The computer industry has a certain genius for turning its own excesses and errors into new business opportunities. Computer code written with no regard for a new millennium? What an opportunity for Y2K remedial work. The Internet as a playground for hackers and identity thieves? Let us show you our security solutions.
Now, having sold so much hardware, software, middleware, vaporware, services, and sundry other line items to Corporate America — to the point where customers continue to have trouble digesting (not to mention paying for) it all — the industry has responded with a highly touted concept known variously as utility computing, on-demand computing, adaptive computing, pay-as-you-go computing, and software-as-a-service. While it's not nearly as simple as it sounds, it certainly sounds good: customers find the idea of paying only for the computing resources they actually use irresistible. Before they can get to that metered model, however, they may have to incur some significant costs, primarily in shaping up their business processes. And the promise of lower overall IT costs seems to hinge on spending more money with key vendors, allowing them to enjoy larger slices of a shrinking pie.
That's why some wonder if utility computing (to use the most generic-sounding option) amounts to what Forrester Research Inc. principal analyst William Martorelli calls "an account-control mechanism." He sums up the keen vendor interest this way: "If you can sell customers on using your infrastructure, they won't buy from your competitors."
Spending more money with fewer vendors is an IT trend that predates utility computing, of course, and is in fact a tried-and-true cost-cutting strategy in virtually all expense categories. The utility-computing concept is appealing to many financial and IT executives, a number of whom have already taken the plunge. A recent study by Saugatuck Technology (in conjunction with our sister company CFO Research Services) found that nearly 20 percent of the more than 300 executives surveyed have already implemented some form of pay-as-you-go IT services. Reduction of capital and operating costs rank as the top lures, while the chief inhibitors are security, privacy, and vendor (over)dependency. Despite those qualms, Saugatuck concludes that utility computing will be mainstream by 2006.
Meter Leaders
Sensing that they have a winner, a substantial number of IT vendors have come out with utility-computing sales pitches, and many others are ready to respond if market acceptance warrants. IBM and Hewlett-Packard have been the most aggressive champions of the idea — or ideas, since the companies have different visions of what utility computing actually is — but the noise generated by smaller companies clearly indicates that if utility computing is ultimately about giving more business to fewer companies, the smaller firms don't plan to disappear without a fight. And while it's been quiet so far, Microsoft has made a number of moves that could help drive the utility trend.
IBM CEO Sam Palmisano has committed $10 billion over 10 years to develop and market "E-business on demand," or, more casually, "on demand" services. HP claims it already has thousands of pay-as-you-go contracts signed, but emphasizes that the metered pricing model is but a stepping-stone to its grander vision of the "adaptive enterprise." Sun Microsystems, EDS, and others all promise to bring savings, efficiencies, and greater business flexibility to corporate customers by allowing them to pay only for the computing capacity they actually use.
Early adopters include such large enterprises as Philips Semiconductor, which tapped HP to help it move to a utility model in order to utilize its internal-computing resources more efficiently. Large companies with complex infrastructures represent the sweet spot for utility computing today, but growth-oriented firms as well as those with seasonal spikes in demand are also likely candidates. Hallmark Cards contracted with IBM to avoid buying extra Website capacity that would be needed only around such busy card-mailing holidays as Christmas and Valentine's Day. And Paul Mercurio, CIO of Mobil Travel Guide, says metered Web hosting by IBM allows Mobil to pay only for the computing resources it actually uses, saving it 25 to 30 percent annually compared with a traditional fixed-price outsourcing arrangement (see "Leave the Disk-Driving to Us," at the end of this article).
Just how real is utility computing today? Nick van der Zweep, director of virtualization and utility computing at HP, says 40 to 50 percent of HP's high-end 128-bit-processor Superdome servers "go out with some form of utility pricing." IBM, which offers more than 30 flavors of utility services, has financial-services giants American Express Co. and JPMorgan Chase among its early customers.
Some executives are intrigued, but wary. "I love the concept, but it's going to take some time to evolve," says Joe Gottron, CIO at Huntington National Bank, a Columbus, Ohio-based regional bank with more than $30 billion in assets. Gottron likes the idea of slashing capital expenditures and operating costs, and he enthuses over the prospect of handing over the time-consuming task of negotiating individual software-licensing agreements. But he is concerned about the risk of signing a utility agreement that does not define charges for every service the bank may need in the future. "The biggest challenge is being all-knowing with the original agreement. When you hand control of your infrastructure to another company, you can really get burned," he says.
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