully when it comes to costs, said Nigel Beighton, international VP for Rackspace: “One of the things about moving to pay-as-you-go is that people do need to be aware of what they’re spending,” said Beighton. “The cloud offers huge advantage as long as you understand what you are spending and you control it.”