IT as a Profit Center

by David Merrill on Apr 3, 2014

For decades, IT departments have been a cost center. Information technology is a cost to the company. The services and capabilities are undoubtedly valuable, but like legal, accounting, or human resources departments they are a cost to the company. In my humble opinion, in many cases this should change.

 

Most of my work as the Chief Economist at HDS, has focused on ways and means to help IT departments reduce their costs. As a cost center, a dollar (or ringgit) saved is a dollar to the bottom-line. Almost all of my efforts have been to identify, measure and recommend options to reduce costs. For IT service providers, or cloud service providers, the IT department is the profit center, and their cost reductions result in a lower Cost of Goods (CoGs) that in turn improved profitability. These IT departments look for any and all ideas that can open new channels of business and revenue. Many of these operational and planning perspectives should become the norm in traditional cost-center-IT departments.  

 

Now lets suppose for a minute that IT (or some percentage of IT) can be converted to a profit-center. Cost optimization is still important, but the emphasis is now on how to turn higher profits. The mind-set, traditions, practices of IT would be challenged, and innovations would be embraced when these innovations improve profits. Here are two simple areas where I have seen traditional IT departments consider for-profit expansion:

 

1. Private Cloud Service Provider – This has been most common in the government sector. One department becomes very good at delivering IT services and systems at a quality price, and then turn to other smaller agencies to vend their offering. Government may not be a for-profit company, but these IT groups that assume this type of leadership do transform themselves to be customer-sensitive, price-sensitive and service conscious. By moving to a for-profit model, they ensure that their operations and standards contribute to the quality and value of the offering. They discourage and attack waste, long turn-around times, ancestry resources and licenses. Some hospital and higher education IT organizations are also making this transition by offering very customized and specific IT services available to like-minded organizations in which they may have a semi-formal or cooperative arrangement.

 

2. Next is the idea of Big Data. Here is a new opportunity where the IT department can now take years of data (or meta data) and work it into a product offering to sell within or without their own organization. They create, management, ownership of the data is within IT, why not turn around and drive revenue with assets within your control? This Bloomberg TV interview of HDS VP in APAC shows one perspective on how this can be done.

 

These two examples above may not be enough to convince someone to turn IT into a profit center. There are certainly several risks and issues, but the value and historical resources, or data, can be thought of as a commodity. Best practices and operational efficiencies could be sold to others that do not posses the same levels of cost effectiveness. Moving to a profit-center mindset may also change some of the architectural, operational and attitudinal traditions that exist within IT, and in the least may lead to a secondary path of OPEX and unit cost efficiencies. So even if you don’t change to a profit center, the planning and process might well result in better cost-center cost results.