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Why Utility Computing Will Succeed Where ASPs and Outsourcing Failed
[Leif Eriksen, Founder and Principal, Industry Insights 2003/8/6]

In our last article (“Will the Real Utility Computing Model Please Stand Up”) we defined utility computing as the provision of IT-based functionality on demand.  We argued that much of the marketing hype around utility computing misses the mark. IBM and other vendors hoping to benefit from the trend have done the concept a disservice by not being clear about their own definition and delivering very little in the way of working examples.   As a consequence users are struggling to see the difference between utility computing and previous, failed attempts to reduce the cost and complexity of IT such as Application Service Providers (ASPs) and outsourcing.  In today’s article, we will explain why utility computing will succeed where the others failed.

The Rise and Fall of ASPs

It’s not clear when the first ASP emerged but by the year 2000 they had become the next greatest thing since applications themselves.  From a hype perspective the timing was good.  ASP proponents were able to ride the wave of inflated expectations created by the dot.com mania.  Everyone – even the big telecommunications firms such as AT&T and Sprint – jumped on the ASP bandwagon.  It seemed so compelling.  A third party operates and maintains your applications resulting in cost savings and better performance.  The only problem: They failed to convince users.

The ASP vendors hung their hat on a weak value proposition, namely the marginal cost savings available from hosting someone else’s applications.  Users did the math and were not impressed with what they saw.  Given the marginal economics, the questionable business models of many of the ASPs, and the consequences of failure, the lack of user enthusiasm is understandable.  Today the term ASP has assumed negative connotations and is on the way to becoming a historical footnote.  Most providers have exited the space.  However, some ASPs are hanging on, whether from hope or simply contractual obligations.

Outsourcing Hangs On

Outsourcing, unlike ASPs, has a long history in the world of IT provisioning.  And it continues to hold an attraction for a certain segment of the buying market.  Yet, despite its longevity, there is no shortage of dissatisfied customers of outsourcing.  Two to three years into outsourcing contracts, many users find themselves questioning whether they are getting a good deal or not.

The most common complaint about outsourcing can be paraphrased as “IT productivity is no better than it would be with internal resources but we have less control and pay too much.”  Whether true or not, the comment highlights a problem with outsourcing, namely, there is no good way to measure performance for comparative purposes.  The only baseline most companies have is the productivity of their own IT department pre-outsourcing.  Which begs the question: Just how good (or bad) was their IT productivity before outsourcing?

Utility Computing: A Different Paradigm

Utility computing starts by asking what the user wants.  By contrast, the ASP and outsourcing models started with the existing IT infrastructure and asked how they might do it better.  Utility computing is IT-based functionality on demand.  The other two are IT resources, infrastructure, and/or applications for lease.  Utility computing is a service that is so compelling that it makes little sense for users to do it themselves.  The other two are options that leave the users ambivalent about the trade offs.

Ask any business manager or executive how they would like to get their IT-based functionality and the answer will be something like “reliably and cost-effectively.”  The analogy to established utilities is appropriate because the services we take for granted today such as reliable and cheap delivery of electricity, water, and telephone were once only available to companies that could do it for themselves.  On the other hand an apt analogy for ASPs and outsourcing is leasing.  But you will hear very few business managers and executives say “take my existing infrastructure/applications/people and lease them back to me.”

A true utility computing service provider builds an IT architecture from the ground up that takes advantage of shared resources, whether it be the Internet itself or shared application resources such as a database.  The result is an order of magnitude cost saving over owning the infrastructure and applications yourself.  In comparison, the ASP and outsourcing models only deliver, at best, low double digit cost savings.  Best of all, utility computing costs are scalable – users only pay for what they use.  Both the ASP and outsourcing models assume the execution of a traditional software license/maintenance contract – which encourages overbuying of functionality and seats – by one of the parties.

Increased responsiveness is the most compelling benefit of utility computing.  A utility computing service provider’s income is dependent on delivering the functionality users need, when they need it.  And in a utility computing model the barriers to switching between service providers drop considerably.  As a result the service providers will be significantly more responsive than internal IT departments, outsourcers, and ASPs alike.  Customer satisfaction becomes the only metric that matters, dispensing with the need to develop a shopping list of IT performance metrics as in outsourcing and ASP contracts.

The differences between utility computing and the ASP and outsourcing models are summarized in the accompanying table.  Utility computing is a new model, one that even some of its most vocal proponents don’t fully grasp.  But one thing is for certain, there will be plenty of pretenders looking to take advantage of the growing demand for utility computing.  Why?  Because it will succeed where others failed.

Stay tuned for the next installment where we discuss the barriers to utility computing adoption.

Leif Eriksen is founder and principal at Industry Insights, an independent consultancy. He has over 20 years experience in business strategy and technology and can be contacted on leif@industryinsights.net.


Utility Computing vs. ASPs and Outsourcing

Outsourcing

ASPs

Utility Computing

Description

Outsource IT resources.

Outsource the operation and maintenance of applications.

Subscribe to IT-based functionality as required by the business.

Analogous to

Contract labor

(variable term based usage and billing)

Equipment leasing

(fixed term based usage and billing)

Electrical power (demand based usage and billing)

Buyer

CEOs/CIOs/Senior VPs

CIOs

CIO/Business Users (manager & above)

Seller

Traditional IT outsourcing firms (EDS, CSC, IBM, and others)

ASP startups, hardware vendors, software vendors, telcoms

New vendors (e.g., salesforce.com), software vendors, hardware vendors

Product

IT resources

Application hosting

IT-based business functions

Cost

High – client has limited leverage over resource pricing and productivity.

Medium – marginal cost savings over self-hosted.

Low – pay only for current needs, vendor leverages shared resources.

Benefits

Reduced complexity.

Marginally reduced costs –results are mixed.

Reduced complexity, reduced costs,  increased responsiveness.

Risk

Medium – service providers tend to be large and stable but it can be disruptive.

High –an immature market with many providers failing or dropping out.

Medium – the market is immature but the model limits financial exposure.

Flexibility

Low – wholesale, all or nothing.

Low – limited by the terms of the ASP contract as well as the application license.

High – as flexible as the users ability to switch providers as necessary.

Scalability

Low – vendors are primarily interested in large contracts.

Low – determined by the license terms and vendor interest.

High – functionality and number of users adjustable on demand.

History

Long, but mixed results.

Short, very few positive experiences.

New, building on the lessons of the past.

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