On the teams I've worked on at Google, we pretty much take the same approach. The only problem is when you're looking beyond your own team's contacts, and you have to search a few different spreadsheets to find the contact of interest. We've thought about using the API to provide a central search to all of the spreadsheets for that case, which wouldn't be too difficult to do.

I'm sure the real contact management tools are nice, but I also love the beauty and ad-hoc nature of spreadsheets. It's so easy, anyone can do it, and so everyone does do it. Might as well embrace it and build on top.