On Monday, IBM unveiled the latest step in a long-term project in Dubuque. IBM will monitor how over 300 volunteer households consume water. IBM doesn’t build any of the hardware—a company called Neptune built the low-flow water monitors that all Dubuque residents are having installed in their homes. The monitors take many more readings than normal, about once every fifteen minutes, which should offer people valuable information about water usage or leaks.

On the surface, IBM (IBM) benefits because it can test new cloud-computing software that crunches numbers for water and electricity consumption from a real community. Then members of the community will give IBM feedback on the service. “These are insights that you can never create by developing stuff in a lab,” says Milind Naphade, the director of the project in Dubuque, Iowa. Dubuque residents will benefit from accessing that information and establishing the city as a sustainability hub.

But the project will pay off in other ways for IBM. The company wants to push its image as the leader in cloud computing for sustainability initiatives, which is a service that other companies will probably require soon. Also, IBM is a company whose bread and butter is the sort of intangible consulting work that gets made fun of in Dilbert comic strips. To bolster its image as a service provider that can effect tangible change, IBM is embarking on projects like this one; partnering with a city government. Then if the Dubuque experiment works, IBM can point to its success here to use the same model in cities everywhere.

The idea is that consumers will make more sustainable choices if they can better understand their water consumption. The data generated from the project is an engineer’s dream. The problem is, without IBM’s help, it’s also a homeowner’s nightmare, or just another complicated document to ignore; These meters spit out a ton of data that needs to be processed in order to gain any useful information.

That’s where IBM steps in. The company claims that it has the expertise in cloud computing to manage the data. The company will present information from the meters in a web portal, says Naphade, and it will be easy to read. “We have a user-experience designer who worries about every pixel that gets on there,” he says.

IBM’s three tiered cloud strategy

IBM plans to roll out cloud-computing services on three different levels, again, first in this pilot project, and but also as a blueprint for future programs. First comes individual consumers who want to watch their bills or check for leaks. Second are resources at the city-planning level: The company will come out with a product soon that will let government officials look at aggregate data to see whether the sustainability policies they put in place actually work. Third, IBM wants to make a version of the software for utilities companies and larger corporations.

Ultimately, IBM aims to expand its utilities-monitoring software beyond water to electricity. But watching water is going to be a key service for corporations, says James Governor, who’s been covering IBM for about 15 years for a London industry analyst firm called RedMonk.

“If you’re Coca-Cola and you’re making Coke in India, what you’re doing with the water table is a big, big issue for you. Water is not a side issue—it is the issue in terms of corporate responsibilities.” Governor says that when big companies need this kind of software soon, there’s a good chance that IBM will have a jump on the market.

But why expend so much effort in developing the software for the city level, especially when cities are generally broke? That also pays off, says Governor. “IBM is investing in the city because it’s trying to get that sort of buy-in.” The company has worked with all levels of the Dubuque local government. It has also created a physical presence in the city and boosted employment. IBM has done this elsewhere, and it protects the company. “One of the reasons why governments were somewhat reticent to attack IBM was because of how many jobs they’ve created,” Governor says.

Also, the project helps people connect with the company’s brand. That has historically been a challenge for IBM, Governor says, simply because of the nature of its product. It’s mainly a data-processing company.

Governor says that now people will attach something concrete to the company’s presence. “IBM improves the quality of my water. IBM improves our energy footprint—these are big but consumable ideas.”

If the company can demonstrate that the monitoring program works in Iowa, it can roll it out to other cities sometime in the future, says Naphade. IBM has been investing to ensure its market share. According to the second quarterly report in 2010, it spent $3 billion on acquisitions to beef up the company’s smarter-planet and cloud-computing initiatives. The outlook is good, says Governor. “It’s very early days, but IBM does understand managing data at scale. It will be a leader in this area, I don’t think there’s any question.”