UC: Many industry users we’ve spoken to feel under-informed about Utility Computing. What can you tell us about it and how would you differentiate Utility Computing from outsourcing, if indeed you would?

Joe Hogan: Well...what we’re often talking to clients about, is being positioned to adapt their infrastructure very quickly to the changing demands of both technology and business requirements. In order to be able to do that, there are really three options. You don’t necessarily have to choose just one – you might choose a combination of all three – but there are really three economic models under which our clients would buy from someone such as HP.

The first is what we call the fulfillment model. That’s where a client says, "I know what I want to do, I know the kind of variability that I need. What I really need from a provider right now is the platform and the customer support for that platform so that I can take care of it myself as self-enabling."

The second economic model is what we call enablement. For example, if a client comes to us, and says, "Gee, I’ve got all of these disparate servers all around the world, in closets, etc. I’m only utilizing 10 percent capacity. Why don’t you look at something like file print for me, and see if you can consolidate those and enable me to do that kind of work on an on-demand basis, so that I can let my users know that they’ll pay for this on a consumable basis.

Then you have the third model – really, an out-tasking one. That’s where the client is looking for a provider to manage the risk of that environment, based on what they need to accomplish and to be able to pay for that on as much of a variable basis as they would like.

What we’re talking to clients about, is a standard menu. We’ll sit down and say, "OK, here’s how that would work out." The next step in that process is typically them saying "ok, 50, 60, maybe even 70 percent of this, is just what I need standard wise - but on this 30 percent I need something a little bit different." So as you move into something, for example, like SAP supporting payables, receivables, general legend, manufacturing process, the client says, "Well, I have very specific configurations; I have very specific images."

So I need both this kind of standardization, but I need the customization that’s focused within my world. And so really what we actually find ourselves doing right now, is providing the customized utility approach to our clients so they can take advantage of the variability as much as possible today, but still have what they believe they need that’s proprietary to them.

UC: When you talk to customers, what are the typical objections they raise to Utility Computing – a lot of people seem uncomfortable with the fact that they would no longer owning those assets, but are effectively renting them. Are there deep-rooted objections, or do we just need a change in people’s attitude?

Joe Hogan: Typically, what we’re seeing today, and I’ve been in this business for about 21 years, (and I think the economy drives this) is that people are moving more towards consolidation and cost reduction. The emotion around saying, I need to own that asset so I can physically touch it, is beginning to move away. People are beginning to recognize that certain processes and certain applications, don’t actually drive competitive advantage.

For example, the payroll system doesn’t drive competitive advantage for a lot of folks, unless you’re ADP. However, to General Motors or to Deutsche Bank, that’s not necessarily the thing that makes my world go. And I think there’s a much greater realization in the executive ranks today, that that’s definitely something to look at – what is the best in terms of the infrastructure, the apps and the process that support that – ‘what’s the best return on my investment?’

You know, just one of the things I point to that when I look at our out-tasking or out-sourcing business, every one of those has a variable component today. That market, depending on who’s statistics you use, has a growth rate of about six to eight percent. What we’re seeing (also against some of our more successful competitors) is double-digit growth!

A lot of times when I talk to both CIO’s and CFO’s today, the first thing they bring out of their mouth is, ‘I want a different model of doing this so that I can have the availability to scale up and scale down.’

Take the recent CIBC deal, where they had us do a long-term outsourcing deal with them. Inside of that, there’s about 30 percent variable component to it.

The whole trend seems to be, customers wanting that flexibility, adaptability, and the on-demand variability. Then, if I’m going to do business with you, the next question that really comes out is show me in your research and development, what your roadmap is to get me to that point.

What we’re excited about is the fact that we have the roadmap that we’ve been thinking about for many years. In some ways, when IBM announced last November (and this is not a shot at IBM), when they announced "on-demand" in November, it really for us, was a great shot in the arm, because it continued to validate everything that we’ve been saying in the marketplace for a year.

UC: Are particular vertical industries adopting this technology, much quicker than others and what are the markets to which utility computing offers the most opportunity?

Joe Hogan: Our view is that there are four prime markets for this today. One is financial services which has always had more of a predisposition to an outsourcing or an out tasking type of approach.

However, when you also look at the Telco industry and all of the capital constraints that they have on them now, there’s a real economic reason to look at how do they variablize the infrastructure that they have and be able to provide better service to their clients?

The third space that we look at is the manufacturing space. There we see a much higher level of demand on the discreet side, as well as in the process area.

The other space we see is the government space, partly because we’re in a down economy and that affects the tax rolls, so it affects their revenue. So there is the need to go more variable, be more efficient. What they’re beginning to look at is, is there a different way to do this fixed budget that I get every year?

UC: Has the merger increased your abilities, where does the Utility Computing capability come from within HP?

Joe Hogan: Well if you look at the intent of the merger and start from the beginning of that, I think what they [who put the deal together] were really looking to put together, in the marketplace, the foundation for an effective alternative to an IBM.

When we put the Compaq and HP services pieces together we ended up really with a very good foundation. If you compare our services versus IBM’s services versus EDS, it actually took both of us from a much lower ranking to a very strong three behind those two firms.

So the first objective was to say, "OK, if we can put all this together in a very fundamental way, set it up as an alternative and prove to the world that we can do this," which is really what we’ve been about since May the 7th... we’ve been able to achieve the cost saving synergies that we wanted.

We’ve been able to achieve the increase in our services business. If you look at our quarterly earnings announcements since then, in terms of where we’re going, we’ve been able to get market recognition that this is of value. One citing that I’d offer to you, would be the Information Week article that came out in November, where they did a sampling of 740 IT Directors and VP’s, within North America and had them rank on a set of criteria who the easiest people were to do business with. We got a really nice result, our customers said us, and we rank number one.

The next thing’s that happened, is the analyst community beginning to say, "Hey, these guys are definitely contenders, someone that is an effective alternative."

We can also bring in some very strong partnerships with, say an Accenture or a Deloitte Consulting. Our positioning, at least for the short-term right now, is that no one company can really do it all. We have to grow up to that in the future.

UC: One term that is often used is that of grid computing derived from the national electricity grid. In the future do you see users simply plugging into a monolithic provider to access the applications they require?

Joe Hogan: I think you can make the argument that yes, sooner or later (probably more later than sooner), you’re going to begin to have that kind of grid on a very basic level. Yet I still believe that, enterprises being enterprises, companies still have very specific value propositions, whether they are factual or believed, in terms of what they bring to their clients.

So they’re still going to need some level of customization or specialization as you move from you know, say the cage box on the floor. For example, to a specific configuration of SAP, supporting a very specific business process.

Yes, you know, I think that need for variability is still going to always be there to drive them.

UC: The idea of people plugging in, is too idealized to happen for a very long time...

Joe Hogan: There’s a lot of artificial intelligence that needs to be put in place, to make something like that happen.

The other issue, the one that I always keep running into in my mind, is one that nobody’s been able to solve yet, is the licensing of the software.

If you think about, doing business with, say, Oracle today, you can buy their database licenses and everything else in about four or five, maybe eight, nine, ten different ways. And they’re very specific to the site, very specific to the box. If we go to that grid world in the sky... the very large software providers like Microsoft and Oracle and SAP are literally going to have to change their economic model to make that work.