In an accelerating trend, corporations of all sizes are outsourcing their IT infrastructure to service companies. Basic services offered range from shelf-space rental, electricity, air conditioning and network bandwidth to the provision and maintenance of servers, storage, middleware, help centers and deskside support. These are the first steps toward a “computing utility”, in which computing services are delivered “on-demand” like energy, communication, transportation, and other commodity services.
The economic pressures underlying this trend are many. On the customer side, oversubscription to accommodate peak usage requirements substantially increases fixed costs, and isolated information technology (IT) departments find it difficult to match the economies of scale that service providers have in plant, equipment refresh rates, personnel skill development, and software infrastructure. On the provider side, Moore’s Law improvements on cost and performance together with the steady enrichment and standardization of middleware make it possible to supply a network in which excellent computing resources can be distributed cheaply and securely. But Moore’s law also cuts the other way. The slowdown in equipment refresh rates for both hardware and software, the inexorable decrease in unit profits, and the huge fixed costs of technical leadership strongly incent the industry leaders to move to a services provision model with its steady payments and opportunity for increased profits through bundling.
The future of the computing utility is today very much in the making. There is evidence that the market may desire specialized solution offerings like human resources, payroll, procurement, supply chain, email, Web-hosting, data storage, numerically intensive computing, et cetera, all of which may depend on predictable contracts for the underlying computing infrastructure. Commoditized computing elements together with very high global bandwidth capacity may encourage the development of exchanges like those in the energy or telecommunications industries. Finally, as the industry confronts the days of reckoning for the current wave of outsourcing agreements, competitive pressures will undoubtedly lead to industry-wide standards for service agreements.
By: Alan J. King, Mark S. Squillante
Published in: RC23095 in 2004
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