Reference no: EM13946516

Case study

Electricity, water, phone, ..., IT can IT become a utility?

The case discusses the future for renting software through application service providers (ASPs). Benefits and disadvantages to organizations are described.

In the early days of the internet, visionaries talked of computing becoming a utility. Users would plug into the internet for their data just as they plug into the wall for electricity or turn on a tap for water. As the internet boomed, many new companies were set up to transform this vision into a reality.

Enormous sums were invested in building infrastructure for application hosting providers (AHPs) and application service providers (ASPs). Their mission was to manage software that could be accessed by customers over the internet. ‘Software as a service' took away the need for an organization to worry about IT, so it could concentrate on its own business. The model makes a great deal of sense, but is only immediately attractive to new organizations without an existing computing infrastructure. Dotcoms were natural customers and they signed up in droves. However, when the internet bubble burst, the customer base and market contracted dramatically.

Most of the new players closed down, restructured or changed direction.

Nevertheless, the analyst community believes that the concept of software as a service has a long-term future. ‘There is clear recognition that software as a service, in some form, has value to customers', says David Friedlander, who is responsible for IT services at Giga Information Group, the analysts.

There are a number of differences between an ASP and an AHP. The ASP charges a fixed monthly amount per user that includes use of all software, as well as hardware. The AHP charges for the hardware and operating systems, but requires the customer to buy a full licence for the application software in advance.

Jean Lorrain, chief technology executive Europe at IBM Global Services, points out that ASPs only provide access to a single software application. In contrast, AHPs give their customers access to all the infrastructure needed to support an entire business process.

In its purest form, an ASP writes software ‘from the ground up' to be delivered over the internet to multiple customers from a single copy of the software. This is the approach taken by Salesforce.com, which provides sales force automation software, and WebEx, which provides internet conferencing.

Managing a single copy of the software and its associated hardware reduces the costs to an absolute minimum.

Alternatively, customers want to use one of the major packages, like Oracle, SAP, PeopleSoft, Siebel or Onyx. ‘Most of the software that most businesses use at the moment is not yet written to support delivery on a "one-to-many" basis', says Katy Ring, senior analyst at Ovum, the market analyst. ‘It is a technical constraint on development of the market. The established software vendors are getting there slowly, but they are not there yet.'

This is the model followed by AHPs, such as USinternetworking, Corio, BlueStar Solutions or ManagedOps, as well as software giant Oracle which has 500 customers for its own application and data-base software.

Because these applications are not yet fully ready for use by multiple customers, companies usually require a dedicated copy of the software and sometimes even dedicated hardware, which reduces the cost advantage. However, customers are still expected to use a standard version of the software, to create economies of scale.

Although the concept of software as a service is very simple and appealing, it faces several major obstacles. The first is the sheer complexity of modern IT systems and the inability of any single AHP or ASP to provide everything an organization needs. There is a danger that the customer ends up managing multiple providers instead of managing complex technology.

Associated with this is the problem of integrating different systems. The AHPs and ASPs require large numbers of customers using standard configurations in order to create economies of scale. They do not have the skills or business model to provide integration services beyond simple generic ones, often using their own proprietary utilities.

Similarly, the providers are not geared up for customisation of software, which is an essential source of competitive advantage. They argue that they provide competitive advantage through lower costs. However, this is a short-term advantage that disappears when an entire industry moves to the model.

For these reasons, the major computer services companies, such as CSC, EDS and IBM, are taking market share in the AHP space from the specialist companies. ‘They are independent of the applications themselves,' says Ms Ring. ‘They can supply the underlying infrastructure, implementation, customisation, application, integration and operational skills.'

Mr Lorrain points out that the original AHPs and ASPs had to put together the entire infrastructure to support their business, which is very expensive. ‘We [IBM] are only extending what we are already doing with our strategic outsourcing customers', he says. Management is a major cost and the outsourcers already carry the burden of the five shifts needed to operate 24 hours a day for seven days a week.

Clearly, organizations will not be able to use software as a service for all their needs. It is most appropriate for areas of the business that add no value and will not be appropriate for areas that provide competitive advantage.

‘Organizations should consider software as a service where they need access to an application or discrete set of applications, with limited integration or customisation requirements', says Mr Friedlander. ‘They will avoid high up-front implementation costs and shorten the time needed to bring the application online. However, they must become more involved with the provider on service delivery and integration than they would with a traditional outsourcer.'

The concept is ideal for new organizations, but those who already have an infrastructure will find making the change disruptive. They are therefore likely to wait until existing packaged software needs upgrading or replacing. It looks increasingly likely that the new companies with deep skills that were set up to revolutionise the software market will be overshadowed by the computer services companies with their much broader range of skills.

‘Software as a service makes sense and will happen ultimately,' says Ms Ring. ‘In every industry people eventually go for a standardised solution because it is cheaper. However, it is going to take a long time for the market to develop and it may take longer than our working lives for it to be established as the mainstream way of delivering software.'

Questions

1 What are the benefits of ‘utility computing' according to the article?

2 How significant does the article suggest utility computing will become?

3 Evaluate the facilitators and barriers to the adoption of utility computing.