Services ready for prime time

A year ago in this space, I suggested 2003 would be remembered as an inflection point in which the IT and telecom industries began to move from a product/ technology orientation toward a new services-oriented model. I predicted this movement would continue to evolve in 2004, fueled by growing acceptance of on-demand/utility computing and managed services models. As we approach 2005, the question now is whether vendors, carriers and resellers truly can deliver on their utility computing and managed services promises.

Given the significant proportion of traditional outsourcing deals that fail, it is not surprising that managed services have become an attractive alternative for many users looking to offload some of the hassles associated with IT and networks. Unlike traditional outsourcing arrangements that typically entail the wholesale transfer of an entire IT or network operation, today's managed services let users shift day-to-day management responsibility to service providers incrementally, test the service provider's delivery capabilities on a pay-as-you-go subscription basis and mitigate their risk.

Rising demand for managed services has led Cisco to acquire NetSolve, a managed network service provider, in September and Sun to acquire SevenSpace, an IT and application services provider, last month. These acquisitions are newsworthy because both vendors generally had purchased only technology start-ups.

In September, Sun also jumped on the utility computing services bandwagon when it unveiled a managed, on-demand grid computing service starting at $1 per processor, per hour. By shifting from a traditional system sales model to a managed services approach, Sun clearly is responding to users' growing preference for pay-as-you-go services. Sun's aggressive pricing schedule also has brought a new level of price competition to the utility computing market.

On the network side, AT&T unveiled its WebService Connect service, which creates an online, extranet-type environment in which companies can develop applications and then share them with business partners on an on-demand basis. The service is built on a service-oriented architecture platform developed by Grand Central Communications that lets corporations and government agencies more easily create, share and manage electronic supply-chain capabilities.

Cynics might see these offerings and acquisitions as simply the desperate moves of companies that are facing stiff competitive and severe financial pressures. One industry event suggests otherwise. Salesforce.com, a leading provider of Internet-native applications, had one of the most successful IPOs in 2004 and announced an 81% increase in subscribers over the past year, resulting in an 82% revenue increase.

Bottom line? The demand for on-demand/utility computing and managed services is growing. The challenge in 2005 for vendors, carriers and resellers will be how to package, price, position and deliver these services successfully. For users, the challenge will be how to use these services more effectively to achieve their business objectives.

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Copyright © 2004 IDG Communications, Inc.