Is E-Sourcing The Next Wave?Is E-Sourcing The Next Wave?

The idea of offering IT infrastructure and services as a utility has come to the fore recently with such companies as Compaq and Hewlett-Packard announcing plans to provide customers with on-site server and storage capacity that scales up or down and to charge them accordingly. But IBM Global Services says it plans to push the utility model further, delivering and managing infrastructure and applications as a single outsourced service.

To accommodate the growth of its "E-sourcing" model for utility-based delivery of IT resources, IBM during the next three years will expand the number of Web-hosting centers it runs worldwide to 75, up from 25, at a cost of $4 billion. It's a sound investment if market-research firm International Data Corp.'s prediction holds true that the market for on-demand services such as network management and Web hosting will grow to $55 billion by 2004. IBM says its E-sourcing services, which include Web hosting and network management, will pull in $6 billion this year.

E-sourcing encompasses a spectrum of IT resources, from Web, server, and storage infrastructure services to on-demand E-procurement and help-desk business-process services. "The market is heading in two distinct directions," says Doug Elix, IBM Global Services senior VP and group executive. "The first is a technology utility, where you can get IT infrastructure by the click, on demand. The second direction is utility-based IT at the business-process level." For example, E-procurement is a business process--what the customer is really buying is a more efficient way of procuring goods and services, Elix says.

With IBM's E-procurement services, which include access to the Ariba Commerce Services network, customers log on to a site with catalog information from vendors that IBM has preselected; they pay a monthly fee based upon the volume of purchases they make and the number of catalogs they add to IBM's offerings.

Procurement, help desk, storage, and server services are available now. As part of E-sourcing, IBM also remotely monitors and manages the health of its customers' infrastructure and applications. IBM charges all its E-sourcing customers a monthly fee, using criteria appropriate to the different services. Customers pay for storage and server capacity by the gigabyte, managed services according to the volume of network traffic being monitored, and help desk by the number of seats eligible for support.

This usage-based pricing is a key distinction between E-sourcing and conventional outsourcing, where IBM Global Services takes over all or a portion of IT operations for a flat monthly fee. Another difference: Rather than customizing for a single customer, the utility model relies on mass customization to multiple customers on a shared infrastructure.

Elix says the services market is in the early stages of this new trend, which has its roots in Web hosting, where real estate, network connections, and management resources are also shared. For Nexstar Financial Corp., IBM's Web-hosting services have enabled the St. Louis mortgage provider to keep its site up and running while its clients research interest rates, apply for mortgages, and check the status of their applications. Because the housing market hasn't been as affected by the economic downturn as much as other markets, it's harder than ever to forecast bandwidth, power, and capacity requirements, says Thomas Richardson, Nexstar's VP of technology. He's intrigued by the idea of extending the utility concept to other areas.

"IT resource forecasting is time-consuming, and if you wait until it becomes a problem, it's too late," he says. New services "will become more advantageous to us as they mature." Web hosting lets Richardson keep Nexstar's Web site up at a fraction of what it would cost his company to buy or outsource its entire IT infrastructure.

Customers of utility-based services need to be certain that their service provider can deliver a high level of uptime with "massive cost-savings, meaning more than 20% off this year's outsourcing contract," says IDC senior analyst David Tapper. "We're heading toward a utility model of delivering IT, but the service providers have to deliver better savings than existing flat-fee outsourcing. If they don't, they're doing it wrong."

Elix agrees with Tapper's sentiments that cost savings are key and points out that the utility computing model won't work for every IT application or every business. For example, banks won't see cost savings by placing databases that process a consistently high volume of transactions out on a distant network. "That database is better managed right next to the server that processes the transactions," Elix says.

But a company that relies more on the Internet for storing digital media content, hosting applications used by its customers, and conducting E-procurement is more likely to appreciate the value of E-sourcing, Elix says. "Companies with a lot of Web-based content but an unclear picture of when and how often that content will be accessed are candidates for the utility model."