IBM, other vendors say pay-as-you-go utilities are the future

The pressures on. A major competitor has just launched an online service, and your customers are calling and e-mailing by the hundreds, asking when they can expect to see your companys response.

The sad truth, however, is that youve been caught flat-footed. You have to cook up a strategy and business plan; develop and test applications; and deploy servers, storage and network capacity—overnight. In the weeks or months it will take to do that, your impatient customers can have long since defected.

Youre toast, right? Not necessarily. You pick up the phone, dial your favorite IT service provider and say, "I need e-commerce applications and the servers, storage and bandwidth to accommodate 5,000 online customer transactions a day, and I need them deployed by Friday. Have a menu of service options and prices on my desk by tomorrow." By early the following week, youre ready to rock n roll.

If vendors such as IBM, Sun Microsystems Inc., Hewlett-Packard Co., Compaq Computer Corp. and Accenture Ltd. have their way, this is how enterprises will procure and pay for the IT infrastructure to support e-business initiatives in the near future. In the last few months, each of these large IT hardware and service providers has begun to lay out plans for offering pay-as-you-go IT utilities. Though the details vary, the essential idea is that vendors such as IBM, in Armonk, N.Y., or Sun will deploy ready-to-use computing capacity—either at a customers site or in shared data centers. Customers can then tap into that capacity quickly and easily, much like users of electric power who buy more by simply flicking a switch.

On the surface, experts say, the idea seems well-suited to e-business, where new business plans need to be executed quickly and where IT resource needs arent easily predictable. But dont expect the idea to become a reality overnight. Even deep-pocketed vendors such as IBM—which since last December has been pouring billions into the idea—admit that its going to take years, not months, to develop and refine the new technologies and business models that the IT utility concept will require. Such technologies will include, for example, those needed to monitor and tune the performance of a shared utility to meet specific customers performance needs and to automate usage-based pricing.

In the meantime, it may take vendors at least that long to sell the idea to enterprise IT executives, many of whom are skeptical of turning over control of big chunks of the e-business infrastructure to service providers, particularly if it means relying on shared servers and storage networks. "Were executing the same thing as IBMs initiative, but were doing e-sourcing ourselves—internally," said George Surdu, director of e-infrastructure and network services at Ford Motor Co., in Dearborn, Mich. "Were determined to maintain our key intellectual capital in this area. Were not interested in outsourcing it to anyone."

Learning to share

ibms version of the it utility concept—which it calls e-sourcing—is certainly among the most comprehensive and ambitious. CEO Lou Gerstner introduced the initiative in December, promising that IBM will spend $4 billion to build 50 new data centers and the new technologies needed to give the companys e-business customers IT capacity on demand. Since then, the cost of the initiative has increased, IBM officials said—although they wont say by how much—as the task of making e-sourcing real raises new requirements. IBM, for example, is making a major push to find and train legions of integration experts who will be needed to make sure the hosted e-business systems that customers sign up for under e-sourcing work well with existing legacy systems.

"Investment in and commitment to the idea is definitely accelerating," said Ginni Rometty, general manager for strategy and marketing at IBM Global Services, in Somers, N.Y., and strategy leader of the e-sourcing initiative.

The capacity-on-demand IT utility idea being promoted by IBM and other vendors is significantly different from traditional outsourcing and Web hosting. In the new model, enterprise customers will be able to quickly and easily increase or decrease their use of IT resources. And, at least in the version being promoted by IBM, they will not have specific, identifiable servers and storage devices dedicated to their applications. Instead, they will share resources with other e-businesses using the same utility. The vendor will track usage and billing as well as guarantee data and application-level security. Service providers such as IBM said that sharing servers and other IT resources in this way—and driving high levels of use—will allow them to reduce costs and offer lower prices that even small and midsize e-businesses will be able to afford.

So far, the test case for this concept from IBM has been its Managed Storage Services offering announced last September. Customers pay a flat, entry-level rate of $30 per GB per month for access to shared, managed network storage. Rates go up for add-ons such as guaranteed high levels of availability. IBM officials said e-business customers can save between 30 percent and 40 percent on the total cost of storage by turning management and provisioning duties over to the vendor.

And, indeed, some organizations already are doing just that. ChartOne Inc., of San Jose, Calif., an 18-year-old provider of medical records management services, for example, is using IBMs Managed Storage Services offering to launch an online version of its traditional product line. Historically, the company has provided hospitals and clinics with on-site records storage and management services. The company has installed systems and software at its customers facilities—about 1,000 altogether—where it digitizes documents, stores them and retrieves them as required by customers. That model, however, is becoming more complex and expensive for customers as privacy regulations such as the Health Insurance Portability and Accountability Act require them to keep better track of who accesses records, when and why. So ChartOne is beginning to offer customers lower-cost remote, networked services using IBMs storage utility to store and manage the information.

Dont ChartOnes customers worry about potential security and availability problems associated with sharing storage platforms with other enterprises—possibly even competitors? Not really, said Peter Henderson, senior vice president of marketing and strategic planning at ChartOne. "Were able to explain to them that its a combination of our people and IBM making the information available 24-by-7 with redundant backup and security," Henderson said. "The fact that its IBM provides a lot of credibility."

Without access to IBMs storage utility, Henderson said, ChartOne would not have been able to afford to launch the networked service, which the company calls Vchart.

But, for some vendors, the vision of IT utility goes well beyond just providing shared core infrastructure such as storage on demand and on a pay-as-you-go basis. IBM and services provider competitors such as Computer Sciences Corp., of El Segundo, Calif., for example, are also using the shared-utility concept to offer hosted applications that can be accessed by e-businesses in the same on-demand, pay-as-you-go fashion.

IBM, for example, has begun rolling out its own hosted, horizontal applications using the utility infrastructure. Last month, IBM announced the Virtual Help Desk, a hosted first-level IT help desk service that enterprises can purchase on a per-user basis. IBM said the service will be available next month. That announcement followed similar deals to host materials procurement application services using Ariba Inc.s business-to-business software and remote system and network management application services using software from NetSolve Inc., of Austin, Texas.

Fundamentally, IT service providers say, on-demand, pay-as-you-go e-business infrastructure and applications will give large enterprises and small to midsize businesses the flexibility to launch Web-based businesses quickly and affordably. "Its a license for those people to experiment affordably with what they can do on the Web," said Jim Corgel, general manager for e-business hosting at IBM.

So far away

but while organizations such as ChartOne are buying into the shared, pay-as-you-go IT utility model, others are not. In the 10 months Managed Storage Services has been available, enterprises havent exactly embraced the shared aspect of the pay-as-you-go utility model. And their reluctance, IBM officials said, suggests e-sourcing will likely take years to become fully realized. "Were probably three to four years away," said Don Bradford, general manager of IBMs storage services business unit.

In the case of the Managed Storage Services test case for e-sourcing, IBM has run into problems. First, its been hard for the company to make a compelling economic case for storage as a pay-as-you-go service. When IBM rolled out the offering last September, officials calculated that, including storage hardware, management software and networking bandwidth, they could sell storage on demand for about $45 per gigabyte per month. Not a great deal, considering even small to midsize enterprises at the time could purchase 20GB of storage for about $1,000, Bradford said. While IBM has been able to reduce its costs and offer utility storage for $30 per gigabyte per month, Bradford said it needs to be able to offer storage at between $20 and $25 per gigabyte per month to make on-demand hosted storage a compelling buy. Then the company needs to be able to stay ahead of the rapidly dropping prices of storage.

To do that, Bradford said, IBM needs to develop better software for automating the management of large, shared-storage farms. "We have some technical hurdles to overcome on the financial side in order to make sure our value proposition is credible for clients," he said.

IBM also has hurdles to overcome convincing cautious IT managers that sharing storage networks and other IT infrastructure is safe, secure and reliable. Thomas Richardson, vice president of technology at online residential mortgage services provider Nexstar Financial Services, for example, decided against tapping into IBMs shared e-sourcing utility, even though the company used IBMs full-service Web hosting service, based in Boulder, Colo., to launch its offerings last May. Using the Web hosting service helped Nexstar get its online loan processing system up and running quickly—in just three months. Since then, however, the Creve Coeur, Mo., company has moved its applications to an IBM co-location Web hosting facility in Chicago but taken over responsibility for operating and maintaining routers, firewalls and other security infrastructure. Why? Availability and security, Richardson said, are too important to leave to an outside service provider.

"Economics say if [IBM has] to support more than one customer, they cant do as well as we can supporting ourselves," Richardson said. "Especially when youre talking about database servers, Im leery about sharing infrastructure because I dont know what the other [customer] is doing. What if they suddenly decide to do a big promotion and performance goes down for everyone?"

Fords Surdu has similar concerns. Rather than outsource to any vendors IT utility, Surdu is creating his own. Long before vendors such as HP and Compaq began announcing plans for computing-on-demand service offerings, Surdu demanded that IBM and other vendors install server, storage and other IT infrastructure in Ford data centers in advance of the companys actual need. Ford pays only as it turns on the gear.

So far, most IBM storage customers presented with the e-sourcing concept are instead opting for an approach such as Surdus. Rather than plugging into a shared-storage utility, many have asked IBM to install storage capacity in their data centers and allow them to pay for it as they use it. IBMs Bradford calls it a "private utility. Theyre telling us, Take my storage, but dont take my data. They dont want to let it off-site."

IBM officials said they have a plan for reassuring IT managers about the security and guaranteed performance of a shared utility. The company, they said, is making major investments to develop a new generation of tools that can be used to monitor the performance of a shared utility in such a way that the response time and availability afforded to a given customer can be guaranteed. One such research project, dubbed Oceano, will not only track customers use of shared server farms, it will also monitor service levels so customers can be assured of getting the performance theyre paying for. IBM is also tracking similar development efforts in the open-source arena and plans to deploy significant portions of the e-sourcing utility on servers running the Linux operating system, according to Dave Turek, IBMs vice president of Linux emerging technologies, in Poughkeepsie, N.Y.

Such efforts should eventually go a long way toward reassuring IT managers that moving their e-business systems to a shared, pay-as-you-go utility model is safe. Right now, however, IBM and other vendors need to do more to sell enterprise customers on the potential benefits, experts say. "Neither IBM nor any of the other vendors so far have really convinced customers of the potential benefits of a shared network-level infrastructure," said Melanie Posey, an analyst at IDC, in Framingham, Mass.

IBM officials admit they still have a lot of work ahead, both in selling the e-sourcing idea to enterprise customers and in rolling out the technologies and new business models needed to support it. So far, they said, the companys early efforts at e-sourcing have only proved that building a comprehensive, shared, pay-as-you-go IT utility that e-businesses will buy into will take years.

"Were still in the early stages. We dont have 17 e-sourcing [customer] references who say they can turn it on and turn it off at will," IBMs Corgel said. "But were not all racing to this in the first few months with the expectation that theres a quick pot of gold there. It would be crazy to think that. But theres an inevitability to the idea of all businesses being able to change affordably, to turn computing resources on and off depending on their creativity and the time they can devote to the new business generation."