IT as Profit Center? It Can Be Done

FRAMINGHAM (05/01/2000) - The temptation - and sometimes pressure - for IT departments to market their services externally and become, in essence, profit centers can be great. These "suppliers" have some very distinct advantages and disadvantages in the marketplace.

Many major corporations are moving toward a shared-services structure, where departments typically viewed as overhead types (e.g., IT, accounting, human resources, purchasing and others) must operate as businesses. This means that they must market to the company's business units (BU) the same services they used to provide automatically with the costs usually allocated to the business units for these overhead departments. In a shared-services environment, these departments must recover their costs by charging their internal "customers" agreed-to fees based on service-level agreements. In many cases, the BUs are no longer required to use those internal resources and can go outside the company for these services.

It might sound too revolutionary, but it's being done successfully in some large, conservative companies.

Some have underestimated the changes - after all, the corporation is just going from an allocation to a direct-charge mode for the same services. But beware:

Significant cultural and organizational changes must take place for this shift to succeed. For example, IT managers who used to be concerned only with making sure operations could handle demand now have to become marketeers and compete with external providers who are full-time, experienced, trained professional vendors with winning sales plans.

On the BU side, managers can finally break away from IT departments they say were never very responsive anyway. Now they can go out to the market, but they're faced with the unknowns in dealing with suppliers at arm's length.

These suppliers must make profits while their lawyers make sure the customers take most of the risk. At least the BUs can compare the internal IT department's pricing and services to those in the marketplace.

Some large IT departments are going beyond this model, trying to enter the marketplace to sell and service external customers and compete with other suppliers in the process. The stakes in this endeavor are even higher than just marketing to the BU manager, who more often is like a colleague than a customer. Now, the former staff cost-center IT guy must really become sophisticated in marketing, sales, negotiations, scoping a deal, contracts and relationship management. What's more, he'll be running with the big dogs like IBM and EDS, and there is an entry fee: Staffing up and developing the expertise to compete is no small task. Developing an effective marketing strategy and creating a presence in the marketplace are challenges that, unless successfully met, can leave this new supplier at a disadvantage compared with more established vendors.

But if the transition is done well, the IT-department-turned-supplier should have some clear advantages. Most important, it has been a customer, lived with its customers and - one hopes - managed operations efficiently. It may also be able to boast an experienced, cohesive staff with a solid track record. This can spell a clear advantage over other suppliers who probably have to put together a completely new team to handle the account once they've sold the deal. When marketing to the corporate BUs, IT can also capitalize on the fact that they both have the same shareholders and corporate bottom line and, as a result, should have the same goal, which can form the basis for a real partnership.

Internal IT groups have some daunting challenges in the marketplace. But by capitalizing on their strengths and marketing themselves assertively, they can give their competitors a run for their money and bring some new, outside money to the corporate bottom line. And once they've proved themselves against outside competition, their internal customers will calm down about bringing in outside companies to replace them.

With these potential results, the whole idea can be worthwhile.

Joe Auer is president of International Computer Negotiations Inc.

(www.dobetterdeals.com), a Winter Park, Florida, consultancy that educates users on high-tech procurement. ICN sponsors CAUCUS: The Association of High Tech Acquisition Professionals. Contact him at joea@dobetterdeals.com.

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