"In the early '90s, business operations were static and structured -- basically, not easily adaptable at all -- and only accessible by defined people," he explained. "On Demand is a new level in which infrastructure is highly dynamic, and modular and business operations and services are assembled and provided when they are needed."

To be sure, the concept has won kudos from industry observers. On-demand services can help companies better match IT investment to business returns, which conceivably could jump-start sluggish IT spending, according to Forrester Research.

A recent AMR Research note, however, points out that the pay-as-you-use pricing model may not necessarily offer all companies significant savings over traditional outsourcing contracts.

This is not the case in every situation, though. AMR Research notes it can be beneficial for many firms -- for example, IBM customer Petroleum Geo-Services expects to save US$1.5 million per year on its Gulf Of Mexico seismic-imaging endeavors, a project that has widely varying hardware requirements. However, companies with consistent demand for computing resources may not realize such gains.

Little Choice

Entitled "Pay-as-you-use Pricing for Enterprise Application Outsourcing Won't Save You Much," the report noted that none of the major packaged-application vendors offers pay-as-you-use pricing options for outsourcing partners.

"If a user company wants to outsource the management of its strategic packaged applications, it must purchase the license for the application. In this type of outsourcing arrangement, pay-as-you-use pricing is only available for hardware usage and the time spent by people supporting the system," Lance Travis, vice president of research operations, wrote.

Hardware accounts for between 25 and 30 percent of the total cost of implementation in typical ERP, supply chain, CRM and procurement projects, AMR Research said. When there is consistent demand, users typically over-allocate hardware by about 20 percent to cover peak processing periods.

In these cases, "the variability in pricing that the user would see would be cost increases when the user needed the additional 20 percent computing power ," the report said. If the user never needed the excess capacity, the savings would be just 6 percent of the entire project cost, or 20 percent of the hardware portion of the implementation budget.

Acquisition Minded

"The pay-as-you-go model fits with the concept of keeping IT resources focused on a core strategic direction," AMR Research senior analyst Louis Columbus told CRMDaily. Companies that are best suited for this pricing model include those that are growing rapidly by acquisition and need to scale quickly into new countries or markets, he said.

Conversely, companies that are downscaling their operations are also well suited to a pay-as-you-go IT strategy, Columbus added.

Companies that are venturing further afield from their original business purpose, either via acquisition or organic growth, might also benefit from an on-demand pricing structure. "GE is a prime example of this model," Columbus said, "as it has gone into everything from broadcasting to turbine engines -- areas that have vastly different IT needs."