The IBM-Amex Deal: A Radical Change In IT Outsourcing

The utility-pricing model at the center of a $4-billion deal between IBM Global Services and American Express symbolizes a sea change in the way companies will outsource IT services, says a leading expert on IT outsourcing. "It's a blockbuster deal; it's huge," says Vijay Gurbaxani, professor of IS at the University of California at Irvine's Graduate School of Business.

Among Fortune 500 companies, wide-scale IT outsourcing traces its roots to 1987, when providers took advantage of economies of scale and specialized skills to offer IT services at prices below what users would spend to furnish those services themselves. For the most part, outsourcing deals consisted of fixed-priced contracts. The utility-pricing scheme highlighted in the IBM-Amex deal represents a radical change in the IT outsourcing model, Gurbaxani says.

Why now?

Gurbaxani offers several reasons.

Most importantly, user companies have standardized on computing platforms, adopted Microsoft products for the most part, and employed TCP/IP as a standard data-transport protocol. That makes it easier for outsourcers to run customers' apps on the same servers and store data on the same type of hardware. "You're looking at things that are generic: networking infrastructure and common services," he says.

Another factor: IT has gotten bigger in terms of data centers and networks as telecommunications costs have plummeted, creating economies of scale for the outsourcers. "Such a huge E-business infrastructure can be modeled as a utility, and that's what IBM is doing," Gurbaxani says.

In addition, he says, non-IT business executives such as CEOs and CFOs like the idea of paying only for what's used.

Gurbaxani foresees the utility-pricing model to gain wide acceptance in the coming years, as IT hardware, including servers and storage devices and their associated software, become commoditized. He sees utility pricing used for the maintenance of legacy systems as well.

Size matters in making utility pricing work, at least when courting larger customers. To take advantage of the economies of scale, IT vendors must maintain large infrastructures, so Gurbaxani expects the three-largest IT outsourcers--CSC, EDS, and IBM--to dominate in utility pricing of IT services. "Large companies like American Express," he says, "need larger players to provide these services."

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