IT as profit center versus cost center: State of the argument

One of the arguments that has defined the corporate perception of the IT department over the past decade is viewing it as a cost center versus a profit center. Here's where the argument stands today.
Written by Jason Hiner, Editor in Chief

IT remains as critical as ever to running a great business — even more so as tech seeps into every single business process and data becomes a more valuable part of the future for virtually every organization in the global economy.

But there's no denying that IT has lost gravitas in many companies: where it was once viewed as a key business enabler when organizations were first getting computerized, it's now mostly seen as a necessary-but-expensive line item in the budget.

The problem, as many businesses and IT departments have articulated it, happens when IT becomes viewed as a cost center rather than a profit center. In other words, it's viewed as something that's a burden on the business rather than a catalyst that launches the organization toward its larger goals.

Some of that can be solved by better communication — by the CIO being a better cheerleader for the victories that IT is helping to enable. But more of it has to be about IT changing the way it operates.

Due diligence

The smartest IT departments have zeroed in on maintenance costs versus investments in innovation as the way to bring more value and change perception. Once they started measuring, many of them realized they were spending 70-80 percent of their IT budgets maintaining existing applications and infrastructure, which left very little to help the organization pursue new directions for the future. No wonder many of them were viewed as an expensive burden that had to be tightly managed.

That's the big reason why offshoring, outsourcing, and cloud computing became favorite tools of businesses and IT departments. They made maintenance costs more predictable and easier to measure and manage. The argument was that by doing that and getting those costs under control, the IT department could focus a lot more of its effort on exploring new vendors and products, upgrading software, and looking for new solutions that could save the company money, leapfrog competitors, or break into new markets.

Of course, the reality is that offshoring, outsourcing, and even the cloud can sometimes complicate and slow down business processes and can even be more expensive than a well-managed internal solution. So, it's all about doing your due diligence to figure out the real costs and then being honest about what your IT department can do well and what's better left to external service providers.

Control costs and buy smart

The pressure continues to build for IT to justify its existence. It's not enough to just keep things running smoothly. The IT departments that focus solely on that will continue to get their budgets squeezed until it causes pain to the business, and then the costs will normalize. To get new money to invest, IT has to show that it can effectively keep maintenance costs under control and that it can make wise decisions in choosing vendors and products that add long-term value to the company.

That's where we're at. This will all sound elementary to the IT departments that are run well and have been thinking like this for years. But the future remains unevenly distributed in that regard (as William Gibson would say). All IT departments, whatever the size of the company, can take these principles and apply them to the ways they think about, categorize, and spend their IT budgets.

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