Utility computing may force outsourcing providers to abandon neutrality

Major hardware vendors such as IBM, HP and Sun are leveraging their own computing resources to create utility computing environments that enable enterprises to rent computing power on an as-needed basis. For the major outsourcing service providers, the question is rapidly becoming: how do we keep up?

The fact is that hardware providers have a significant advantage over large systems integrators when it comes to utility computing, because hardware vendors bring their own computing resources to the table. A hardware provider can build a utility computing infrastructure at cost, which gives them a decided pricing edge over any third-party provider that must buy its computers. Thus, even the largest outsourcing providers enter the utility computing market at a disadvantage.

How can outsourcing vendors compete? Generally, the answer will be through partnerships with hardware vendors that enable the systems integrator to build a utility computing infrastructure at a low cost, then cut the hardware vendor in on the resulting service revenue. EDS, one of the industry’s largest outsourcing service providers, announced such a partnership arrangement just last week.

EDS said it will work with Computer Associates, Dell, EMC, Sun and Xerox to create utility-computing capabilities at its data centers in the U.S. and worldwide. It has also tapped Microsoft as a partner for user applications.

EDS will leverage the partnerships to help create its Agile Enterprise Platform, through which outsourcing customers will pay only for the amount of computing power they use during a given period.

The effort is clearly aimed at countering offerings by IBM, HP and Sun, through which enterprises can purchase outsourced computing services to customers based on usage. These vendors generally build these offerings using their own dog food; IBM uses a combination of Linux, along with its own hardware and middleware such as WebSphere and DB2, for its utility-computing platform.

Partnerships such as the one EDS unveiled last week could enable the major outsourcing vendors to compete on a level with the major hardware vendors, but they will pay a price. By adopting only the hardware offered by their partners in their utility computing offerings, the major systems integrators will be forced to abandon their neutrality in hardware selection. EDS’s utility computing offering will use CA, Dell, EMC and Sun – clients will not be able to choose their own hardware vendors.

In a recent meeting with financial analysts, Charlie Feld, executive vice president for portfolio management at EDS, acknowledged that the partnerships represent a strategic shift for the firm. EDS hasn’t been price competitive with IBM in the past because of the expense of supporting numerous software and hardware combinations on behalf of its services customers, Feld said. “We have been reluctant to choose sides,” he said. “But being agnostic is too expensive.”

If other systems integrators follow the EDS example – and simple math suggests that they will have little choice – then the potential for user-selected utility computing infrastructures could be at substantial risk. Much as today’s users have little say about which switches their telephone providers use or which equipment their electric companies use, tomorrow’s utility computing service customers may have no input as to what hardware – or even software – their service providers implement.

In some senses, this lack of choice may not create a problem for enterprises. After all, the whole idea behind utility computing is to purchase computing power on an as-needed basis, without doing any of the administration yourself. Most telephone service users today are happy as long as their services work, and they don’t even know the names of the switch providers.

But in the near term, many companies will want to synchronize their own internal IT infrastructures and applications with those of their external service providers. This could be difficult in some cases, because the utility computing infrastructure uses different hardware and software than their own. In the past, outsourcing providers have been willing to acquire the necessary resources to facilitate this integration, but with the advent of hardware vendor alignments, those days may be over.