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Shock treatment

October 27, 2005

We're in the early stages of the second great transformation in business computing - a shift from the reigning client/server model (in which individual companies own and maintain their own IT "power plants") to the utility model (in which outside utilities will run the plants). The change is going to take a while, not just because utility computing's underlying technologies, like virtualization, are far from mature but also because managers naturally fear losing control over the IT assets that have become so essential to their operations. Few executives enjoy having to run their own IT plants (Lord knows, it's not their core business), but most of them have at least a little bit of the "box hugger" in them.

What will spur companies to make the leap will in many cases be a crisis. We've already seen an example with the imposition of regulatory regimes such as Sarbanes-Oxley or, in health care, HIPAA that require firms to meet tough standards for data security, disaster recovery, and so forth. Faced with having to invest heavily in modernizing their IT infrastructures, policies, and staffs to meet the new requirements, some businesses have opted to unload much of their infrastructure onto utility providers running secure, state-of-the-art data centers. They find it makes economic sense to offload the capital investments and labor costs to an outsider, and, equally important, they like the fact that it gives them a way to get the risk and liability off their own shoulders. (It's kind of like keeping a get-out-of-jail-free card in your back pocket.)

Now, companies suddenly have another good reason to jump to the utility model: electricity costs. Corporate data centers are power hogs, and their gluttony gets worse every year. Earlier this week, TechTarget reported on a new survey by AFCOM, one of the leading IT professional societies, that showed the amount of electricity used by the average data center is increasing at an 8% annual clip, and for some centers the growth rate is as high as 20%. Up until now, though, the increases haven't been severe enough to attract the attention of most business executives. But that's about to change. The spike in oil and natural gas prices is pushing the cost of electricity up dramatically as well. Boston's Beth Israel Deaconess Medical Center, for instance, has just been told by its electric companies that rates are going up 27%. Combine that kind of rate jump with the ongoing increase in consumption, and you've got a problem that's going to get noticed. As the hospital's data center manager, Bob Doherty, notes, "If I told my boss that my staff wanted a 27% increase [in pay], I'd be downstairs on the carpet."

If energy prices stay high, expect to see another wave of companies embrace the utility model and start to close down their data centers. It looks like box-hugging is about to get considerably more expensive.

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Comments

[S]ome businesses have opted to unload much of their infrastructure onto utility providers running secure, state-of-the-art data centers. They...like the fact that it gives them a way to get the risk and liability off their own shoulders. (It's kind of like keeping a get-out-of-jail-free card in your back pocket.)

Hmm, I wouldn't jump on this so quickly. Regulatory regimes such as HIPAA make it impossible to offload legal liability onto contractors. What about financial liability? Large companies with power to move financial risk to contractors may not want to give up the control over legally sensitive operations that keeping IT in-house provides. (This also entails expanding legal/compliance staff to keep an eye on contractors' operations, and the consequent increase in costs.) Smaller companies with greater incentive to outsource IT lack the power to impose financial risk on contractors.

Posted by: Jud at October 28, 2005 09:01 AM

I agree that the economics of utility computing make it more compelling day by day. I also agree that electricity is not a trivial issue. But I'm not sure that it truly qualifies as a crisis event that will push organizations en masse to the utility model.

Box hugging certainly has its intrinsic value but more important is the skill with which the IT industry and nervous corporate technology managers massage executives *perceptions* of risk management. Throw out the logic if you will. Just like the perception of power is 99% of what creates power, the perception of risk is 99% constitutes the vast majority of executive decisions about IT.

The IT industry has been very skillful at using a risk argument rather than an economic one to spread just enough FUD on the utility model to buy it time to get its own utility play right.

Thus, a 20% bump in electricity gets passed down the chain with a shrug just like the appalling mediocrity of today's health care administrative process passes costs down the chain with a shrug.
Fundamentally, there needs to be two moments of public clarity in order for the utility model to tip decisively one way of another. Corporations need to see one of their own knock the ball out of the park and dominate a market space using a utility approach. They also need to see one of their own get sucked into a vortex and disappear using the utility model. Then you will see bets being placed that a.) have some intellectual heft and b.) have some financial heft. Speaking of heft, I would be interested in your views about the 3rd parties who will get involved in real risk management (eg. selling indemnification insurance to utility providers) under the utility model.

Posted by: John Gauntt at October 28, 2005 09:35 AM

sorry, Nick...utility computing is still utopian ...and the "fuel" that keeps today's utility computing unattractive is not the kind we can blame Arab sheiks for.

see my blog at

http://dealarchitect.typepad.com/deal_architect/2005/10/utility_computi.html#

Posted by: Vinnie Mirchandani at October 28, 2005 11:39 PM

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