Your IT Department: Cost Center or Profit Center?

Moderated by Jason Hiner | May 7, 2012 -- 07:00 GMT (00:00 PDT)

Summary: There's increasing pressure to transform IT into a business. What kind of transformation makes the most sense for your shop?

Justin James

Justin James

Cost Center

or

Profit Center

Dana Gardner

Dana Gardner

Closing Statements

Let's be realistic

Justin James

 

Reading and re-reading our debate, I think that Dana and I are in agreement on most of the fundamentals here. We certainly agree that IT cannot deliver value or ROI (the things needed to shift from “cost center” to “profit center”) unless the business knows enough about IT to really use it; and IT cannot be responsive enough to business to let this happen unless they have open ears and open minds.

If you look at our responses regarding the kinds of key hires needed, you’ll see that we’re both talking about the need for IT to be ingrained at the top and for the top of IT to be oriented towards partnering with the business.

Unfortunately, I have seen scant evidence to suggest that many companies can do this. They lack the leadership and vision. They treat IT like expensive janitors. And there is nothing wrong with that. If all you want is to “keep the lights on” an IT department can do that for you, and you don’t even need to hire top talent to make it work. Unless you are in one of the rare companies that can truly use IT to transform their business (a “profit center” kind of IT department), then you need to be honest and realistic about it, and that means treating it like a “cost center” and trying to minimize its damage to you budget.


 

It's about creating new business

Dana Gardner

The lines are blurred between businesses and IT as never before. Nearly all businesses need to exploit IT to grow and compete. IT needs to transform into a profit center mentality to allow the business then to thrive.

Success nowadays is not just survival of the fiscally fittest, it's about gaining dominance by bring the most technology capable. Let's face it, a lot of companies are not going to make IT a profit center, and they will be in trouble, and then deeper trouble. It will be very hard to transform a company that is dysfunctional in IT.

On the other hand, companies that do IT well, that integrate the technically possible with the business necessary, will be able to change, adapt and compete.

I'm seeing companies now following that model, taking their IT capabilities and making them the product, combining their digital services and market insights to forge whole new services, and bringing in whole new revenues.

IT needs to be at the strategy table to explain to leadership what can be done, or the best way to procure IT services to the same ends.

So the discussion has changed. It's not how will IT support the old business, it's how is IT able to create new lines of business, to be a driver of new business development.

 

IT's best days still ahead

Jason Hiner

This week's debate turned into a highly useful discussion about how IT got itself into its current mess and what it can do to dig itself out. Both of the debaters offered analysis that was right on target and that yielded a set of useful insights that our readers can use to better understand the situation and start driving useful changes immediately.

Justin did an excellent job of pinpointing many of the attitudes and approaches that are to blame for IT getting the reputation of a cost center and thus being targeted for cost cuts. On the other hand, Dana provided the vision for how an IT department can break out of that scenario, bring game-changing value that impacts revenue, and establish itself as a critical resource for making the company faster and more innovative. The real winner here is the reader who gets the benefit of some excellent insights from both commentators. But, since I think IT's best days are still ahead, I'm going to give Dana the nod for this debate. 

Talkback

29 comments
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  • Depends on the IT department

    Most IT departments exist for the purpose of continuing the IT department. Some very small number of IT departments exist to do exactly what the business needs to be successful in business, and listens attentively to do exactly as asked, and no more. As soon as IT starts making up solutions for the business, the business itself does not know what to do and has given up. IT can't buy itself out of the lack of this knowledge, but it usually tries by purchasing something based on a huge Oracle-based platform. This is exactly the point where the productivity curve peaks and starts to fall back.
    Tony Burzio
    Reply Vote I'm for Cost Center
    • Depends on the executives and the board

      The executives need to define their strategy. Once that's completed, IT can come in and help align the IT organization to support those strategies.

      Otherwise, it's just IT thinking what's best for the company and becomes the tail wagging the dog.
      matthewboh
      Reply Vote I'm for Profit Center
      • Does your company have a strategy?

        Most industries leverage IT these days. If you leave the IT requirements up to non-IT people, you may find your IT resources are not aligned correctly. Align correctly. Make IT responsible for revenue and costs. Either embed IT into each revenue area, or manage as a cost center to drive it's own agenda.
        rch07860
        Reply Vote I'm for Cost Center
    • You are talking about IT and business leadership

      ... ask any one of us 'plebbs' in IT to help and we will and CAN help. We don't choose the tools we are given.

      "Most IT departments exist for the purpose of continuing the IT department."
      This sort of derogatory comment is completely lacking perspective. Most of my users are still confused by the photocopier and the applications that they use EVERY day. What do you think the workforces chances are without an IT dept to help?

      That is why we are here - to help augment other departments - and that is what we do.
      12312332123
      Reply 1 Vote I'm Undecided
  • Cost Center, but dont get lazy

    I think Tony is right to say that many IT departments are often self-serving and are inclined towards self-preservation rather than ensuring that the business gets what it needs. IT departments who continue to do that will eventually find that they make themselves irrelevant.
    For an IT department to prosper I think that it needs to be completely 'in bed' with the business - fully focused on what the company's needs are and always ensuring that it makes an objective choice between doing things in-house or outsourcing. If they don't do that they will find there are sharp-suited, smooth-talking cloud providers whispering tales of huge IT cost-savings in the ear of their CFO in no time!
    patrickbosworth
    Reply Vote I'm for Cost Center
  • One or the other depending

    If IT seems to be a law onto itself or self-serving it is in my view largely because the organisation does not have a clear strategy for IT governance and so it falls to the IT Department to determine its service delivery and to prioritize same.
    I think as a profit centre there is the best chance for agility, innovation and even cost effectiveness. However it is a perfectly ligitimate requirement of an organisation to perceive its IT department solely as a service arm to support its stratrgic objectives. This requirement is better served I think by a cost centre model.
    doreen.mallett
    Reply Vote I'm Undecided
    • Here's the truth

      What you say is true, in a very 'politically correct' sort of way. The blunt truth is that the general user to the topend executive is clueless ( and most would admit it) about technology (of all kinds) and it has always fallen to IT to learn new things faster than their users, support them with knowledge, fix problems and provide solutions.

      In return for your services, you often get a bunch of whining execs, sales people and project managers who know nothing about anything, 'rebelling against IT overlords' because they want an iPad... pure and simple.

      The reason IT has a 'special place', is that unlike even a far reaching dept like Engineering/Maintenance, it is completely interwoven with the fabric of how EVERY dept, process and person works in every conceivable situation.

      IT now touches everything and therefore the IT dept has to touch everything as well. Turn off IT and you might as well turn off your lights. This is a fact not appreciated by some.
      12312332123
      Reply Vote I'm Undecided
  • A Lot of Both

    I don't really have access to the balance sheet nor the inclination to figure out if customer-facing IT offerings bring in more revenue than the internal cost of IT, but we have departments engaged in both. Of course, those "profit center" departments are still consuming internal IT resources for their own use, and as infrastructure (or cost of goods sold) for external offerings.

    Companies I've worked for in the past have been a lot of what Justin describes -- I've brought up ideas on how to generate revenue, but the mindset when it comes to dealing with external customers is so completely different that most minds were extremely closed to these ideas. These same people would bemoan insufficient budgets, but a mental block when it came to thinking of ways to overcome this.
    jvitous
    Reply Vote I'm Undecided
    • History weighs on many decision makers & decision processes

      It will never matter how much you "align" your IT department with the business ... unless the "core competency" and focus of the company is the business of selling IT services/products to external customers, then the business will always consider IT as a cost center plain and simple.

      Would you walk into a company's HR department and propose ways to make money? Their accounting department? Logistics? Plant/property? Please note I am specifically envisioning these situations in businesses where none of those internal business functions (which ALL businesses have, and need in order to simply exist) are the core competency of the company. A company that manufactures widgets is, generally speaking, not a company that makes money by selling IT services or HR services or Accounting services, or logistics, or facility maintenance ... they make money by making and selling widgets. If said widget manufacturer tries to leverage internal functions into some kind of externalized profit making enterprise, the usual result is abject failure since those functions are not the core expertise of the business.

      The other difficulty with this question/concept is simply the definition of "IT". In many (most?) companies, IT means the technical infrastructure that supports the business, and not the business applications themselves. Apps can be part of the "money-making business" side of the house at the exact same time that "IT" is an internal cost-center. I've worked at/with/for a handful of large companies over the years, and in those companies, as well as in all large business that I have any reasonable knowledge of, "apps" or "app dev" have always been separate from "IT". This even applies in technology companies. A business can provide a service via computer applications and make money from those apps, and those profit centers are simply NOT considered IT.

      IBM makes money by selling software, hardware, and services. They don't make money from their IT department ... it's an internal cost center.
      Gravyboat McGee
      Reply Vote I'm for Cost Center
  • Unless it's a tech company, in reality most are cost centers

    While the idea of being a profit center is sexy enough to evoke a strong defense and support for that position, in reality most IT departments of non-tech companies are truly cost centers. They aim to deliver what the business needs in the most efficient manner, driving increased productivity at a cost that is below the benefit.

    Departments that are profit centers get a lot of respect and are often in the spotlight as the lifeblood of the organization, but the cost center departments remain necessary and it's not like companies can just do without them. To make money you have to spend money. The trick for the successful IT department is to do it wisely in a way that clearly supports the needs of the business in a cost-effective and strategic way. Both short and longer term.
    cwcjr1
    Reply Vote I'm for Cost Center