When you pull up to an intersection in your car and there are two self-serve gas stations, both have 87 octane regular fuel and one station is 10% less expensive than the other, which one do you buy fuel at?
The cheaper one of course, because the fuel is a commodity. It provides exactly the same performance (87 octane) and in fact was likely made in the same refinery. In this example, neither station provides you any additional value, differentiated service nor better performance. The cheapest price gets your business.
What services in IT are like fuel?
No value add over any other service
No better performance
No competitive differentiation for your company
Let’s look at desktop video conferencing (DVC) as an example. It is offered by numerous vendors as a “utility service” virtually all vendors provide high quality, video, audio and a good set of conferencing tools. According to the criteria above DVC qualifies as a commodity utility service. Today in organizations where DVC is deployed in a discrete utility model it is effectively used by less than 5% (on average) of the people who have it available in commercial and public sector enterprises. What does that tell you?
In any business you drive down the cost of commodity expenses and you invest in things that differentiate you or give you competitive advantage. When someone tells you that IT is now a commodity utility service, what do you do? For certain, you need to make sure the service in question IS actually a commodity.
Any IT service has two very important attributes; the functionality delivered by the service and the delivery of the service that makes it not only possible to get adoption but also highly productive use of the service and the associated benefits from actually using it.
The acquisition, deployment and operations cost of the utility DVC service is without question a cheap commodity service, but if it is not adopted there is no actual business value.
In utility computing it is not about elasticity (very few customers have massive burst requirements really) , it’s not about unattended operations (operations cost on a well managed virtualized environment is not that high), it is about POWER and heat.
Let’s keep the math simple. Suppose you have a datacenter with 100,000 servers and each server draws 1000 watts of power. That’s 100 Megawatts of power drawn. Now that 100 Mw gets turned into heat, so no surprise that in most climates you need another 100 Mw of cooling just to bring the datacenter back to the previous operating temperature.
Now let’s assume the following (from Wikipedia http://en.wikipedia.org/wiki/Electricity_pricing )
Suppose you are a utility computing provider and you place a contract with a Canadian electricity producer for 3.5 cents per KwHr. Your 200 Mw datacenter costs you $3,500 per hour or approximately $31 Million per year in power costs only.
That same datacenter if it was located in Brazil it could cost you $310 Million per year in power. Assuming ubiquitous, low latency networks it would make sense that most Brazilian enterprises would have their non-mission critical applications hosted in a utility model in a Canadian datacenter. Facilities and hosting are clearly a commodity and for most IT infrastructure services commercial SLA’s are achievable and sustainable in a utility model.
Is the same true of higher level IT services?
If you use a Utility application in your business, you must be able to make the clear decision that being the same as everyone else is okay. You do not need to be better or differentiate yourself.
Does your email system just need to be good enough or is it actually an important part of your business processes?
What about collaboration tools?
What about your CRM solution?
What about your ERP solution?
What about your HR solution?
What about your financial solutions?
Is being the same as everyone else sufficient for your business?
UPS and FedEx are fierce competitors. They effectively do the same business; they pick up and deliver parcels using trucks and aircraft. The IT services that these companies use to compete and differentiate themselves are not commodities. They strategically build business ideas into software solutions to give them an edge on their competitors. Do they use the same utility truck route scheduling system? Of course not. They build custom systems that give them distinct competitive advantage. It is by definition, the opposite of a commodity.
You may hear industry pundits claim (some of them rhyme with “Partner”) that the day of custom solutions is over and everything will become a utility in the cloud. They could not be more wrong. Only things that are true commodities to an enterprise will be utilities (datacenter infrastructure is a good example) but the need to differentiate and compete will continue to be an axiom for the future.
The trick is to know the difference.