The Voodoo Economics Behind Utility Computing

The Voodoo Economics Behind Utility Computing

Before you sign up for pay-as-you-go, you need to understand how utilities can manipulate and hide the true costs of plugging in

The best reason why information utilities may be hazardous to corporate CIO health is that they inherently trivialise the hard lessons we've learned from deregulation in so many industries during the past several decades. Energy utilities and telcos developed increasingly complex networks of financial cross-subsidies that far exceeded the technical sophistication of their physical networks. Large customers subsidised consumers and vice versa. No one - not even the regulators - could get a real grasp of costs. The clever accountant had greater impact on a utility's fortunes than a brilliant engineer.

To be sure, deregulation has its debacles. Enron's frauds immediately come to mind. The hideously mismanaged deregulation of California's power grid. The savings and loan scandals of the 1980s. But these examples only illuminate the larger point: Ill-conceived regulations create market distortions that pervert economic efficiencies and undermine business effectiveness. Utility economics are predicated on the fundamental notion that a regulated monopoly will allocate resources more efficiently than a more competitive marketplace.

Now, I'd be the first person to agree that internal competition for IT resources is not likely to be cost-effective. But I'm the last person to believe that a dominant information utility is the most economical, responsive and cost-effective approach to IT management in either the short or long term.

The classic spiel supporting information utilities is that corporate customers will plug in apps just like electric utility customers plug in appliances. The sad fact is that not all plugs are compatible. Not all utilities understand how to manage peak and off-peak pricing. Monopolists tend to be lousy collaborators. Indeed, many large customers annoyed with utility pricing actually go off the grid. They explore alternative energy sources.

Utility Computing's Siren Call

The current interest in information utilities reflects that corporations are sick and tired of the uncertainties, risks and costs of enterprise computing. Vendors recognise this. That's why the lure of an outsourced utility is so tempting (read "Plug and Play", May CIO). Then again, if pay-as-you-go info-utilities were really the way to go, you'd think more businesses would use chargebacks. They don't. What we have is a wilful ignorance of real economics and true costs.

There is no point in trying to implement an information utility until the CIO sits down with the CFO and COO and explains that a CRM system or the e-mail network can either be infrastructure or apps. Implementing a utility means using a cost structure - nothing more, nothing less. Allocating costs for shared services is an accounting game, not technology management. That's equally true for recovering costs from that information utility investment.

To put the question harshly, how do we know we're being cost-effective if we don't know what our costs really are? The CIO as "Information Utility CEO" is appealing because utilities are so good at concealing, manipulating and cleverly reallocating their costs - at least until some serious competition comes along. That's the cynical interpretation. Here's a kinder one: CIOs should encourage top management to carefully examine the information utility idea to better appreciate how their internal marketplaces distort, pervert and misalign IT investments and implementations. The accounting costs of implementation can't be divorced from the implementation of accounting costs. Tomorrow's IT infrastructure investments should be determined by the business value they can create, not the accounting loopholes they can exploit.

Michael Schrage is codirector of the MIT Media Lab's eMarkets Initiative. He can be reached via e-mail at

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