Pay-as-you-go IT

Just like gas and electricity, some companies are paying only for the amount of IT resources they use.

Eighteen months ago Fluor, one of the world’s largest publicly owned engineering groups, was managing a bloated infrastructure. The Aliso Viejo, Calif., company’s 1,000 IT professionals ran multiple IT operations serving 50,000 employees in 50 countries. Pockets of IT functions were outsourced, there was duplication of effort among operations, many servers were underutilized and costs were hidden.

Drastic measures were needed, which led newly appointed CIO Ray Barnard to draw up a global enterprise strategy to maximize efficiency and minimize cost. The result was a $531 million, seven-year pay-as-you-go IT infrastructure deal with IBM that’s projected to save Fluor between $65 million and $80 million in costs over the life of the contract.

Under the deal, which Fluor and IBM implemented in January, Big Blue provides support in four areas: network infrastructure, desktop and LAN, global server management, and help desk administration. Although IBM is the service provider and about 285 Fluor workers transferred to the vendor, Barnard maintains this isn’t an outsourcing arrangement. “It is an on-demand sourcing strategy,” he says. IBM owns all the equipment in the new infrastructure. Similar to how customers pay a public utility for the gas or electricity they consume, Fluor only pays for the resources it uses.

Utility pricing isn’t new. Rooted in the mainframe days, the model became popular in the dot-com era when Web hosting firms, application service providers and storage service providers gave start-ups flexible resources. That model fell by the wayside after the dot-bomb, but utility pricing has recently resurfaced with big names such as EMC, HP and IBM pushing their offerings.

During the soft economy, traditional companies such as Fluor are finding benefits in such pay-as-you-go plans. “IT was on an 80% fixed and 20% variable cost model; with on-demand we are moving to a 78% variable and 22% fixed model, which allows for movement of IT support to meet the needs of the business,” Barnard explains.

Internal customers are looking forward to only paying for what they use, whereas previously, IT costs were split equally among large and small business units. Usage is measured based on throughput in processors, number of helpdesk calls taken and gigabyte-size for storage. By year-end, once the new infrastructure is complete, IBM will bill Fluor monthly.

Fluor’s new IT strategy also has enabled the company to reduce its global IT headcount to 400. Those folks work with IBM to provide infrastructure support and are responsible for internal applications development and management. The other 600 staff either moved to IBM or another area of the company, or had their positions eliminated.

Just six months into the program, Barnard already is a huge fan of utility pricing, and says that it could spark a rejuvenation of the IT industry. “This is the first time that I’ve seen the IT world come up with a new strategy that would allow me to support business needs without being locked into a vendor or a flat rate cost model. I’d be more willing to try new software and services, such as wireless and Linux, if I am charged by what I use.”

On a smaller scale, Wells Dairy introduced utility pricing in its midsize IT environment last December, in a bid to save $200,000. The ice cream maker signed a three-year pay-per-use contract with HP and is considering bringing its test environment plus other applications to the new model, which would increase cost savings to $1 million over the same contract period, says Kim Norby, vice president of IS in LeMars, Iowa.

Previous to utility pricing, Wells Dairy ran an eight-way server that was leased from HP. For three hours a day the server would be maxed out processing a specific application that measures inventory to calculate how much raw material is needed to make ice cream. But for the rest of the day, only two CPUs were required for regular IT processing, the other six would be sitting idle – as an expensive overhead.

Now, under HP’s utility pricing scheme, Wells Dairy is leasing a pair of 16-way HP RP8400 Minidomes and the company pays only for the number of CPUs it decides to turn on. It uses four CPUs on one machine and two on a second failover system and is billed monthly.

“We’ll continue to field test pay-per-use and there will be an aggregate move of applications to this model. Applications considered include data warehousing, payroll, additional HR, and manufacturing control,” Norby says.

Mark Johnson, manager of systems engineers at Wells Dairy, adds, “When testing applications we had to guess how much power we would need. [This model] enables us to add and subtract resources so we don’t need to be as accurate in guessing how much power is needed.”

Although storage and hardware vendors are making a lot of noise about utility pricing, enterprise software vendors, whose lifeline is complex software licenses, have been very quiet on the idea. Oracle, for example, says utility pricing wouldn’t work for software because it’s difficult to determine how much of a software suite each user would use at any given time. Instead, company officials say it is considering a subscription model to small and midsize businesses.

Barnard and Norby say they would jump at a utility pricing model for software and believe that software vendors would eventually offer it under customer pressure.

“There’s not a lot to lose to get into pay-per-use,” Norby says. “You’ll quickly find it makes sense.”