SmartAdvice: Tips For Turning IT From Cost Center To Profit Center
CIOs must focus on increasing revenue, not just cutting costs, in moving IT from cost center to profit center, The Advisory Council says. Also, how to build a defensible business case for moving off obsolete Windows 98 PCs, and using the Future Search approach to jump-start a vision statement.
Editor's Note: Welcome to SmartAdvice, a weekly column by The Advisory Council (TAC), an advisory service firm. The feature answers three questions of core interest to you, ranging from career advice to enterprise strategies to how to deal with vendors. Submit questions directly to email@example.com
Topic A: Should we try to make IT a profit center, rather than a cost center?
Our advice: For years CIOs have been in a push/pull relationship with CEOs because IT has been a cost center. Since the early days of the mainframe era, the CIO would be asked to prepare a budget of what was needed to keep the IT operation running during the coming year.
After the budget was in, the money bucket would be handed out. Since many of the CEOs didn't care to understand what IT was doing behind closed doors (with Diet Cokes and Twinkies), it was assumed that whatever the CIO needed was justified, and no one looked deeper.
The outsourcing trend of the 1990s and client/server model changed this. More and more CIOs began to report to the CFO, who had auditors peel back the IT onion, setting up the dysfunctional model that many IT departments face today.
Succeeding As A Profit Center
To move from a cost center to a profit center, a CIO must:
Produce a revenue model that will increase the business's bottom line
Identify the people in the IT organization who can add value
Drive this model to increase earnings, the value of IT, and the CIO's and team members' careers
This shift isn't for the faint of heart. It needs to be driven by a new "revenue model" that adds to the bottom line. While many CIOs focus on decreasing costs, growing revenue is equally important.
Why isn't it for the faint of heart? If the CIO doesn't have technical personnel who also can operate as business people, adding value during customer sales calls or by answering callers' questions in a profit mode, the team will fail.
The larger issue is how the CIO can build a business case, present it to the CEO, and sell it to the customer base, who may not currently be paying for these services.
If done properly, the upside is great. The old cost center becomes a positive cash-flow business. The internal IT group, currently cut to the bone, will be seen as adding value. Other business units will begin to view this group as a lifeline to its customers and a source of new "sales" opportunities. Likewise, the CEO and CFO, who often have bonuses attached to earnings, will view this development with great interest.
In the heyday of ERP implementations, it wasn't uncommon to have the vendor's support team (referred to as a Professional Services Organization) be the face-off people for all add-on work after the initial contract was won. Why? The customer didn't perceive them as salespeople, but as technicians. However, these new "profit center consultants" often created billable revenue, at many times their salaries.
Today this business-value proposition for the C-level executive is more important than ever.
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