Why IT Should Stop being a Cost Center
In most non-tech companies, IT is considered a cost-center. This means that IT does not affect profit, but instead provides services to the business units that do affect profit. They are given budget to spend, but never show returns. This makes sense for things like desktop support and network infrastructure but when we’re talking about building software I’m not so sure.
Technology has become so ingrained in every part of the business, it doesn’t make sense to have it separate anymore. Technology can be a key differentiator if used properly. But it will never be a key differentiator if you have your technology cordoned off and transacting requests as a cost center.
Let’s take the example of a soup company. I’m choosing soup because it’s hard to imagine a tech-enabled soup can. The soup company’s IT department runs the systems that manage the back-office systems including inventory, the brand website, invoicing, orders and timesheets. These all seem to be cost-center items.
What would happen if IT had a P&L? (Profit and Loss) Take timesheets for example. What profit could we possibly have from timesheets?! What if my goal is timesheet system manager is to create a profit or cost savings? What if my team can create a system where factory workers no longer need to clock in and out, we will use their badges to automatically track their time. We’d free up 20 minutes per employee, per week! Imagine the increases in production!
This is, of course, a fictional example, but the idea is that when everyone is thinking in terms of P&L, innovations start sprouting. IT becomes a participant in the business, instead of a responder.
Another effect of having IT on a P&L is that it promotes value-driven work and optimal prioritization. The days of over-engineering are done, we want to get value. IT will come up with creative solutions to provide value quickly if they are driven by profit. As a cost center technologists are forced to overbuild and overestimate as a protection mechanism. They know more requests and changes are unbounded, so they need to put up blockers. In a profit-driven team, they’re open to ideas and always optimizing.
Bootstrap. Startups talk about a ‘bootstrap’ or ‘organic growth’ meaning they make the money to pay for growth. IT teams are always worried about funding and proving their value. Teams are at the mercy of their funding. I propose we give the team some seed money and then let the team find their way to paying their own way. If a team is covering their costs and making the company money, there’s no reason for them to get funding. They pay their costs out of the money they make.
Wrap IT in with the business units. This may not make sense for all IT functions, but certainly the ones with tight business partnerships. For example, my soup company has an IT team that writes the robotics code for the factory. Just make them part of operations. Their cost is the factory operation cost, their priority is the factory operation priority. Keep the cost and the people close to the work.
Consider the example of the website. The website design and updates are part of marketing. There’s no reason to make it part of IT. Same goes for Data Analytics, Ordering, and Invoicing. The timesheet folks may be part of HR.
An IT executive once said to me sarcastically “the business would just loooove to have their own dedicated IT person so they can have them do whatever they want.” Well yes, they do, is that wrong? They want them to do things to positively affect their P&L, are we trying to stop that from happening?
Keeping your systems whole. What about economies of scale? With an IT cost center, I can leverage programmers and testers across functions. You can. But are you getting the best outcomes by having people separated from the business function? Consider other organizational design models to maintain clean systems and build technical capabilities. Guilds or communities of practice can keep people with like-disciplines in touch and share good practices.
What do you think about IT being a cost center?