By Michael Azoff, Senior Research Analyst, Butler Group

Outsourcing the data centre is by no means a new concept, but whilst the large enterprises exploit such opportunities and reap the benefits of scaling, there is a much larger market by volume for SMEs and large enterprise departments that has remained mostly untapped. The twist today is that convergence of standards, Web services, Service Oriented Architecture, Rich Internet Applications (RIAs), virtualization, and higher processing capabilities at lower costs, make the new business proposition of application hosting and utility computing very attractive.

The introduction of RIA technology has enabled Web server-hosted applications to behave like desktop applications from an end-user's viewpoint, and so a number of businesses are now realising the opportunity of providing customers with hosted RIAs within a utility computing model. Utility computing, which essentially entails hosting the IT infrastructure and charging the customer on a pay-as-you-use basis, can range from simply providing a convenient hardware resource, such as Amazon's Elastic Compute Cloud (EC2), to offering pre-built business applications, such as Google Apps and Microsoft Live.

However, a new breed of business (including Bungee Labs, Coghead, and Salesforce.com) is rising up that provides the customer with the facility to build their own custom applications to be hosted on the utility computing cloud. The market is still at an early stage and some of these ventures are in a beta mode, with full running capability but with an evolving price structure and functionality.

The two largest inhibitors are security and compliance. Virtualization can help deal with security concerns, as well as improve the host provider's capacity utilization, by isolating virtual machines and limiting fallout due to security breaches. The winners in this space will be those businesses that can offer the best IT governance on top of the best development and hosting environment.

The pieces do appear to be in place from a technological perspective, and far-sighted entrepreneurs are taking the plunge with some quite serious ventures. To enter this space you need to provide data centre capabilities, which are typically farmed out to third parties, and this in turn makes the monitoring of performance delivery, and quality of service that much more complex. The question of whether to exploit this market from a client's viewpoint is therefore not just about the cost savings. Having your data center down the corridor has distinct advantages to plugging into the 'Internet cloud', where the service can be provided from anywhere in the world.

In practice, we can expect businesses to run test applications and new ideas on utility computing platforms, on the basis of rapidly commissioning the necessary infrastructure, which otherwise would have longer project lead-times - and this also fits in with Agile practices. Once completed, mission-critical applications can always be brought back in-house. There are many other scenarios where the new utility computing models offer distinct benefits; therefore Butler Group expects this market to be a major growth area. ENS