Is IT a profit center or a cost center? Who cares?

There are several recurring debates in the IT management community. Most of us have read articles or perhaps engaged in debates over topics like IT "alignment," the best way to implement an ERP, and that old favorite argument of whether IT should be a profit center or a cost center.
Written by Larry Dignan, Contributor

This is a guest post from TechRepublic's Patrick Gray. For more posts like this see TechRepublic's IT Leadership blog.

There are several recurring debates in the IT management community. Most of us have read articles or perhaps engaged in debates over topics like IT “alignment,” the best way to implement an ERP, and that old favorite argument of whether IT should be a profit center or a cost center.

In most organizations, IT ends up taking its place beside logistics, order processing, and other back office functions as a cost center — the fancy accounting term for an entity that generally consumes cash rather than producing it. In these organizations, IT might be “the man behind the curtain,” putting in systems and processes that help the folks over in sales bring in cash or creating efficiencies that conserve cash, but at the end of the day, in this model IT is essentially a corporate expense.

Proponents of the profit center model point to the savings and efficiencies created by IT. This school of thought supposes that if a massive systems implementation is predicted to save $10M over five years and if it is successfully implemented, IT generated a “profit” of $2M in each of those years.

The cost center model seems straightforward. After all, the developers and CIO are not out pounding the pavement with the salespeople and generating quantifiable revenue. This, however, does not sit well with many in IT management, who have legitimately argued that IT is more than just an expensive utility and a cost to be minimized. If IT is to be a true “value engine” and if there is little more valuable to most for-profit operations than revenue, why shouldn’t IT be a profit center that generates revenue rather than merely consuming it?

While the intentions behind attempting to make IT look like it’s generating a profit are noble, too often they come down to accounting gymnastics that convolute IT’s role in the company rather than clarifying it. Since IT generally is not producing a product for an external customer, many profit center proponents resort to using a system of chargebacks where other business units must pay for internal IT’s services. If marketing wants a new CRM system, IT will charge them for its services, thus generating what looks like income. In essence, the corporation is taking a dollar from one pocket and placing it in the other. While this may appeal to those who thirst to have “profit center responsibility” on their resume, a six-year-old could tell you that this is not actually generating anything other than accounting headaches for the organization as a whole.

Furthermore, I have seen several organizations that use such a convoluted chargeback model that managing it literally takes several weeks of top-level staff’s time each year. In the name of making IT look like it makes money, reams of spreadsheets and internal paper passing are instituted, almost universally to the chagrin of other business units that must deal with the mess. Not to mention there is the lackluster internal PR that is generated when IT comes to other business unit managers with an unrealistically high internal chargeback rate, spouting off about IT pulling in its share of corporate profits one moment, then telling the exec that he is forced to pay above-market rates and jump through accounting hoops to facilitate this so-called profit.

At the end of the day, the accounting treatment of what IT endeavors to accomplish matters far less than its actual results. A profitability mind-set can be a wonderful thing, as long as it considers profitability for the entire corporation, not the amount of money it can transfer from one internal account to another. Partnering with other business units with the needs of the paying external customer will create real monetary value for the organization and free IT from convoluted arguments used to justify its existence. A focus on true profitability for the organization as a whole will likely generate far different results, both in terms of the projects IT focuses on and its execution, than mindlessly worshiping the internal “customer.”

Arguably, the only true profit in any organization is generated when the external customer gives cash to the organization in exchange for a good or service. If IT truly wants to deliver profit, focusing its efforts on making this interaction as effective, efficient, and, yes, profitable as possible is the right path. Leave the debates about accounting gyrations to the bean counters.

Patrick Gray is the founder and president of Prevoyance Group and author of Breakthrough IT: Supercharging Organizational Value through Technology. Prevoyance Group provides strategy consulting services to Fortune 500 and 1000 companies. Patrick can be reached at patrick.gray@prevoyancegroup.com, and you can follow his blog at www.itbswatch.com.

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