News Feature

Understanding Pay-As-You-Go Services Before You Sign Up

By Michael Schrage

May 15, 2003 — CIO — The frustrated general manager of a fast-growing division of a Fortune 100 pharmaceutical company decided to game his corporation’s IT budget rules. On one hand, he couldn’t afford to self-fund a supply chain initiative he thought essential to his group’s growth. On the other, corporate wouldn’t fund division-driven apps unless the group committed itself to an unrealistic ROI.

The business manager sat down with his IT guru and crafted a cunning third option: Transform the supply chain initiative into a "value-added" e-mail initiative. Why? Because e-mail-oriented IT initiatives were funded by corporate as "infrastructure." The manager got his infrastructure proposal approved.

So what’s the real difference between an app and an infrastructure? That’s easy: Don’t look at who uses it; look at who pays for it. Management?not technology?determines when an app is an infrastructure and an infrastructure is an app.

The current incarnation of the apps versus infrastructure debate can be found in the promises of the pay-as-you-go "information utility" metaphor being marketed by such vendors as Hewlett-Packard, IBM and Sun Microsystems. "If you can make [computing] a utility," HP Senior Technical Adviser Joel Birnbaum observes, "that means your network is on all the time, and you’ll use special services only when you need them. If you do one day’s supercomputing a month, you don’t need to own it."

Indeed. The whole marketing idea behind information utilities is that their data and transactions?much like water and electricity?are available whenever you need a sip or want a jolt. Utilities are infrastructures that facilitate and enable apps. Quality and reliability standards exist. Costs are more or less predictable. Information-intensive companies such as J.P. Morgan Chase and American Express seem increasingly convinced that the utility analogy is the smart way to manage their businesses.

There’s legitimate logic to this. But CIOs investing in the utility paradigm need to understand what they’re really implementing. Any serious discussion about utilities requires a brief appreciation of their economics. The fact is that the history of utilities in every industry is a history of regulation, politically driven cross-subsidies and monopoly pricing?which are not necessarily bad things. But let’s not kid ourselves that an enterprisewide information utility would be anything but a creature of internal and external regulation, cross-subsidies and monopoly, no matter who runs it. Numerous empirical studies assert that regulators invariably fall captive to the utilities they oversee. Executive operating committees supervising their information utilities may share that same fate.

So any company implementing an information utility isn’t implementing a cost-effective ensemble of digital networks as much as creating a regulated monopoly destined to battle over cost allocations for bits, bytes and bandwidth. Why? Because utility economics vastly favors cost recovery over value creation.