Global internal spend on IT is estimated to be somewhere between $2 to 3 trillion. Internal spend means company money spent on IT personnel, training, offices and other facilities. I confess this figure has little real meaning for me but I share it because I like to think that someone, somewhere is busy counting in trillions.

However, this next dynamic makes absolute sense. IT suppliers saw rapid growth during the 1990s and in the heady days of 1995 the average corporate was spending half its profits on IT. But if the growth in the late 1990s was extrapolated for another five years, the average corporation would now be spending more than its total profits on IT, an impossibility. So, if suppliers are to achieve future growth, a generous proportion of this internal spend needs to be "externalized" and diverted to their bottom line.  

The IT industry like many others is cyclical. Investment comes in waves and although the consensus is the next wave may not truly gather pace until 2004, when it does, the big five IT vendors (IBM, Microsoft, Oracle, Sun and HP) and the myriad of others who follow in their wake, are betting on a metamorphosis for IT from being a product-based industry to one that is service-based. The catalysts for this?  Web Services, Grid computing and the whole outsourcing and ASP model.

I've done my bit on the process-to-process collaboration promised by Web services (see this month's Web Watch) but what of Grid computing, outsourcing and the application service provider (ASP) model? 

Grid computing and the Virtual Organization

IBM defines Grid computing as a flexible, secure and co-ordinated sharing of resources over networks among a community of individuals and institutions. Grid technology allows a network of users to access and share applications, data, processing power and storage capacity over the Internet, thereby greatly expanding the available computing workload capacity for these users, while significantly reducing their infrastructure investment requirements. In other words, Grid computing allows IT resources to be defined and called upon as a service.

IBM has already been involved in some of the world's largest supercomputing Grid deals with governments and universities. They now claim to be moving Grid technology into the commercial market space, enabling the participation of small and medium-sized businesses in a global Grid community by equipping their entire product line (hardware and software) with the tools for Grid access. IBM refers to members of  a particular Grid as VOs - virtual organizations - who access Grid resources from a single point of contact and to whom the massive resources of a Grid appear as a single, large, virtual computer. 

And the benefits of it all? Firstly, the ability to capitalise on massive computational, storage and application service capability with minimal infrastructure investment. Secondly, collaboration with global partners, sharing everything from databases to research to workloads of all types and thirdly, allowing a move to e-business on demand through Grid access to powerful and sophisticated IT solutions on a pay-per-use basis.

Back to the ASP model

This is all beginning to sound pretty familiar don't you think? The concept of software sold as a sort of utility via ASPs, with users renting programs on a subscription basis, has been around for quite a while now - so why not hardware and middleware? Admittedly the software ASP model has been slow to catch on. It's had plenty of fits and starts and got caught up in the dot-com hype and crash of 2000, but many industry insiders say it's only a matter of time before the idea becomes the norm.

Merrill Lynch surveyed CIO's last year and found that two-thirds of them would consider paying for software under a subscription model. Proponents of the model say that ASP software is generally less costly than traditional up front license fees and companies don't have to worry about maintaining or upgrading their software. ASPs manage the software in data centres, providing access to the programs via the Internet.

Analysts also say the ASP market is already maturing and consolidating. The most successful firms are not only focusing on specific industries such as manufacturing, financial services, construction, publishing and the service sector, but also identifying midsized firms as the most profitable market. It seems that the larger companies still don't want the prepackaged ASP software offering but more highly customised applications specific to their business processes, and the smaller companies are just too difficult to sell to!

Although traditional software makers such as Oracle still make most of their money from up front license fees, they are embracing the ASP model. They deliver many of their products online, calling it "outsourced software." The president of Oracle's outsourcing unit is on record as saying that his team can cut clients' software service costs by 44% to 66%. He estimates that 75% of technology spending now goes towards maintenance and services, not buying new products. Outsourcing can fix this, as well as improving the quality of the software as programmers can find and fix bugs more quickly because they are constantly monitoring the outsourced product.

Outsourcing is all the rage

But why stop at software outsourcing? Using external suppliers for IT maintenance and support and possibly entire business processes (billing, payroll, logistics etc) offers a number of advantages. Many companies believe that outsourcing some skills is necessary in the current economic environment but that it also provides access to the technologies, people and methodologies that a business could not develop or sustain on its own. Cost cutting it may be, but good outsourcers also provide guaranteed response times, faster completion of upgrades and maintenance jobs and 24-hour support, all of this guaranteed through much more rigorous and comprehensive service level agreements (SLAs) between company and outsourcer.

Of course, if the cost savings and other benefits of outsourcing look too good to be true then they probably are.  In a survey of FDs and CIOs, Unisys found that 66% of those surveyed believe that the finance division is far more influential than the IT department when it comes to decisions about outsourcing. The research also shows that the finance division views outsourcing almost entirely as a means to cut costs which Unisys warns exposes projects to failure from the outset. When organizations measure what IT delivers for the business, it ought to be in terms of the value it adds rather than on a cost saving basis and this must also include IT outsourcing projects. If you don't understand what it is you are buying, it is extremely difficult to manage the process or to be clear whether you are getting value for money.

Morgan Chambers, Europe's largest consultancy that advises on outsourcing strategies, has published a survey which shows that larger service providers are simply not getting close enough to their users and their potential to add value to the business is in doubt. Instead smaller and medium-sized hosters seem better placed to become trusted business partners rather than simply a supplier. And as the move towards business process outsourcing (BPO) gathers pace, many companies are now moving towards a more selective outsourcing strategy. Not the old-style ASP one-to-many model, but fully managed, dedicated systems, more involved with the business decisions being made day-to-day and thus better able to respond quickly to handling the processes that the hosted applications are used for. 

In conclusion, we can rely on the likes of Gates, Ellison and Siebel to map out a services-led IT future. Selling the vision is what they are good at. As for boosting their wealth over the wealth of more selective and aligned business partners? Let's hope not.