IBM sharpens utility computing edge

IBM is upping the stakes in the race to become the dominant provider of utility computing services with a plan to build out its data centers worldwide with sophisticated software and flexible service offerings.

Over the course of the year, Big Blue will upgrade its 32 data centers around the world with cutting-edge management software and tools, the company told CNET News.com. Once installed, the new software will allow IBM to offer customers a range of services in an a la carte fashion and accelerate its utility computing push, the company said.

The package of technologies and services offerings, called Universal Management Infrastructure (UMI), will help IBM sell more advanced and relatively high-margin services. Instead of simply housing a customer's servers in IBM data centers, UMI allows IBM to offer a broader suite of offerings, from full-scale application hosting to a hybrid arrangement under which its data centers can remotely manage applications and gear on a customer's premises.

The flexible management software in UMI helps IBM deliver its hosting services in an on-demand fashion, which means customers purchase processing power and software on a per-usage basis to meet spikes in demand, said Jim Corgel, general manager of IBM's e-business hosting division.

Adding computing power on the fly and paying on a usage basis are critical components to an industrywide vision of utility computing. According to that vision, businesses buy computing power much like they buy electricity or energy.

"UMI allows tremendous command and control from infrastructure sites around the world," Corgel said. "We have 32 well-synchronized data centers around the world waiting for the upgrade."

Upgrades to IBM data centers with UMI, which is already installed in IBM's Boulder, Colo., facility, are planned for other sites in North America as well as Europe and Asia.

Analysts said that the advanced services based on UMI will help IBM launch its utility computing services more aggressively around the world and stave off competitors such as Hewlett-Packard and Electronic Data Systems, which also are vying to become the dominant utility computing supplier.

While many high-profile technology providers, such as Intel, Exodus Communications and Loudcloud, have been forced to exit the hosting business, IBM's persistence and focus on high-value services--enabled through its software--are starting to pay off, said Laurie McCabe, an analyst with Summit Strategies.

"IBM really stayed the course with this hosting," McCabe said. "In the dot-com dizzy days, everyone was all over it...but when things went bust, a lot of the big players bailed."

In IBM's 2003 annual report, the company said it earned more than $1 billion in revenue from its hosting business, which is profitable. The company singled out e-business hosting as an emerging growth area. The division's revenue has increased 20 percent over the past three years and now has 2,000 clients, according to the report.

A wave of application service providers, or ASPs, that launched in the late 1990s failed as they struggled to find a profitable business model and overcome potential customers' fears over security and reliability.

But now, corporations are showing growing interest in hosted applications. According to preliminary results of a Summit Strategies survey, about 70 percent of companies surveyed said that hosted applications are a viable option. "The market itself is becoming very bullish," McCabe said.

That improving customer sentiment has been helped by companies like Salesforce.com, which have demonstrated that applications can be delivered reliably for less upfront cost than running them in-house, McCabe added. Where IBM differs from many of its competitors is in the completeness of its utility computing services offerings, she said.

UMI, which will tie hosting more closely to on-demand computing, is a compilation of a number of tools and services that IBM has generated through working with customers in its Global Services division. IBM itself is taking advantage of the software tools, which are designed to help businesses allocate computing resources efficiently.

UMI includes IBM's provisioning software, called Tivoli Intelligent Orchestrator, which lets groups of servers automatically add computing power to jobs that need it or subtract it when demand dies down. UMI also draws on IBM's virtualization technologies, which can pool the computing resources of several servers or storage devices.

Helping more for less
With UMI, Big Blue can use fewer servers and storage devices to host applications for more customers, Corgel said. That allows IBM to maximize its data center resources while giving customers the ability to quickly purchase more computing power to meet spikes in need.

For example, at last year's men's U.S. Open golf tournament, IBM was able to allocate more servers to handle the tournament's Web site, which had higher-than-usual volume when Annika Sorenstam was competing. Other customers, such as online retailers, have contracted to add more computing capacity to meet increased demand during a high-volume shopping period, Corgel said.

Five years ago, if a customer wanted to buy more computing capacity as part of a hosting contract, IBM needed to order more servers and install them, which could take several days or weeks, he explained. "Today in a matter of hours, you can alter that predictability (of demand) and add capacity to meet it."

The virtualization and provisioning software benefit IBM as well. With better use of its own computing gear, IBM can lower the capital investment required to meet customers' computing demand, Corgel said.

These new utility computing services offer fatter profit margins than so-called co-location services. With co-location services, a provider simply houses the physical servers of its customers. More complex managed services help service providers lock customers in for longer contracts, noted Jeffrey Kaplan, an analyst at consulting firm Think Strategies.

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"There's an annuity, and there's a loyalty factor with services. You can add more services to the mix, which reduces the cost of sales and cost of delivering solutions," Kaplan said.

Nearly half of IBM's hosting revenue comes from hosted packaged applications, Corgel said. As Big Blue muscles into the market for applications delivered over the Internet, or "software as a service," the company faces competition from services heavyweights such as HP and EDS, as well as several smaller companies including Corio and USinternetworking.

Future versions of UMI will incorporate services that allow companies to operate their computing infrastructure as an "internal utility," Corgel said. IBM will provide the ability to meter computing usage so that a large company could create a charge-back plan to its internal divisions. Instead of buying dedicated hardware to host a sales application that served only one department, for example, companies would share computing resources and pay based on usage.

IBM also views its hosting business as a key component to its business process outsourcing push. Under that strategy, companies hand off entire business processes, such as human resources and finances, to IBM's Global Services division. IBM calls these services business transformation outsourcing.

"When customers look at us and ask us, 'Exactly how is this going to work?' we have a wide variety of application hosting and managed services," Corgel said. "It's not your father's co-location company--it's far more complex and a far bigger bet for customers to make."