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IT as a profit centre: Could we? Should we?

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Let us agree that technology is or should be a big differentiator for business. Let us also agree also that particularly in very large companies, the IT department may be more cost effective, reliable, agile and so on than external service providers.

And of course, getting IT to think and act as a services organisation where cost is competitive with external providers, is a good thing, yes?

It is even fairly uncontentious to say that in forward thinking companies at least, the IT department is no longer seen merely as just a cost centre - but has a seat at the top table in its shiny new role as a business enabler.

But is there a next step? Can we turn the IT department into an actual profit centre?

Easy, Tiger

The IT department is one of those things that will never be a profit centre, right? Like the finance and HR departments, the people that look after the company's IT are always going to be one of those departments that simply cost money.

But is that really the case? After all, much of what the IT department does is just as applicable to third parties as it is to one's own company, so maybe there's some mileage in considering using it to generate revenue and perhaps even doing so to the extent of bringing in a profit of some sort.

I have heard this concept mooted several times over the years, and in many cases by managers and business leaders I hold in high regard.

So if we are to make the IT department profitable, how shall we do that?

Selling our spare capacity

The obvious first step is to take what we have and use it to implement customer-facing products. So if we have an extensive email infrastructure, for instance, we could rent the spare capacity to others - host their domains on our servers and charge them for the privilege.

Hang on: why do we have spare capacity? If we have 500 users and we've bought an email platform that can support 5,000, what were we thinking? What numpty signed off the spend?

I've worked with thousand-person companies that had strong plans to grow to many thousands in a short space of time, but even they started small based around architectures that could scale with the growth of the company.

In 20-plus years in this industry I've only ever built one infrastructure that on Day One could support the 100,000+ users predicted for Year Three.

Being our own first tenant

To have capacity to sell we need to build the infrastructure to fit that model. So we'll build a multi-tenanted infrastructure (i.e. one that can support numerous customers, each in its own secure sandbox and oblivious of the others' presence on the platform) and become our own first customer. Excellent idea.

So of course, we'll have dual installations, each in a separate data centre, with active replication between the two.

Of course the customers will expect 24x7 monitoring and support, so we'll ensure we have an effective monitoring and alerting platform and sufficient staff in the data centre or on call to deal with out-of-hours emergencies.

This will mean recruiting staff, of course, since we won't have a bunch of techies in the IT department sloshing around with nothing to do.

And of course alongside the techies we'll need sales staff to go out and find the customers for us: they don't appear by osmosis, after all.

And don't forget that we'll need to arrange to bill the customers – though that shouldn't be too hard as we should already have a billing system for the products we sell to our existing customers.

And if we're using commercial software there'll be an incremental licence cost as we grow the user base – extra users doesn't equal pure extra profit.

We do need to make sure our service is competitively priced or customers will go to (say) Office 365 or one of the other big providers that have the economy of scale that enables them to charge rock-bottom prices.

And of course we can't do that, so the big companies with significant numbers of users will simply sign up for the big providers' services, leaving us with the smaller ones.

The smaller ones that don't have their own IT talent in-house, and hence will be particularly needy and cost us a lot of implementation and support time.

Turning it around ...

Taking this argument on a little let's ask ourselves why we're implementing an infrastructure to sell to people. I can just about see why we might do that if we were a technology company with an IaaS product that had a USP and was an attractive proposition to potential clients. But we're not: we're an IT department trying to stop being just a cost centre.

As we've just seen that it's clear we're not going to provide a product that anyone big will actually buy, why don't we follow the crowd and move our world to a managed service anyway?

It's going to be cheaper that doing it ourselves, and in a world where we can't really afford 24x7 internal support anyway, the managed services we could buy will, as well as costing us less, have better support too.

Back to the point

But we digress: we're trying to make the IT department a profit centre, not outsource its systems.

If we've said that we can't reasonably implement services we can sell outside the business, why not look at selling them inside the business instead? After all, we have a captive market of people who have no choice but to buy what we do - in many cases no matter how abysmally we do it.

So instead of the IT department being a standalone cost centre, let's put a value on everything it does and account for it through an internal IT chargeback.

It's surely the case that some departments have a greater use than others for technology (Finance probably has a greater demand for servers, software and storage than the marketing department, for example).

If we're a monopoly we can charge what we like

And it's quite a fair way to work, in fact - each department can then be internally recharged for the IT systems it uses, and perhaps we can implement a system of service credits so that they get some recompense in the event that the Help Desk fails to meet its Service Level Agreements (SLAs).

Bit of a problem there too. If departments' budgets are being charged for your services, this gives them an implied right to choose to go elsewhere if your services are sub-standard or, more likely, too expensive.

And no, we can't compel them to spend their money internally because that cocks up the whole model: if we're a monopoly we can charge what we like, and all that happens is a load of arguments between budget holders and the CFO at year-end.

As we've already mentioned we are unlikely to compete on price with the big players - though I guess if we're only servicing internal customers we could depreciate our equipment over five years instead of three and ensure we're as lean as possible on staff to keep costs down.

What can we do, then?

So: we've decided that we're not in the business of being a service provider to other organisation, and anyway we couldn't compete with those that already are.

The customers we might get on board will be the ones that will take loads of our support time. And if we charge our internal departments for our services then unless we're cheaper and/or better than a third party they can justifiably choose to spend their money elsewhere.

So, there are two things we can do:

  • Do the aforementioned exercise of calculating what services cost and report each department's actual usage cost at the end of each quarter. No wooden dollars will change hands, but it'll demonstrate where the money's going and what it's being used for.
  • Forget the whole idea of IT becoming a profit centre: while the beancounters might find a way of reporting it as such it won't actually make any difference whatsoever because it won't genuinely be profitable.

A parting word of caution

There is, however, one more over-riding thing that the individual departments might like to do. When you've calculated the cost of everything as mentioned above, you could accept that you'll never make a profit and instead embark on an exercise of whether you could do things more cheaply, perhaps by using cloud services and other third party services.

It's a great way to show the business that although you're a cost centre, you're a cost-conscious cost centre that cares about expenditure.

It will also show that you want to keep your job. Because if you don't do this, someone in finance will. And if they don't, someone in sales will. And if they don't, someone in HR might.

And in a year's time you'll be out on the street because they disbanded the IT department and got their IT more cheaply elsewhere. You were, after all, a costly service provider and they chose to get a better, lower cost service from someone else.

Because it doesn't matter a damn whether the IT department shows a profit or a deficit. What matters is the amount of money flowing out of the company. ®

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