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"On Demand" Computing- "The Next Utility"? Overview. "On Demand" computing has been heralded as the leveraging tool that enables a company to scale its demand for e-business services, to Web-enable its applications and services, and otherwise to reduce errors and latency in transaction processing. Is this really computing "on demand", or is it just another marketing ploy to sign up customers for a long-term contract bearing unknown benefits? Impact on Enterprise Customer. From the customer's standpoint, "on demand" computing (also called "utility" computing and "grid" computing) makes outsourcing an easier decision. This form of subscription, or quasi-"requirements purchasing agreement", allows the customer to rely upon the services provider for a suite of services that will evolve over time. This "frees" the customer from making decisions on management of the rapidly evolving underlying technology. However, the customer continues to manage the process. In particular, a customer can never outsource responsibility for managing the customer's business. Effective outsourcing requires the customer's continuing management of the tools that outsourcing makes available. Unique Structure. How does this deal structure differ from traditional outsourcing? Essentially, "on demand" computing requires the service provider to have a rapidly scalable infrastructure. Scalability may include variations in scope as well. In a recession, excess capacity will justify marginal pricing. In a strong economy, tight capacity (or a non-scalable architecture) will command a premium, as additional capital must be invested. With more complex paradigms for elastic scope and pricing, "on demand" computing requires a tighter alignment of mission and governance. Thus, in return for getting quasi-exclusive rights over the customer's IT business operations, the services provider commits to more flexibility. Legal Risks of On Demand Computing. The design of a contract for "on demand" services requires special attention by experienced attorneys. It may be similar to, but should be contrasted with, the Uniform Commercial Code (or "UCC," governing the sale of goods). The UCC contains special conditions governing output contracts, requirements contracts and exclusive dealings. Thus, a contract provision that "measures the quantity by the output of the seller or the requirements of the buyer means such actual output or requirements as may occur in good faith, except that no quantity unreasonably disproportionate to any stated estimate or in the absence of a stated estimate to any normal or otherwise comparable prior output or requirements may be tendered or demanded." UCC 2-306(a). Similarly, as to exclusive dealings, "a lawful agreement by either the seller or the buyer for exclusive dealing in the kind of goods concerned imposes unless otherwise agreed an obligation by the seller to use best efforts to supply the goods and by the buyer to use best efforts to promote their sale." UCC, 2-306(b). In addition, the UCC helps focus attention what happens if one party (e.g., the customer) has a duty to specify which items it wants, but fails "seasonably" to do so. In that case, there would normally arise questions whether the service provider is excused from performance and, if so, whether the customer is in breach. UCC 2-311 imposes a "good faith" duty to perform and fill such gaps, but in "on demand" computing that might not suffice. If a purely "UCC" solution were used, such a flexible computing model might push the limits of good faith. Instead, outsourcing lawyers adopt other processes and procedures to avoid the potential for confusion about "good faith." When structuring the relationship, the parties need to address these issues. The law of services stems from different origins and is NOT governed by the UCC. The fact that the UCC governs that sale of goods and not services underscores that the outsourcing agreement needs careful drafting. Customer's Perspective. As a flexible business model, "on demand" computing remains somewhat rare. It implies a long-term commitment to a solution that includes unknowns. It may limit the customer's freedom to select other vendors with superior products or services, to make changes without incurring liability for any sunk or capital costs, or to exit the relationship. Accordingly, the customer must manage its internal workforce to be able to take advantage of the "on demand" solutions. For example, if the customer fails to manage the strategic planning process, the implementation or the ongoing operations, the customer may fail to achieve the stated business goals. This could lead to legal disputes about compliance with the contract, with an ongoing course of dealing or some warranty (to the extent one might be implied by law) where "the buyer is relying on the seller`s skill or judgment to select or furnish suitable goods or services. Cf. UCC, 2-315. "On demand" computing might therefore be suitable only for customers with a strong internal management of the outsourcing model. For the Service Provider. "On demand" services require constant capacity planning as well as a tight communications channel with the customer. If the resources being offered have a long lead time to procure or dedicate, such resources will not be "online" or "on demand" except within agreed parameters. Without strong direction, communications and commitment from the customer, the service provider might be charged with tasks that are inappropriate, outdated, misaligned with business strategy or simply "too much" or "too little." This issue arises in the service design, marketing, sales, contracting and service delivery phases. Care is needed to avoid exceeding the limitations of an "independent contractor" provision. Common Interests. Given the interdependency of the parties for mission-critical tasks, in "utility"/on demand services each party needs to focus on satisfying not only the other party. In this process, the concerns and interests of the board of directors and shareholders of the other party should be addressed. Marketing Risks. Under an "on demand" model, the service provider purveys a spectrum of goods and services. "Channel conflict" will arise if this spectrum includes the services normally provided by the service provider's other customers. Thus, for a computer manufacturer such as IBM, Compaq, Hewlett-Packard or Sun Microsystems, extending services to an "on demand" model could drive away "business partners" unless provisions are made for subcontracting or other support. Limitations on the "Utility" Model. This model
claims to enable enterprise customers to get utility-like access to the vast
computing resources of a service provider, thereby improving quality,
performance, delivery, cost-savings and flexibility for rapidly changing
customer needs. If IBM is the service provider, such computing
resources may indeed be vast: skills, licensing, intellectual property,
manufacturing capability, business processes and economies of scale.
That's fine for IBM and American Express Company (which processes about 1
billion transactions daily in 200 countries). But this business
model has a number of critical limitations:
Future Implications. As this concept gains favor, it is expanding into business processes other than purely transaction processing. Effective planning, contracting, managing and renewal of such IT and Business Process "utility" agreements requires a substantial investment. Additional resources: Definitions |
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