practicalities of office 365

this is the reason Microsoft created sbs essentials.  Limited to 25 uses, does your file sharing, remote access but integrates with O365.  Whether O365 is good for a particular customer remains to bee evaluated.  If they have solid internet service (very infrequent outages) with petty good speed...O365 might be a good choice

As Cris says, SBSe is great for te under 25 user businesses. For over 25, just a win 2k8 R2 standard edition server works well as a domain controller and print server. O365 can be a good fit, but that takes evaluating your needs.

For file sharing, long before O365 I've been slowly warming my customers up to Sharepoint. Beats file servers hands down. With O365, I'd leverage sharepoint workspaces, an on premise Office 2010app, to help cache and sync, reducing the over-wan editing and uploading pain points you mention.

-Cliff

Exchange, Sharepoint and Lync are IMPORTANT items for a business, if the server goes down, you're in a pickle.  A broken update, a server failure, a hard drive failure, and you're toast. Having them hosted elsewhere relieves the network admins of a lot of potential problems. For the price it is well worth it. Disclaimer: I am a Microsoft partner (Gold) so I can be a bit biased.

A good blog to read is here

@ve3ofa
Not sure what your experience with SBS is, but when properly spec'd, installed and maintained, the likely hood of the issues you mention are minimal.  And with a proper Disaster Recovery plan, pending hardware issues, the server should be able to be recovered in short order.

The outages I've seen of BPOS/Windows Live/etc, are far longer than any interruptions any of my customers have had

With an onsite server, if the net goes down, you at least have access to existing data/mail, with hosted solutions, if the net goes down..now your screwed.

I hate having to rely on a 3rd party to rememdy an issue affecting my customers.

Also a Microsoft Partner and Microsoft Small Business Server MVP, so I know I'm biased.

Food for thought. That fills the gaps in for me somewhat I need to investigate 2011 essentials more. What happens user documents and desktop items on client machines, they obviously still remain locally? Most companies run a networked accounts package again this will be local.

So the options are really are install sbs 2011 standard have everything internal have users accessing owa services externally coming in on the current broadband or else install sbs 2011 essentials paying to have sharepoint /exchange/ lyncs in the cloud but everything else local? With my early knowledge of this product I think this would be a hard sell
For a company that has 2003 sbs that want to upgrade other than connectivity for working remotely (which issues are few and far between on the current setup) and disaster recovery which also is covered by proper backup procedures I am struggling to see why you would want to complicate things by using sbs 2011 essentials and office 365?  There is also the security element your data is now in the cloud and there is no way of knowing who potentially has access I can personally see customers opting to error on the side of caution and keep everything internally for the sake of the extra money..

There is always going to ba a need for something on site...then there must be an evaluation between IT staff and business owner about which solution is the best

And as Cliff pointed out, you could use windows server standard and 035 if it fits the business need.  SBSessentials is a better value for 25 or fewer employees because Remote Web Access exists there too and all 25 cals are included

Not sure what your experience with SBS is, but when properly spec'd, installed and maintained, the likely hood of the issues you mention are minimal.  And with a proper Disaster Recovery plan, pending hardware issues, the server should be able to be recovered in short order.

As long as you are careful with updates it works very well, unfortunately a sharepoint service pack tended to break Sharepoint 2010.  In which the Microsoft Employee mentioned that Server products were special and had to be maintained (re updates) differently, the fix was simple once one knew about it but in most SBS installations the level of experience of the "tech" is rather low. And SBS is pretty much a set it up and forget it.. it just works.

BPOS and O365 are different products with different SLA's  (most recent Oct 1,2011) and it is broken up into 9 different categories. And starts and discounts start at less than 5-9's 99.999% which is still almost 6 hours per year. We use a combination of both, with a backup exchange server available as needed.

The outages I've seen of BPOS/Windows Live/etc, are far longer than any interruptions any of my customers have had
With an onsite server, if the net goes down, you at least have access to existing data/mail, with hosted solutions, if the net goes down..now your screwed.
I hate having to rely on a 3rd party to rememdy an issue affecting my customers. Also a Microsoft Partner and Microsoft Small Business Server MVP, so I know I'm biased.

you and me both.. having good backup practices in place, we can normally get them up on new hardware in 1hr from the time of the call. And most internet providers do not provide 99.999% availability, but they try and schedule their planned outages to the wee hours of the morning which just happens to be in the middle of our major critical networking time. Redundancy in depth always helps. (piece of mind costs $$$)

Basically, you still need your local server. O365 can federate with your local AD for seamless user login.
Sharepoint is not recommended for companies bulk files but for a selected active files. Bulk files should remain in the file server and should be backed up as they are today. Also, you can use Sharepoint workspace (included in all O365 packages) to work with offline files in case there is no internet connection and all files are synced as soon as the internet is available.
In my opinion, for the price, it's a great option, because there are many things you are not considering, like electric bills for the servers, or TI services for maintenance.

BTW, they do offer free unlimited archiving from E3 and free Blackberry BES server starting next year.

As a business solution you can address these issues discussed.
Complementing Office365 with SharePoint Wworkspace 2010, you can synch local files to the O365 to provide local files speeds and off-site storage.
With a local copy of Office (one of the package options or install retail pkg)  to include Outlook, you do not have to put users in OWA.  However, when the user is NOT local (using a laptop, smartphone, home computer, etc.) the email, contacts, calendar, etc. are synched and available in OWA and/or a phone app.  
I would conceptualize the use of Office365 to deliver (as you originally state) email, contacts, calendars, and shared files.  When you off load that much activity from a server, you have moved that much traffic and admin headache from the local network.  
Don't forget that you get full Exchange features - discoverability, archiving, shared calendars, and more!  You  have email discoverability accross mailboxes.  Retention policies, password resets, corporate messaging rules protect the business.  
You can supplement your OFfice365 with a Small Business Server Essentials for local app proecessing, local file storage, backup of your cloud files, and, even, use for remote desktop access when away from the office.  
Think about having laptops use the remote desktop in place of VPN or offline file copies.  Working remotely would be more secure than letting the laptop (or phone) data travel with the user.  (What about the business issues of lost laptops and cell phones)   Shared desktop support is included for remote support issues.    
In short, the Office365 extends your solutions for email, contacts, calendars, and shared files access.  It does not replace ALL of your needs for a local server.  
PS  PowerShell scripting is available for the O365 environment too!

Apologies for the delay I will close off shortly