Monday, December 16, 2002

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Guest Commentary: Utility computing could make the ASP model a reality

By Jeffrey M. Kaplan

IT prognosticators have been promoting the virtues of utility computing for a number of years, but the concept has only recently begun to gain momentum.

The concept is to deliver turnkey IT services on a fee basis similar to those provided by electric power companies, cable operators and telecommunications carriers.

Recent events and relatively successful client trials make the prospects for utility computing greater than ever.

The question is: Can the growing number of utility computing providers overcome customer fears about this new form of IT service and convince them of its business benefits?

The utility computing concept is an outgrowth of two faded ideas spawned during the Internet craze: the hosting business and application service provider (ASP) model.

The hosting business was born of the premise that enterprises would not want to assume the capital costs of acquiring storage and server technology to support their escalating computing needs during the Internet boom times.

The ASP model was an extension of the hosting business premise, offering enterprises a pay-as-you-go software services alternative.

These two ideas combined to suggest a shared services computing solution that became the underpinnings of the utility computing services model gaining popularity today.

However, the hosting business collapsed as a standalone industry with the demise of companies such as Exodus, Digital Island and Genuity. Excessive spending on facilities and technology ahead of real demand led to economic ruin for these companies. The fall-off in Internet growth and the commodization of server and storage technology compounded the hosting industry's problems.

The ASP market hasn't fared much better. Enterprises have been hesitant to subscribe to third-party software services because of security, reliability and flexibility concerns.

Given the tenuous financial status of many ASPs, enterprise customers were reluctant to entrust their corporate data to companies that could fold at any point.

As a result, a majority of ASPs, including many leading players in this market, have either disappeared or downsized considerably.

These problems haven't prevented some of the industry's biggest players from attempting to take the concept of shared services to the next level - utility computing.

Earlier this year, EDS acquired LoudCloud's hosting facilities and related services to expand its IT outsourcing business toward a utility computing model.

Big IT vendors see utility computing as an opportunity to penetrate the small and mid-size business markets, where they have had limited success in the past.

But the big players still face serious challenges in making the business a success.

First, they must build the technical infrastructure to deliver these services in an automated and cost-efficient fashion.

Second, they must develop differentiated packaging and pricing models that appeal to a variety of customer segments.

Third, they must assure customers that the service is reliable and the customers' proprietary data will be safe.

Finally, they must develop a migration strategy that assures customers they can acquire their own technology and assume full responsibility for their IT systems and applications.

These challenges are compounded by escalating competitive pressures from smaller, local IT service companies and resellers who are entering the utility computing market.

As competition intensifies, each provider is defining its offerings differently and running the risk of diluting the meaning and value of this new IT delivery model.

Utility computing holds the promise of delivering IT business functionality without the capital expense of hardware and software acquisition, or ongoing operating costs of application development, deployment, maintenance and management.

Whether utility computing suppliers can fulfill the promise by properly packaging, pricing and positioning these services remains to be seen.

Jeffrey Kaplan is the managing director of ThinkStrategies, a Wellesley-based IT consultancy. He can be reached at jkaplan@thinkstrategies.com.