E-sourcing: Information Technology on demand: Utility computing marks a new stage in the evolution of outsourcing, and may be the first to fully deliver on the strategy's true potential - CEO Perspectives

Chief Executive, The, Feb, 2002

The business objective behind the concept of outsourcing has always been a fundamentally sound one: handing off responsibility for non-core functions to a third-party provider, thus freeing up capital and human resources that can be redirected to more strategic uses. In theory, the strategy is supposed to result in improved quality and efficiency in both the outsourced support functions and the in-house strategic ones, along with a net cost savings. In practice, results may not meet expectations. Customer demands increase, as well as the need for greater speed and cost efficiency to remain competitive. In the area of information technology, however, that may be about to change, thanks to a new concept dubbed utility computing, or "e-sourcing."

Utility computing is a pay-as-you-go model frequently likened to the electric industry. Just as end-users tap into their local electric grid and pay only for the power they use, utility computing customers will be able to tap into a mammoth computer grid and be charged on the same basis for their IT services. Transforming fixed costs into variable costs has long been one of the key objectives of IT outsourcing, and utility computing promises to provide a more granular and flexible way to achieve that end, notes Bill Martorelli, vice president, enterprise services strategies, at the Hurwitz Group, an information technology industry research and consulting firm.

"The emerging excitement over utility computing stands in stark contrast to the dismal current picture for co-location and managed services providers," Martorelli says. "By offering a variable-cost alternative, the advent of utility computing opens up exciting new possibilities for enterprise customers increasingly concerned with the high costs of current computing models."

Simply stated, e-sourcing entails the delivery of standardized processes, applications and infrastructure as a service over the network, with both business and IT functionality. It differs from traditional outsourcing and current hosting services in three key ways:

* E-sourcing is shared, simultaneously serving multiple customers in a flexible, automated fashion.

* It is standardized requiring little customization or integration.

* It is scalable, providing capacity on demand in a pay-as-you-go model.

The concept also holds out the promise of additional benefits to end-users. It can help companies simplify the adoption of new technologies, minimize IT hiring and training obligations, and compress time-to-market for new, value-adding projects and initiatives. As IBM Chairman and Chief Executive Officer Lou Gerstner Jr. pointed out in a security analyst briefing in May 2001, that last point may be the most significant to chief executives.

"Speed drives every CEO and every business manager today," Gerstner told the analysts in supporting his contention that IT will increasingly be a services-led industry in the years ahead. "It is the top item on every manager's agenda -- specifically, speed and response time to competitors. When you couple this with the [IT] skills shortage, you see the explosive demand for services."

Utility computing's promise is prompting many enterprises to view the concept as a continuum that extends beyond commonplace IT resources on demand. Indeed, utility computing aims to strengthen the delivery of business process and management functions integral to the way the organization works. It is in that expanded view that its ultimate potential will be realized, most analysts believe.

THE FUTURE OF CORPORATE COMPUTING

Virtually all the IT industry's heavyweights, along with a host of smaller companies, are positioning themselves to jump on the utility computing bandwagon -- or have already done so. Some are focusing on providing the enabling hardware and software infrastructure, some on content and processes. One of the most comprehensive and wide-reaching efforts to date is IBM's "e-business on demand" project, and senior executives at the company have clearly signaled their belief that this is the future of corporate computing.

Gerstner set the tone in December 2000, when he declared that the future of business computing would be the sale and delivery of information technology as a utility-like service over the Internet. "We are rapidly approaching a day when customers aren't going to have to own, manage or even house any of the traditional assets of our industry," he said. "The processing, the storage, the applications, the systems management, security, load-balancing -- all of it -- can be provided over the Net as a service." Gerstner also promised that IBM would focus on this new utility model, delivering software, server time and data storage to customers on a pay-as-you-go basis, like power from a socket.

To be sure, some observers have been skeptical. They point to the hype surrounding e-commerce in the past and previous outsourcing trends that did not live up to initial expectations. "They want to know if utility computing is for real or merely the latest hope for vendors anxious for a way out of the current industry slowdown," Martorelli says.