Pay as You Go: Instead of buying computers,
you pay for the work you do on them; It's a
whole new business model -- and it has some
big backers
Gary McWilliams
Mar 31, 2003
THERE'S AN IDEA sweeping through the computer world -- one that has
companies rethinking how they buy digital gear and manufacturers rethinking
how they sell it.
The idea -- called "utility computing" -- involves paying a company to provide
you with computing power when you need it. So, instead of buying hardware
and software, companies would pay for the work delivered on those systems,
much like paying for electricity rather than constructing a power plant.
Early adopters of utility computing have been cash-strapped companies that
can't afford to buy the latest gear. But the idea is catching on fast among
thriving companies that simply want to save money on overhead costs. And
many in the computer industry predict such arrangements will boom in years
to come as companies face ever-increasing pressure to rein in spending and
streamline their operations.
"At the end of the day, it's about savings," says Michael Sztejnberg, a
managing director in J.P. Morgan Chase's Enterprise Technology Services
group, which recently agreed to pay International Business Machines Corp.
$5 billion over seven years for utility-computing services. IBM will take over
the operation of J.P Morgan's data centers, help desks and network servers,
providing extra capacity if needed.
The biggest savings with utility computing, Mr. Sztejnberg says, come from
better use of computing resources. Today, he says, big corporations overbuy
equipment, stocking up on thousands of computers, storage systems and
networks that are chronically underused. "There can be multiple servers for
each application [that a corporation uses] -- one for production, one for
backup and one for testing," he says. "There is limited sharing and very low
utilization on average."
Meanwhile, for a computer industry struggling with an uncertain future, utility
computing could represent a sea change in how technology consumers and
their hard-pressed suppliers operate. Instead of selling a computer, a onetime transaction, companies would earn monthly fees for the metered use of a
computer. The same goes for software companies: They're accustomed to
selling a program and perhaps getting small maintenance fees or an upgrade
fee when a customer accepts a new version. Under a utility model, they'd
earn revenue based on how much a customer uses their package.
Utility-computing advocates are betting that the idea will become so popular
that customers will end up buying more services over time, thus making up for
the lost equipment sales. Providing everything a customer needs to deliver a
paycheck or some other business staple "is a good business for us, and a
decent margin business," says Nick van der Zweep, Hewlett-Packard Co.'s
director of utility computing.
H-P, for instance, offers traditional computer leases as well as utility
arrangements. So, a customer could choose between paying $5,000 a month
to lease a supercomputer, or take a capacity-on-demand contract and get the
same computer as a service for $3,000 to $5,500 a month based on usage.
"We guarantee they're not going to pay more than a lease and most likely
they'll pay less," says Mr. van der Zweep. "We've shipped over 10,000 of
these capacity-on-demand systems."
The system works like this. First, you contract with a technology company to
provide some or all of the computer infrastructure you need for your business.
For example, if you need a top-to-bottom computer setup, the contractor
would provide an array of desktop PCs and the network hardware needed to
run them. If you just need extra computing capacity during peak times, you
might simply get access to the contractor's servers when necessary.
After the equipment is set up, you pay the contractor based on how much you
use the equipment -- either by the hour or in terms of the number of specific
tasks done. So, instead of laying out for a companywide computer network or
a massive supercomputer, you might simply pay a monthly bill for each
payroll check or health-care claim processed on the system, or each e-mail
sent and received.
Currently, very little of computer and software companies' revenue comes
from utility operations. But the companies are beginning to make big
investments in the hardware and software that make utility operations work.
IBM Chief Executive Samuel J. Palmisano last October pledged to invest $10
billion over the next five years in research and development, acquisitions and
marketing for its e-business on demand utility. H-P and Sun Microsystems
Inc. each are rolling out software and services to deliver this new paradigm.
Last month, Microsoft Corp. acquired technology from Connectix Corp., San
Mateo, Calif., to help network servers handle utility arrangements. Software
maker Cisco Systems Inc., of San Jose, Calif., has agreed to make its
products fit into H-P and Sun's utility-computing plans. Companies such as
Opsware Inc., of Sunnyvale, Calif., already provide software for monitoring,
metering and allocating computing costs among departments in a company.
So far, many of the firms that have gone the utility route couldn't afford to buy
machines of their own. For instance, IBM's earliest customers for its utility
services include Amtrak, the troubled railroad, and Petroleum Geo-Services
AS, a debt-laden oil-field-services concern based in Oslo.
PGS pays for time on an IBM supercomputer to run a three-month-long
seismic-processing project. Previously, PGS would have had to expand its
data center to handle the peak load. With IBM's supercomputing-on-demand
service, PGS simply turned on the faucet for the additional processing power,
saving an estimated $1.5 million.
"PGS has been looking for a more flexible business model which addresses
peak computing requirements . . . but minimizes long-term, incremental cost
commitments," said Chris Usher, president of PGS Data Processing.
Now utility computing is starting to spread to big, stable companies that
simply want to save money -- a category that's growing fast in this unsteady
economy. To be sure, the companies are starting slow, combining utility
computing with traditional outsourcing deals (which generally offer a fixed
price and a fixed set of features, with little wiggle room if your needs change).
But utility advocates argue that even those first steps show there's a market
for the cutting-edge idea -- and that it will spread as the economics of it
become wider known.
GATX Capital, a unit of Chicago-based finance company GATX Corp., pays
H-P a monthly bill to manage its data center, but can buy more computing
power to accommodate its changing needs. IBM, meanwhile, counts among
its clients auto-parts maker Visteon Corp. The company was spun off from
Ford Motor Co. in 2000, and didn't have its own computer gear. So it signed a
10-year, $2 billion contract to have IBM provide all its systems and ongoing
operation service. Visteon will also pay a variable monthly fee depending on
how many services it uses.
Some industry experts, however, question just how widespread utility
computing will be. META Group analyst Dean Davison says that companies
won't switch to the utility model unless it's obviously cost-effective -- and
companies won't be able to judge that unless they know their own computing
habits in great detail. For example, a company would have to know how many
e-mails it sent or how many claims it processed in a given month. Many
companies don't have the time or resources to track that kind of minutiae.
"Companies will have to get away from the idea of how business is done
today," he says. "This isn't going to be for everybody."
Moreover, Mr. Davison says, companies will need much more detailed
information about the quality of service that utility firms provide. Anybody can
find out the specs for a specific piece of hardware, he argues, but nobody
knows how good a hardware maker will be at providing reliable service.
Meanwhile, Randall D. Mott, Dell Computer Corp.'s chief information officer,
says utility computing is nothing but an attempt by makers of mainframes and
other expensive computers to hold onto their hardware business in the face of
lower-cost products -- like the kind Dell makes.
Utility advocate Tom Kucharvy, president of Summit Strategies, a Bostonbased technology-consulting firm, believes that argument is a canard. The
companies providing utility computing will be always looking to new
technologies to lower operating costs, he argues, if only to improve profits.
Further, Mr. Kucharvy believes utility computing will spread. The appeal of
paying only for what you use, he says, could an irresistible lure as resourcesharing technology becomes more widely available.
Indeed, says Mr. Sztejnberg, as companies begin to better grasp the cost of
conducting an inventory check or a online sale, the benefits of paying for
computing according to the ebb and flow business will become indisputable.
"It's not that someone blows a whistle and it all changes," he says. "It'll be a
gradual change."
--Mr. McWilliams is a staff reporter in The Wall Street Journal's Houston
bureau. He can be reached at gary.mcwilliams@wsj.com.