Utility computing is creating unprecedented flexibility in the services outsourcers can offer to enterprise customers.
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Outsourcing is as old as the hills, and on-demand computing (or utility computing, if you prefer) is becoming a better understood concept in enterprise computing.
Put the two together and you get a fascinating opportunity for IT organizations to “transform the way computing power is consumed,” says Jeff Kaplan, managing director at THINKstrategies, a research firm. “Traditional outsourcing was about handing over enterprise problems to a vendor, without any expectation of transforming the operation. With on-demand [outsourcing], that expectation is there.”
On-demand outsourcing has the potential to help companies meet today’s IT goals: a direct, measurable link to business goals; the ability to change quickly; and increased flexibility in staffing.
Vendors pile in
From the beginning, IBM has been closely associated with pay-by-the-drink computing. This extends to the outsourcing arena. IBM’s Strategic Outsourcing Flexible Support Option, introduced early this year, lets companies outsource data center management on a pay-per-use basis. In a departure from previous IBM on-demand outsourcing, customers need not transfer their data center IT assets and employees to the outsourcer.
Here’s how it works: IBM’s Global Services unit uses its Universal Management Infrastructure (UMI) – a blend of systems management; software deployment and configuration management software; architecture workflows; and outsourcing methodologies – to manage the client company’s data center remotely from an IBM facility. First comes an assessment of the customer’s data center to map the infrastructure. Next, IBM consolidates and standardizes the data center environment, with the goal of simplifying management. IBM then uses UMI to link the data center to its remote management site.
From that point on, IBM manages the data center, primarily via automated tools. In this fashion, the customer has the option to outsource only parts of its data center – applications, storage devices, servers, networks or some combination thereof. Pricing depends on the scale of the job, the number of components under IBM management and service use volumes; fees are negotiated monthly or quarterly.
While IBM leads the field of on-demand outsourcing, it is hardly the sole entrant. HP is IBM’s “most prominent competitor,” followed by Unisys, Kaplan says. Electronic Data Systems, too, is a player.
Most major enterprise application vendors, including Oracle, PeopleSoft and SAP, are aggressively pursuing the software-as-a-service idea. (Kaplan says Oracle claims half of its new software sales follow the pay-per-use outsourcing model.) Microsoft is a notable exception, “hanging on the sidelines,” he adds.
System integrators, such as Accenture, have joined the on-demand outsourcing fray, too. Application-on-demand specialists, such as Corio, and hosting survivors, like NaviSite, round out the list of competitors.
Road map
Utility-style outsourcing works well for Mobil Travel Guide, a 2-year-old unit of Irving, Texas-headquartered ExxonMobil that runs like a start-up, says CIO Paul Mercurio. “We’re growing rapidly, and it’s a seasonal business,” he says.
For those reasons, Mobil Travel Guide chose IBM’s On Demand Linux Virtual Services to run what is essentially a virtual data center that encompasses all the guide’s IT operations except its core e-business application.
“Under [outsourced on-demand computing], we can add capacity as needed and also can ramp it down,” Mercurio says – a vital capability, because automobile traffic swings up 50% from winter to summer. “That way, we match our cost with our revenue,” he adds.
Mercurio estimates he’ll save 25% to 30% over three years. “IBM manages everything except app dev,” he says. “It runs our servers, network and databases and monitors the whole thing 24/7.”
Mobil Travel Guide pays for its resources on a usage basis. Mercurio says the ability to adjust capacity on short notice is a major advantage; IBM can effect changes to network bandwidth, storage or processing power almost instantly (although Mercurio says real-world administrative needs make two weeks more realistic). For example, in mid-August, the travel guide notified IBM that it was expecting heavy Labor Day weekend travel, and IBM assigned additional resources accordingly.
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Under the agreement, Mercurio’s group retains control of developing and supporting its e-business application. “Our responsibility is to deliver an app that does what our company wants it to do,” he says. “IBM’s responsibility is to load [that application] into our environment, manage it minute-to-minute and work with us so we know when we need to grow it.”
City slicker
For the city of Minneapolis, utility-style outsourcing enabled a necessary regrouping of the IT department, says Karl Kaiser, who joined the city four years ago as CIO. “I’d inherited technicians focused on IT for its own sake – there was no business focus, no customer-service focus,” he says.
At the time, Minneapolis’ IT organization, which has an annual operating budget of $20 million to $22 million, devoted about 60% of its resources to “keeping the infrastructure alive,” Kaiser says. The daily drudgery involved in maintaining the city’s servers, PCs, PDAs and network was a distraction that could prevent employees from focusing on customer service, which is his top priority, he says.
“I didn’t just want a typical outsourcing deal – I wanted to find someone to acquire those [infrastructure] assets so I could get out of that business altogether,” Kaiser says.
Kaiser’s group sent out an RFP in May 2002 and, later that year, signed a utility-style outsourcing contract with Unisys. Under the deal, Minneapolis moved all its servers (a combination of AS/400s, Unix and Windows NT) to a Unisys data center. Intensive effort, led by a full-time project manager, let the city complete the transition in 10 months.
Minneapolis’ rapid transition is enviable and rare, says Chris Engle, a Meta Group analyst. “For the most part, [on-demand outsourcing] is not a flip-the-switch proposition,” Engle says. Meta’s enterprise clients are finding that a two- to four-year transition to utility computing is typical. Much of that time is devoted to altering business processes such as procurement or asset management to exploit the outsourcer’s software applications, Engle says.
For nearly a year, Minneapolis has bought its basic IT infrastructure from Unisys as a consumer buys electricity from the local utility. The outsourcing arrangement has been a success on two levels, Kaiser says. First, the city is ahead fiscally. “I had operating savings of $2.5 million” in the first full year, he says. Minneapolis also has dodged other costs by signing with Unisys. The city faced a $4.5 million upgrade of its disaster-recovery capabilities, but that expense was folded into the outsourcing deal. All told, Kaiser forecasts savings of more than $20 million over the seven-year contract.
Savings like that are not unique to on-demand-style outsourcing, but this is: By handing off only its infrastructure to Unisys, Minneapolis can devote more resources (including the savings noted) to developing, integrating and in some cases Web-enabling the applications that are important to city residents.
“We are refocusing the department on becoming more of a consultant service to city agencies,” Kaiser says. “We now have more flexibility to provide service, rather than tech talk. We can go in and act as business-process-reengineering consultants, asking [agencies], ‘What is your business need?'”
Ulfelder is a freelance technology writer in Southborough, Mass. He can be reached at sulfelder@charter.net.
