Compaq is the latest vendor to let its customers pay only for what they use.
As more businesses try to squeeze inefficiencies from their IT operations, here's a place to look: costly servers that often run at a fraction of their capacity. Flexible new product and service offerings from computer vendors make it possible for companies to pay for only the CPU power they consume. It's the IT-as-utility concept playing out in the server market.
Compaq last week said that by the end of September it will give customers the ability to scale AlphaServer, NonStop Himalaya, and ProLiant servers up or down based on their needs and pay only for the capacity they use. Usage-monitoring functionality built directly into the servers makes this possible, along with services that track usage and help customers decide when to adjust capacity. "This is a complete break from the earlier model of server acquisition," says a Compaq spokesman. "This may well change the way pricing is done in the industry."
For a year or more, IBM, Sun Microsystems, and others have shipped servers with extra built-in CPUs that can be "turned on" and paid for as computing demands rise. Now some vendors are taking it a step further, letting customers turn up CPU power as needed, then crank it back down as the workload lightens up. "If they'll bill us per cycle time or something, and it doesn't cost us more, we'll look at doing it next year," says Eric LeSatz, VP of IT at online brokerage A.B. Watley Inc. in New York.
Storage is one area in which the utility-based concept has appeal, says Memorial Hermann Healthcare System's Barr.
The common practice at many companies is to buy more computer power than is usually needed in order to be ready for spikes in demand. But it's an inherently inefficient approach. "Why would you want to pay for peak capacity if you're not using it?" asks Jim Pierce, director of business systems development at $3.8 billion wiring and cabling manufacturer Anixter Inc. in Skokie, Ill.
It's a good question, with a complicated answer-and one that isn't necessarily leading to a stampede to pay-per-use systems. Some businesses already have more than enough CPU capacity, so pay-per-use won't make sense until they need to upgrade. And for companies that usually come close to using 100% of capacity, pay-per-use can actually cost more. "Finance will drive it," says Thomas Kraemer, Merrill Lynch financial analyst. "The technology becomes more and more of a commodity."
But the trend is clear: A growing number of vendors are making pay-per-use a part of their product-service portfolios. Unisys Corp. is offering three such options on the ClearPath Plus server line it released in April. Customers can use software "keys" to add capacity for a single day, four days, or 30 days. "Most customers have things happen at the end of some months, and they want the extra capacity to get the work done," says Rodney Sapp, director of ClearPath programs. "But they don't need it every month."
The unusual pricing structure is already raising questions among Unisys' customers. To better deal with the queries, the company this week will hold a Webcast to go over the details with its sales force, Sapp says.
Compaq has not yet defined pricing for its new server offering. "We're engaged in a number of pilots with major customers, and the pricing in all those cases has been customized," the spokesman says. Standard pricing is planned. "When they use more, they pay more; when they use less, they pay less," he says. As part of the program, Compaq is also offering a flexible PC support service that makes it easier to add or subtract the numbers of desktop computers it supports for a customer.
"CIOs are being held much more accountable today as to how their IT infrastructure is able to deliver business results," says Peter Blackmore, Compaq's executive VP of sales and services. "As a result, they're looking for flexibility for scaling up and down."
Of course, there's something in it for vendors, too. Gartner senior analyst Ron Silliman says the computer companies are looking to generate recurring revenue through monthly or annual pay-per-use programs."The real significance of Compaq's computing-on-demand is how aggressive the company is being with the services side of its business," Silliman says. "That's good for Compaq's customers and for its competitors' customers, because it drives those service providers to offer something comparable."
Memorial Hermann Healthcare System in Houston is a potential user of the IT utility model. "Paying as you go, rather than always having to look ahead to a place where you could potentially bump your head in terms of growth and scalability, can't be a bad thing," says John Barr, lead clinical systems architect for Memorial Hermann.
The $2 billion not-for-profit network of 12 hospitals throughout southeast Texas has more than 280 Compaq ProLiant servers and four Alpha clusters. Scaling up has been a gradual process, Barr says, and Memorial Hermann hasn't had to scale down at all. Memorial Hermann keeps just enough excess server capacity on site to carry it through several months at a time. "I don't think anyone buys ahead of [growth] too far, because then you're giving the vendors more than you need to," he says.
Of particular interest to Barr: pay-as-you-go storage. Memorial Hermann is building and operating its own storage area networks, but Barr says as medical facilities put more and more patient information online, the data can quickly overwhelm a system.
Kevin Manion, CFO for EBS Partnership, a London online brokerage, says the utility model has its limits. Some companies don't want their infrastructure costs to vary from month to month. While it's important to keep costs down, he says, it can be just as important to have predictable IT expenses. "As long as our infrastructure costs don't move from the amount budgeted, we're all right," Manion says. In 1999, EBS, which moves $90 billion in currency daily along its global network, signed a $3 million, five-year contract with Compaq Global Services for management of its desktop assets.
And pay-per-use isn't necessarily the best option for companies that run their servers at full speed most of the time. The price tag for an HP Superdome server is about $2 million. Under HP's pay-per-use program, that system would range in price from $30,000 to $70,000 a month, depending on usage. Customers running at less than 10% capacity can receive as much as a 50% discount on the monthly cost of the server. But at 100%, they pay as much as a 17% premium on that monthly cost.
And just how does HP monitor the systems? On NetServer, HP loads usage-monitoring software into every system it ships as part of the program. The software measures CPU usage and sends the information to a central server on a customer's site, which collects similar data from multiple servers and sends the aggregated information to HP's billing system. HP generates an invoice that takes the average of highs and lows each day for the month.
Sun began shipping servers with unactivated CPUs that could be turned on as needed almost two years ago. But it has yet to offer the more sophisticated capabilities unveiled by HP and Compaq. Sun expects to catch up when it ships its 128-processor StarCat server in October. Jamie Enns, group product manager for capacity-on-demand at Sun, says it takes time to create the capability because of the complexity involved. "Now we just know when a CPU is activated," he says. "It's harder to measure the capacity usage day by day." The process involves not just hardware, software, and support, but also a financing program.
But Enns says it will be worth the wait. "We don't plan to charge a premium," he says. "We're doing this to increase market share, not make money out of the feature."
IBM launched what it calls "capacity upgrade on demand" for its entire line of servers, from mainframes to Intel-based servers, in October. As a part of that program, IBM even provides entire servers at a customer site that can be cut over as needed. IBM Global Services would like to manage these environments for businesses. It can be less expensive for both IBM and its customers to let IBM provide hardware on an outsourced basis, says Doug Elix, senior VP and group executive of Global Services.
Regardless of the model they use now, all vendors may eventually have to let businesses pay for computing power as they need it, says Melanie Posey, an analyst at International Data Corp. The problem with charging a one-time flat rate for IT hardware is that customers wind up buying more capacity than they typically need in order to handle peak loads and anticipated growth. "If your company has variable demands for Web hosting or storage," Posey says, "it makes sense to pay for exactly what you use."
Merrill Lynch analyst Kraemer agrees, adding that utility computing will help commoditize systems-and change the way computing resources are offered for good. In the future, he says, "Everyone has it, and all the customers expect it."
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