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By Doug Bartholomew  |  Posted 06-01-2004

Utility Computing: Back to the Future

To download a PDF of the Utility Computing Factsheet, click here.

To download a table outlining the path to Utility Computing, click here.


The ROI for the utility computing model is a no-brainer. But not even the vendors pushing the concept think it's ready for prime time.

IBM Corp. calls it "on demand computing." Hewlett-Packard Co. says that it goes hand in glove with its vision of the "adaptive enterprise." Computer Associates International Inc. has launched a fleet of systems that do nothing but map it, track it and bill for services rendered.

Whatever the label, the concept is compelling: the idea that companies could get rid of rows of back-room servers, legions of IT staffers, and all those expensive software upgrades in favor of a system that seems to require little more than plugging into an electric wall socket.

It's called utility computing, and although, in concept, it has something in common with electricity, the reality is still a ways from catching up to the hype. What's driving interest in the model is sheer economics: If enterprise applications—along with all the necessary hardware and people needed to make them work—could be paid for as needed, then corporations would stand to save untold millions of dollars they now spend each year to buy and maintain their underutilized equipment. And given the budgetary scrutiny every CIO faces these days, it's no wonder the pay-only-for-what-you-use plan is looking so attractive.

Unfortunately, most experts say it may take as much as a decade before most computing chores become as easy to access as current from the local power plant. It may be unreasonable to expect that companies will ever be able to tap into every last piece of business functionality, perform every number-crunching computer task, track every customer shipment, and process every invoice using someone else's system— not to mention someone else's IT staff.

Even now, when you peek under the hood, what most IT vendors are labeling "utility computing" is really a warmed-over version of old ideas such as outsourcing, hosted applications, Web hosting and the like. Says Lance Travis, vice president of research on outsourcing strategies at AMR Research Inc. in Boston: "No vendor has a customer that is taking advantage of the whole spectrum of things—hardware and software, service and outsourcing, and pay-per-use—that makes up utility computing."

As an example, he points to IBM's taking over Sprint Corp.'s call centers and providing business-process improvements and new technologies to support those processes. "The net result is improved business processes and technologies at lower cost." But the deal, he points out, is primarily outsourcing plus consulting services.

Even IBM admits that its customers tend to be trying bits and pieces of the whole. "Customers are moving parts of their computing infrastructure toward the utility-computing goal line," says Eric Stouffer, program director of on demand management solutions for IBM Tivoli Software.

Still, it's best to consider true utility computing as an endgame that you should be preparing for now, because even if you aren't, your competitors may be. And the big reductions in IT costs the model promises will be sure to give the overachievers a huge competitive advantage.

Ask Your IT Staff:

  • Where do we stand in the pay-as-you-go provisioning of our IT resources?

    Ask Your Line-Of-Business Managers:

  • Would you be willing to accept IT resources provided on a utility model?

    Tell Your CFO:

  • We need to determine the financial benefit of utility computing.

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    Experts agree that the first steps toward utility computing will arrive in the bits and bytes of corporate computing—data-processing power, data storage, connectivity over a network and basic applications. It's less clear, however, whether strategic software applications that support key business processes are likely to be served up over a network any time soon. As AMR's Travis puts it, "Utility computing allows companies to save money on things that are not critical, so their IT staff can spend their time improving the processes that give them real advantage in the business."

    Merrill Lynch & Co. Inc., for instance, is looking into the utility model, but not for its core business processes. "Utility computing holds a huge opportunity, but there are a lot of business practice constraints, not technical ones, to actually moving this into the production environment," says Dave Cohen, a vice president with the firm's technology-architecture team in New York. For one thing, it's unlikely that the brokerage house's traders will allow their complex data feeds to be farmed out any time soon. The company's systems are too business-specific—and too strategic—to be offloaded to someone else, Cohen says.

    Despite these limitations, many companies are trying out utility computing in one form or another, usually for a particular application such as messaging, Web hosting, PC management, payroll, accounting or call-center management. Saugatuck Technology Inc., a research firm based in Westport, Conn., recently surveyed 310 business executives and found that nearly 20 percent of companies are using some form of pay-as-you-go IT services. Roughly half of those responding thought pay-as-you-go computing would help reduce costs and complexity.

    Most of the examples of pay-as-you-go computing at firms participating in the survey were for basic human-resources and accounting applications, but some included ERP, CRM and procurement. "We're now in the early adoption phase, but eventually it will become the norm in enabling, managing and improving business strategies," says Saugatuck Senior Program Director Mike West. Meanwhile, according to the survey, almost 40 percent of company executives expect their firms to adopt some form of pay-as-you-go IT within two years.

    Ask Your COO:

  • What business applications would best lend themselves to the on-demand delivery format?

    Ask Your Executive Team:

  • What are the business issues that could constrain utility computing?

    Ask Your CTO:

  • How can our infrastructure benefit from offloading certain IT functions?

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    To adopt utility computing, start slow.

    Like cautious consumers taking their first hybrid cars out of the showroom for a tentative spin up a steep hill, companies trying out the utility model tend to go easy on the juice. "We haven't jumped in all the way," says Mike Sutten, vice president of IT business solutions at Royal Caribbean Cruises Ltd. The Miami-based cruise-ship operator is using the utility model to handle seasonal high-volume activity on its Web site. By offloading the Web site functions to Akamai Technologies Inc., including the streaming video imagery associated with the company's various cruise packages, Royal Caribbean can rest assured that its customers are able to get the information, and book the packages, they want. At the same time, the company is spared the expense of having to bulk up its IT muscle just to handle the heavy lifting of those few months each year.

    Although Royal Caribbean's use of Akamai to handle its Web site functions could be viewed simply as an example of Web hosting, it does have certain utility-computing characteristics: The cruise line pays only for capacity it uses, and its Web operations are run on a network of servers shared by other firms.

    The ability to tap added capacity as needed is critical for Royal Caribbean. Last year, the company sponsored several major promotions, and these were expected to double the number of hits the Web site normally received from potential cruisers. "In 2003," Sutten recalls, "we had instances when we had guys literally running down the hallways with servers to add more computing juice. Capacity estimates are not always what reality is."

    In an example of IBM's computing on demand, New York and Los Angeles interactive-marketing communications firm iDeutsch (the interactive arm of advertising agency Deutsch Inc.), contracted Akamai to support a special promotion for Mitsubishi, a key client. Partner and Director Fred Rubin says that going outside for computing services was nothing new for his firm. But last January, iDeutsch had a particularly thorny computing need. The communications firm needed a Web provider with the IT power to backstop what turned out to be more than 4 million unique visitors to a promotional Web site linked to a Super Bowl commercial for Mitsubishi automobiles.

    The job required fielding a total of 14,000 servers. "Absolutely, we were very nervous," Rubin says. "Come Monday morning, after the Super Bowl, we were either going to have the biggest success story, or egg on our faces." The campaign drew so much attention, and was so successful, that iDeutsch was named Mitsubishi's interactive agency of record.

    Ask Your IT Staff:

  • What are the most likely parts of our IT infrastructure to go utility?

    Ask Your Internal Audit Department:

  • What are the ROI metrics for shifting to a utility model?

    Ask Your Chief IT Strategist:

  • Which applications are too strategic to our business to be surrendered to a utility provider, regardless of cost savings?

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    Software companies had better get with the program, or get hurt.

    The coming of the utility computing infrastructure is shaping up in much the same way that the coming of the Ice Age developed for the dinosaurs: While the effect was gradual, the long-term result was a disaster.

    To apply a different analogy, try imagining everyone driving "shared" cars or riding mass transit instead of buying their own personal transportation. The future for companies such as General Motors Corp., Ford Motor Co., Toyota Motor Co., and DaimlerChrysler Corp. would be pretty bleak. Software, computer hardware and networking-systems companies have got to be worried about what this new paradigm is likely to do to their sales over the long haul. "When you change to pay-as-you-go, you don't have the ability to soak the buyer annually, the way software companies have traditionally done," says Saugatuck's West. Even so, he adds, "Large vendors are starting to position themselves for this because they see a very different business model around the corner." In other words, nobody wants to be delivering coal in a world where homes are heated with natural gas that comes through a pipe.

    Among the leaders in the nascent utility-computing market are IBM, Hewlett-Packard, Sun Microsystems Inc. and hosted-applications provider Inc., which West terms "a pure utility play." has more than 9,500 customers, most of them small or midsize, that tie into its Web-based system to manage their customers and prospects. But applications hosting, though it's an important piece of the utility-computing pie, has its shortcomings. One downside is a lack of customization and, often, limited integration with other business systems. For one thing, hosted-software firms usually don't offer much in the way of customization to its customers.

    IBM's Stouffer thinks that will change. "I don't believe utility computing limits customization," he says. "It's the other way around: You need decent flexibility to upgrade to the latest stuff. The vendor should provide customization as required. The nature of competition is going to drive IT providers to provide flexibility greater than the common denominator."

    Clever IT organizations can begin preparing for this shift, AMR's Travis suggests, by moving now to concentrate their efforts on harnessing IT to support and improve critical business processes that enable the company to excel in its market. "IT organizations should be thinking of how they can transform themselves from suppliers of information to strategic thinkers on how to use that information for competitive advantage," he says. "All companies have business information," he adds. "It's what you do with that information that gives you a competitive advantage."

    Ask Your Business Executives:

  • Would you be comfortable having an outside firm host your key business applications?

    Ask Potential Vendors:

  • What backup measures do you have in place to ensure business continuity?

    Ask Your IT Staff:

  • Are you ready to rethink your jobs once you've been freed up from your ongoing maintenance duties?

    Doug Bartholomew is a longtime business and technology journalist.