Utility Computing's PayoffUtility Computing's Payoff

When several vendors last year began touting utility computing as the right model for buying server capacity, storage, desktop services, and applications, not many companies were willing to take a risk on an unproven pricing scheme in an uncertain economy. Utility computing hasn't taken off the way EDS, Hewlett-Packard, or IBM imagined, but Hurwitz Group predicts that businesses will spend $12.3 billion this year on the infrastructure, resource-management software, and services to create utility-computing environments.

Companies can adopt utility computing in one of two ways. One is to outsource the entire IT operation under a contract with a service provider that charges the customer only for the server capacity, storage, bandwidth, or applications it uses. This is the more common utility-computing model that's spearheaded by leading service providers EDS and IBM Global Services. Each scored major utility-computing customer wins earlier this year.

American Express Co. signed the largest outsourced utility-computing deal ever in March. AmEx expects that the seven-year, $4 billion deal with IBM Global Services that covers Web hosting, server and storage capacity, and help-desk services will shave hundreds of millions of dollars off its IT costs. AmEx pays a $4 billion base fee, plus fees based on the consumption of CPUs, storage devices, and help-desk services it uses during the course of running its business. A month earlier, 7-Eleven Inc. signed a seven-year IT outsourcing contract extension with EDS worth about $175 million. Rather than structure the contract on a flat fee, the value fluctuates depending on the resources 7-Eleven uses.

The second way businesses can adopt utility computing is with on-demand access to storage and server capacity that scales larger as the customer's needs increase. The trouble is, companies were able to scale up when business picked up but couldn't cut down when things slowed.

Last month, HP advanced its capacity-on-demand computing model so that server capacity could scale in both directions. HP's Temporary Instant Capacity On Demand lets customers activate and deactivate CPUs as their needs change. Similar to a prepaid calling-card model, HP sells a 30-day license for $3,400 and sends customers an electronic key to activate the processors. If a company doesn't need the extra capacity by midmonth, HP can scale the system down and hold on to the remaining time on the license until the customer needs the capacity again. Unisys Corp. is the only other vendor that offers capacity on demand and the ability to scale back down.

It will be several years before any company will place all of its IT resources in a utility model. "I run into very few clients who say they're ready for the big bang of utility computing," says Jeff Kelly, EDS's president for hosting services. The sheer newness of a utility-computing model with software that can accurately meter usage and bill accordingly excuses technology executives from buying into any utility-computing hype. From a more pragmatic perspective, it costs money to invest in new management software and paradigms when the old ones still work.

Companies typically consider shifting certain parts of their business to outsourced utility computing. The patient data at Atlantic Health System is simply too valuable to entrust to an unproven IT model. Robert Hendricks, VP and CIO at Atlantic Health System, is in charge of life-saving apps at the hospital network, which doesn't typically outsource IT. He would be much more likely to entrust payroll systems to a service provider than patient-care applications. "Utility computing does have an appeal on a financial level, but putting that into practice is a major challenge for anybody," he says. The challenges would include implementing management software for companies doing their work themselves, developing service levels that share risk and reward for those outsourcing, and proving the case for cost savings in either scenario.

Much of utility computing's financial appeal is getting more out of existing IT investments or paying a service provider only for the IT resources used in a given month. Although there aren't many companies that can attest to the long-term financial impact of utility computing, the model shows promise. In the past, service providers have signed their customers to outsourcing contracts that estimate usage and charge a fixed amount for the life of the contract. The utility model benefits the customer if it uses fewer resources over the life of the contract, but it benefits the service provider if the customer's IT needs increase over time.

It's been tough for companies to assess such arrangements because they've been shifting priorities in the slow economy. Blue Cross and Blue Shield of Michigan, for example, uses a utility approach to procure and manage its desktops, but adoption of utility computing for back-end storage or server capacity will have to wait until it has finished compliance with the Health Insurance Portability and Accountability Act, freeing staff and funds, says David Doney, director of IS customer service. Doney and his IS colleagues haven't had time to crunch the numbers. "We're heavily involved in meeting HIPAA compliance, so utility computing has been put on the back burner," he says.

EDS hasn't sat idle while it waits for businesses to loosen their purse strings for utility computing. This month, EDS began pilot programs for two customers -- a manufacturer and an energy utility -- that use Ejasent Inc.'s MicroMeasure software to provide real-time metering of the amount of processing power used. EDS also made deals to use IT automation software from Opsware Inc., formerly Loudcloud Inc., and storage-management software from StorageNetworks Inc. in its data centers.

EDS's moves to implement IT resource metering and automated provisioning software will have a serious payoff in terms of finding ways to eliminate unused capacity both within EDS and at its customers' facilities, says Ron Silliman, a senior Gartner Dataquest analyst. "If you get a customer who understands the economics of it, they'll recognize that EDS is providing a powerful set of applications."