Is there a way to make IT both a profit and a cost center?
CIOs often ponder this question, mindful that IT is perceived as a cost center. Being a cost center means that budget discussions concerning new project funding can be uphill battles demanding numerous justifications for investments.
On the other hand, if IT were to be able to show a profit potential from new technology investments, the funding battle in the budget room would get easier and IT’s internal “cost center” perception would change.
Thereare ways in which IT can return dollars to the business bottom line, but before we explore these, let's identify the approaches that aren'tperceived to be profitable in the eyes of CEOs and CFOs.
- “Soft” costs saved by IT innovations such as automation. Soft costs don't count because they don't deliver hard dollar savings to the bottom line, and more often than not, what might be saved in internal expenses in one area are consumed by new operational costs somewhere else.
- Chargebacks. While chargebacks may be credited to IT as internal “profits,” they zero out in corporate value because they are charged back as expenses to other departments.
So how do you make money?
IT’s primary value to the company is in its ability to implement and support mission-critical systems that the business needs.
That being said, there are always willing “takers” for any bottom-line profits that IT can generate provided IT maintains its primary implementation and support roles for internal systems.
For IT, then, the trick is to identify profit opportunities within the purview of what IT provides for the company day to day. In other words, what products and services that IT provides can be leveraged on the outside for profit?
IT profit ideas that work
Here are four areas where companies have been able to generate tangible IT profits that impact the corporate bottom line:
1. Data center services. The internal data center, and licenses for hardware and software, are some of the highest cost areas for IT. When IT finds a way to offset these costs, and even turn a profit, it’s a “win” for IT and a “win” for the company.
There are some larger organizations that have executed this strategy. They made decisions to leverage their excess data center resources by offering pay-for data center services to smaller companies in their industries who couldn't afford to pay for a full IT infrastructure on their own.
In the financial services industry, for example, major banks and credit unions have provided data center and IT services to smaller financial organizations that pay them on a monthly basis for service. If the larger institutions secure a sufficient number of these smaller organizations as clients, they reinvent IT as a profit center, and bring smiles to the faces of their CEOs, CFOs and boards of directors.
2. New product development. Commercial software companies do their best to stay current with their products and build software for the next generation of business use, but they're still not in the trenches of day-to-day business like their clients. As a result, it’s often client IT departments that come up with new product ideas and add-on software modules that work with the vendor’s package and that create new business value.
A majority of these software add-ons built by client IT departments use application generation and programming tools that come with the original vendor’s software. Because vendor tools are used by client IT departments to create new software add-ons, these add-ons are fully compatible and easy to integrate with the vendor’s base software package.
Vendors like it when their clients develop new functionality that can be used in and with their software. They save their own research and development time, plus they have an opportunity to acquire a piece of client IT code that addresses a business issue or adds a new feature that their own code lacks.
If the software developed by a client company's IT department isn’t deemed by the company to be exclusive intellectual property that the company doesn’t want to share, the CIO could opt to “sell” what his/her IT department developed to the software vendor whose package was enhanced.
In these cases, what usually happens is that the vendor’s client, whose IT department developed the new software add-on module, gets paid a licensing fee from the vendor each time the new functionality is sold to another of the vendor’s clients.
3. Incubator products for the company. In some cases, companies have started product “incubators” that are derived from IT but are specifically intended to be technology products that the company intends to commercialize.
When these products start selling, IT can recover its initial costs to develop the product and then start earning revenue credits from sales. When enough product momentum builds, it isn't uncommon for companies to establish separate technology product generation units from IT. Regardless of how companies approach new product development, if the products were IT-initiated, the company begins to view IT as a revenue-generating function. This changes perceptions and moves IT away from simply being viewed as a cost center.
4. Training. User training is not a job in which IT vendors excel. Consequently, there are times when companies take training into their own hands and develop internal programs for their business users and IT staffers so employees can get up to speed with new technology.
This happened at a company some years ago where I was a training director. The vendor we were working with liked the internal training we had developed for its software and asked if they could acquire it.
Key decision points for monetizing IT
While the idea of monetizing IT and converting it into a profit center is attractive, there are plenty of elements that should be thought through before deciding to go forward. Here is a checklist of questions that should be considered:
- Do I have management’s buy-in? If you don't have initial buy-in for an IT commercialization effort from your management, stop right there. You've got to have the company's backing if you’re going to get the resources you’ll need.
- Can you continue to support the business? If your choice is to become a data center for other companies, can you continue to fulfill all the day-to-day IT obligations that your own company expects? If the answer is no, it’s best to defer your plans until you feel you can meet the needs of all stakeholders.
- Is your staff customer-ready? If you decide to commercialize your IT and interact with other company customers, your IT employees will need customer-friendly soft skills that can compete with those of other vendors. If your staff doesn’t possess these skills, it might be necessary to hire people with these skills or to further develop staff before going “live” with your service.
- Is your IT code proprietary? If a piece of code or a software module that you develop contains proprietary information that gives your company unique competitive advantages, it’s best to regard this as your own intellectual property and to keep it within the company. However, if the code you develop is universally useful to others like companies in your industry and there is nothing particularly proprietary about it, it could be an excellent candidate to license to your vendor.
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