While many virtual computing visions promise pay as you go utility-like pricing, some companies are already realising metered rates in outsourcing deals that tie service fees to business performance.
Take Canada Life: The more insurance policies the company sells, the more money IBM gets for hosting its claims-processing application. Similarly, e-commerce service provider Digital River's fees are based on the amount of baseball paraphernalia sold through the Major League Baseball Web sites it built and maintains.
There's growing interest among companies to broker outsourcing agreements that are based on business metrics rather than technology metrics such as CPU cycles or storage consumption, observers say.
"There is no question that vendors are attempting to become more flexible in their pricing," principal at research firm JNoel Associates, says Jasmine Noel, said. "Users are in the driver's seat when it comes to contract structure."
It wasn't a new concept, but it was gaining momentum, program manager at The Yankee Group, Andrew Efstathiou, said.
Early examples of performance-based contracts were rare and typically reserved for a specific element of an outsourcing contract, Efstathiou said.
For example, both parties might agree in advance that if a vendor was able to reduce the cost of service more than anticipated, the customer and vendor would receive a portion of the savings.
Applied more broadly, a business-performance-based contract could be good for users.
"It has the potential to save customers money," Efstathiou said. "Also, it has the opportunity to reduce business risk by converting fixed costs to variable costs,"
Companies also stood to gain greater insight into the profitability of business initiatives with performance-based contracts, Noel said.
"Users can clearly and directly match the amount spent on IT with a revenue stream," she said. "By doing that, they can immediately see if an e-business project is really profitable or not - and they can then make better decisions about managing their costs or offering a particular service."
However, taking advantage of variable-pricing contracts might require a change in IT governance, because most companies budget for fixed IT costs.
"Depending on who the vendor is talking to within an end-user organisation, (their person) may not have the ability to accept a variable-priced contract," Efstathiou said.
For example, an IT manager or CIO might be interested in variable pricing but could not negotiate for it because it didn't match up with the budgeting process. In contrast, a CEO or line-of-business manager with revenue responsibility might have more leeway to negotiate variable pricing.
"When you're dealing with profit and loss, if the revenue doesn't show up, then you're going to be losing money if you have fixed costs," he said. "Being able to convert some of those fixed costs to variable costs helps you to maintain margins regardless of the volume that's flowing through. For people who have profit-loss responsibility, this type of arrangement resonates very well."
Variable pricing is not a fit for every outsourcing occasion.
Companies with stable transaction levels might not have much to gain by switching to a usage-based or performance-based outsourcing model, Efstathiou said.
In addition, there were technology hurdles to overcome.
"It's a big problem to do this if you can't meter how much has been used, and if you can't price per transaction," he said.
Still, vendors such Accenture, Electronic Data Systems, HP and IBM that were aggressively pursuing utility computing initiatives would drive adoption of IT services priced according to business metrics, observers said.
"An outsourcing vendor can only make money on these deals if it can allocate its internal resources in a flexible, adaptable way," Noel said. "Utility computing efforts give the vendors the nuts and bolts with which to create these services."
"The whole utility computing model plays to this," Efstathiou agreed. "In the long run, a preponderance of pricing will be by business transaction."
