Leadership

Is IT a profit center or a cost center? Who cares?

While the intentions behind attempting to make IT look like it's generating a profit are noble, too often they come down to accounting gymnastics that convolute IT's role in the company rather than clarifying it.

There are several recurring debates in the IT management community. Most of us have read articles or perhaps engaged in debates over topics like IT "alignment," the best way to implement an ERP, and that old favorite argument of whether IT should be a profit center or a cost center.

In most organizations, IT ends up taking its place beside logistics, order processing, and other back office functions as a cost center -- the fancy accounting term for an entity that generally consumes cash rather than producing it. In these organizations, IT might be "the man behind the curtain," putting in systems and processes that help the folks over in sales bring in cash or creating efficiencies that conserve cash, but at the end of the day, in this model IT is essentially a corporate expense.

Proponents of the profit center model point to the savings and efficiencies created by IT. This school of thought supposes that if a massive systems implementation is predicted to save $10M over five years and if it is successfully implemented, IT generated a "profit" of $2M in each of those years.

The cost center model seems straightforward. After all, the developers and CIO are not out pounding the pavement with the salespeople and generating quantifiable revenue. This, however, does not sit well with many in IT management, who have legitimately argued that IT is more than just an expensive utility and a cost to be minimized. If IT is to be a true "value engine" and if there is little more valuable to most for-profit operations than revenue, why shouldn't IT be a profit center that generates revenue rather than merely consuming it?

While the intentions behind attempting to make IT look like it's generating a profit are noble, too often they come down to accounting gymnastics that convolute IT's role in the company rather than clarifying it. Since IT generally is not producing a product for an external customer, many profit center proponents resort to using a system of chargebacks where other business units must pay for internal IT's services. If marketing wants a new CRM system, IT will charge them for its services, thus generating what looks like income. In essence, the corporation is taking a dollar from one pocket and placing it in the other. While this may appeal to those who thirst to have "profit center responsibility" on their resume, a six-year-old could tell you that this is not actually generating anything other than accounting headaches for the organization as a whole.

Furthermore, I have seen several organizations that use such a convoluted chargeback model that managing it literally takes several weeks of top-level staff's time each year. In the name of making IT look like it makes money, reams of spreadsheets and internal paper passing are instituted, almost universally to the chagrin of other business units that must deal with the mess. Not to mention there is the lackluster internal PR that is generated when IT comes to other business unit managers with an unrealistically high internal chargeback rate, spouting off about IT pulling in its share of corporate profits one moment, then telling the exec that he is forced to pay above-market rates and jump through accounting hoops to facilitate this so-called profit.

At the end of the day, the accounting treatment of what IT endeavors to accomplish matters far less than its actual results. A profitability mind-set can be a wonderful thing, as long as it considers profitability for the entire corporation, not the amount of money it can transfer from one internal account to another. Partnering with other business units with the needs of the paying external customer will create real monetary value for the organization and free IT from convoluted arguments used to justify its existence. A focus on true profitability for the organization as a whole will likely generate far different results, both in terms of the projects IT focuses on and its execution, than mindlessly worshiping the internal "customer."

Arguably, the only true profit in any organization is generated when the external customer gives cash to the organization in exchange for a good or service. If IT truly wants to deliver profit, focusing its efforts on making this interaction as effective, efficient, and, yes, profitable as possible is the right path. Leave the debates about accounting gyrations to the bean counters.

Patrick Gray is the founder and president of Prevoyance Group and author of Breakthrough IT: Supercharging Organizational Value through Technology. Prevoyance Group provides strategy consulting services to Fortune 500 and 1000 companies. Patrick can be reached at patrick.gray@prevoyancegroup.com, and you can follow his blog at www.itbswatch.com.

About

Patrick Gray works for a global Fortune 500 consulting and IT services company and is the author of Breakthrough IT: Supercharging Organizational Value through Technology as well as the companion e-book The Breakthrough CIO's Companion. He has spent ...

41 comments
oofnet
oofnet

Does IT matter? Absolutely! But IT is a tool and a cost for doing business in today?s world, not too much different than an advertisement campaign the marketing department would launch to generate sales revenue. IT professionals have long disdained the argument of cost center vs. profit center, and some viewed this as a pointless battle. In my opinion, the attempt to justify by proving IT organization can deliver profit (in dollars, mind you) is superfluous. I do agree with the closing statement that IT organization should focus more on it?s execution and integration with business units; not to prove IT?s worth in delivering profits, but to deliver value.

maclovin
maclovin

It honestly doesn't matter to many people. They need it to perform their functions every day, so they spend on it. I, as an IT Manager/SysAdmin, will say that it IS, in fact, a cost centre. There's not any REAL argument about it. This debate sounds like something that Presidential candidates would argue about, just using the same words in a different order. WTF!? COST is COST Saving $$$ = LESS of that COST I think it comes down to some people trying to OVER justify what they do, or over-describe their value to the company. But hey, that's not just in IT. In fact, I would say attitudes like that run RAMPANT in every other role before they even reach IT. Many of us simply DON'T CARE how we're classified by some beancounter that can barely tie his shoes, let alone figure out the difference between RIGHT and LEFT (click).

WCarlS
WCarlS

IT is a cost, one generated by each part of the organization which requires services. The chargeback model should be used to place those costs where they belong, and should be looked at as a cost of doing business for each separate segment of a company. Else you allow unrealistic profits by those other segments.

jdiasq
jdiasq

OK Let's think in a very radical way. Suppose we remove all the IT resources of enterprises. And so? how they survive?

reisen55
reisen55

It is often viewed by AMERICAN management as a profit center. Like HR, and accounting, it is properly a back office support network and, as such, does not produce any profit per se. It is an expense, much as again HR and Finance are expense items for back office support. Which is then why American management loves to outsource these three functions to companies like GenPact in India. Reduce expenses and increase profits and shareholder value always goes the mantra. India - cheaper,faster,better (one word to me). However, IT among all backoffice support functions holds the magic key that binds everything and everybody within and without together. Imagine a day where no IT exists at all. Can we send our office structure back to the days of the secretarial pool, IBM Selectric Typewriters and faxing? Remember what carbon paper was? No email. No internet. Nothing at all. The business would function for a day and then expire totally. THAT is how important IT is an expense and every other department goes along with it. HR and Finance too. Take IT out and everything goes bye bye very very quickly.

nettarget
nettarget

There are many components to remaining competative in the business world. One of the components is IT which may assist in score keeping, attention directing and problem solving i.e. neo-moblie. IT may also porvide up-to-date sales figures that allow "real" mony makers to make more productive decisions. Remember there are big play makers on the field and many supporting their achievements.

terry.coburn
terry.coburn

Whilst I agree making IT an artifical profit centre is an exercise in futility I wouldn't be so quick to dismiss the concept of charge back. This can be a very useful tool in controlling spend and moving the decision making away from pure technology spend for technology sake to focus on real business benefit. If a department knows they have to fund not only the initial cost of delivery but also on-going costs to support and maintain a solution then they work harder to ensure they don't come up with stupid and overly optimistic ROIs. The key is finding a charging solution that doesn't have a large admin overhead and csan typically be achieved if people will accept a 'roughly right' type approach rather than worry about every dollar.

o2463c
o2463c

So if the facilities group switches the company to less expensive to run light bulbs (energy efficient) then they have generated a profit? That is exactly the kind of thinking I would expect from an MBA or a politician. If you want to generate a profit, come on over to the consulting side, otherwise you are just an expense to your employer.

avatar_man
avatar_man

I.T. is a Cost - a cost of doing business. I do however beleive there is a middle ground where internal costs of I.T. support should be tracked. This allows for escalating support costs to actually be tracked back to specific business units or idividuals. Unless you keep track of these types of costs, you really aren't understanding where your internal (albeit assumed) costs are being spent. Once the basline is established, you can easily identofyu and rectify the why portion of staffing justification, additional project or support costs, etc.. I beleive it is a mistake to look at I.T. as solely either profit or cost based, rather it is an integral part of the business machine that allows the company as a whole to make money more efficiently.

bboyd
bboyd

Cost center or Profit center, investments in it should be evaluated by equivalent process either future or Present value ROI weighed against similarly weighted investments. Either way its utility can be evaluated versus the alternatives. My company is willing to give me most projects at 1.5 year payback or better. A few pet projects are squeezing in at 2 years. Given the down turn its harder to make that 1.5 year time meaning that we have to reduce input costs or provide greater benefit. Plus the capital pie is harder to acquire. I'm increasing spending, half my companies capital budget this year, while others are getting squat and forced to make further cuts. Find a way to do these things in your position, man on the ground to CEO. Submit the plan and your estimates and expect to follow it up with results. All worth your time in the long run even if you implement yourself out of the current scheme likely you'll be part of further growth and success.

CharlieSpencer
CharlieSpencer

If the Maintenance & Facilities department puts in low-flow toilets and cuts $10K off the annual water bill, are they now a 'profit center'? There's a big difference between reducing costs and generating profits. IT is a service department, what we in the Army used to call 'ash and trash' (or 'REMF'), period. The only thing we provide that comes even close to qualifying as 'revenue' is the 'income' from the sale of used equipment or the tax-deduction from donating it to charity. Sure, we have to be there in most organizations, but we no more generate profit than any other support department. We're no different from Accounting, Maintenance, or Shipping. You can't do without them either, but no one ever tries to sell the notion that the Receiving dock is a profit center.

TheProfessorDan
TheProfessorDan

This is a ridiculous concept. I used to hear "just remember IT doesn't make any money" all the time and everytime I heard this I wanted to throw up. My thought is that if we aren't making any money then just send all of us home and see how quickly the "profitable" departments stop making profits. This is like saying that your car doesn't make you any money. Try walking to work and see how fast that theory goes out the window. I do agree that IT departments can do their part in reducing costs but to throw that crap around that IT isn't a profit center in moronic. We support the profit making departments. We support applications and systems that the profit making departments effecient and more profitable.

NotSoChiGuy
NotSoChiGuy

If IT starts to lag in performance, the obvious question to the business units becomes: 'why can't we find better service for a cheaper price'? So long IT, hello outsourcing. The point about the end result being of primary importance is well-stated!

CG IT
CG IT

and am very glad you pointed out the Dog and Pony show of IT "profitability" that IT execs use to justify their existence and their pay. The sad part is, those who own the businesses can't see through the Dog and Pony show for what it is. Someone spending all their time and company money justifing their job and salary.

CG IT
CG IT

they use paper.

CharlieSpencer
CharlieSpencer

Accounting will survive a lot better than IT. Let's remove the assembly lines and see how long the company lasts. Let's remove Maintenance and see how long people work when the toilets won't flush. Geez, some of y'all need to get some perspective. All IT does is replace manual procedures. We make it a darn sight easier to step through those procedures, and can provide a big competitive advantage if we do our jobs right, but if all the IT departments went away, companies would find a way to continue operating without us. They got along fine without us for centuries.

CharlieSpencer
CharlieSpencer

Take Finance out, and who can tell if we're making any money? Take Sales out, and who's going to buy our goods or services? Take Maintenance out, and who's going to tie IT's big honking UPS into the grid? Companies got along for hundreds of years without IT. Many small ones still do. We're no more or less 'essential' than any other support department.

CG IT
CG IT

All your claims are nothing more than marketing hype. How does all what you say, have customers buying more widgets the company makes? Maybe if everyone was in the stock market and needed real-time updates that might make money from the use of mobile computing but actual sales? I doubt it. The real money makers are the customers who buy the product from the company making the widget. To sell the widget, the company has to let everyone know they sell it at a price that is better than the competition.

avatar_man
avatar_man

Simply done by leveraging what should be your already existingHelp Desk component of your Service Desk solution. Tie each end user to their specific organizational account number, then when you run the reports from your Work Order systems, you have the metrics available from a support side. easy enough to correlate the date into a meaningful report involving the "soft" costs associated with each department - even if there is no real charge back.

CharlieSpencer
CharlieSpencer

Say Jim-Bob moves to another department, either by promotion or transfer. His old department won't let him take his computer since it 'belongs' to them. His new department has to either produce a machine for him to use or wait while the paperwork is processed to get a new one. Either way, IT has to configure a system for him while a perfectly good one sits unused in his old cube. Maybe tech support has a loaner he can use while his new one is on order; then IT gets to configure two systems for him, the loaner and the new one. Another example: one department may do mostly Office and Internet, while another runs three different CAD apps that are upgraded every year. The manager of the first department may be able to justify replacing his machines every two years, while the CAD manager may not even realize he needs to keep his hardware up with his software. If IT manages the hardware, the CAD users get updated regularly and their used systems can be handed down to the Office / Internet users. Departments owning their own hardware is a source of departmental squabbling and poor asset management.

adeyemiadeoye13
adeyemiadeoye13

you are right about , anytime these people want to cutdown costs, they shutdown the IT dept. someone have tell them that IT dept is valuable to the whole corporation. hope i am making sense to someone out that.

CG IT
CG IT

II departments that support the computer network of a company do not sell good and services that company customers buy. no matter how a department offloads their costs on other departments, those costs are charged against sales of company produced products and services. What off loading costs to other departments really does is make other departments attractive for cost reductions/employee reductions and not the IT department. Bottom line: its how IT departments managers and executives who know they have large costs for all the projects they want, keep their jobs. Sad part is the executive management by the dog and pony show and shell game of hiding how much a department costs a company.

whatever01
whatever01

Seems a lilttle naive that someone would ever say that the IT excutives justify thier existence...of course they do!!! Much like every other executive in any other business organization. While IT organizations are not under pressure to "create" revenue, or generate profits, they are one of the few organizations (other than Sales Orgs)that are truly held accountable for what they spend, how they spend it, and what value it provided to the business. In a era of faster, better, cheaper IT pressures, many of the other organizations within many companies are still fat, slow, and expensive, with little return on the dollars spent. (Take a look at Wallstreet). Sorry for the "RANT" , but many org within a company are not "for profit" org...example Corporate Security, HR,Legal, and many others. The Good news? is that folks are begining to speak to the value that IT brings everyday to the company. Remember, value is not always measured in cost centers, but how well the company does as a whole...IT plays a part in all of these.

Barshalom
Barshalom

This is a new age of how things are being done. This a technological society now. Paper is still needed, but is not a requirement to move ahead in this type of society. Remember the industrial age? One could have stated then "many business have survived without a automobile, they use a horse". How many businesses are using horses to transport their goods and services?

mitch_renko
mitch_renko

This was at a time when no comapnies had an IT deparptment. Today, a company cannot compete effectively without IT, otherwise, I'm sure they would! :-)

CG IT
CG IT

and many haven't ever worked in a company that didn't have computers so they believe all the marketing hype of increased productivity, increased profit, increased competitiveness with computers. To bad Billy Mays wasn't a pitchman for IT advertising, it would have made many who don't know better skeptical about the claims being made. The IT mfgs pitch is: "with this product, you'll be more productive, move profitable, more competitive". All nebulous claims.

PMPsicle
PMPsicle

All parts of an organization are important. Understanding the relationship between the parts is a key strength both at the strategic and operational levels. Unfortunately it is a strength that is frequently missing. Marketing is the source of food for the organization. Sales is the purchasing of the food. Purchasing is the cooking of the food. Manufacturing is the eating. Accounting is the blood system that carries energy around the body. Information Systems (note not IT) is the nervous system take any one of those systems out of the mix and the body (the corporation) dies. As an organization reaches a particular size the cost/benefit swings towards insourcing and away from outsourcing. That's why radical outsourcing is such a great idea for micro-biz but a bad idea for big biz. (Non-radical outsourcing is done for other reasons). And why any part can be outsourced. That's also why IT is so important to a corporation today. The cost/benefit is so heavily in IT's favour (vs manual/non-IT) that even the smallest micro-biz needs to incorporate IT into its mix. A one-time $700 computer investment effectively replaces a $50,000 yearly cost -- and that's for just a G/L based on Quickbooks. Try extending that over 5 years. All parts of a business are important -- that's why they exist. How you get them is a dollar decision. Glen Ford, PMP http://www.TrainingNOW.ca http://www.LearningCreators.com/blog/

dallas_dc
dallas_dc

I have seen another negative result from IT chargebacks first hand. In a company where I was working as a consultant, they had a system where each department was charged back for every IT service provided. As a result, many departments would avoid any IT service in order to meet their budget goals. This would cause many people to have a negative view of IT, but it would also lead to situations where there were no standards. One dept. might be a version behind on the OS, another might be 2 versions back on a common application, and many would have very old hardware that was prone to more downtime. I also agree that having the chargeback makes everyone think of IT as an external entity. It is not a great leap from there to outsourcing. FYI - The outsourcing spend more time and effort on marketing than most IT departments. Who do you think will win the competition in that race? My firm opinion is that in all but the rarest occasions, chargebacks will lead to a chaotic an inefficient IT department with very likely a poor relationship with the rest of the company.

jdclyde
jdclyde

Too many times do I see the manger who does email and memos having the fastest computer while the people that actually work on the computer will have the older, slower systems. It is amazing how stupid "smart" people are.

jck
jck

It just serves to employ more bean counters. Most departments aren't revenue generating at a corporation. Generally, that's your sales division that makes you all your profits. A corporation takes in profits, then divvys up the funds to various divisions, then they go back and spend it through acquiring resources through a procurement department that has to get funding approved through their finance department. If a corporation would just ask divisions for their IT needs and the reasons to validate it (i.e.-number of users, type of work to be done by user, etc.), then the corp IT could evaluate the requests, determine if the need is valid or not, and go just mass purchase IT stuff rather than each individual division doing it piecemeal over the course of the year. But, I guess the beancounters need a reason to exist in companies. Pushing more paperwork back and forth and swapping money in accounts keeps them in a job.

Barshalom
Barshalom

Think of IT as a tool, one that can be efficient, and if used properly, will create tremendous benefits for those organizations that use it. Without this tool, they could not survive nor thrive.

CG IT
CG IT

on almost a perpetual basis. It's a perpetual capital outlay because those with buy power are naive enough to believe the better, cheaper, more competitive, pitchman's pitch that it will. Just like the latest and greatest craze in gaming. Buying the latest and greatest processor, video card, memory, hard drive, custom case, power supply will give them the edge in gaming, all for the low price of $4,000.00 and if you buy now, we'll throw in 3 free DVDs chock full the latest games [omitting their demos]. But wait, there's more [just hear Billy Mays pitching this on TV and what it would do to computer sales] we'll even throw in 2 new mouse pads, for free!!! Don't wait, Call Now!! but back to seriousness, yes, not all value is measured in costs centers but how profitable the company does as a whole. Case note: I was doing a project with HP on a desktop upgrade for a large insurance company. Windows 2000 to Windows Vista [don't ask why Vista] but it goes to show that large companies don't always go with the latest and greatest because pitchmen and marketing says it will make em more competitive, or increase sales. They treat IT, it's software and it's hardware as they do telephones,electricity, buildings, heating, cooling. Not as an expendable item that has to be renewed every 3 years. The only companies I know that are on a 3 year cycle are the ones that lease the equipment and software including support.

CharlieSpencer
CharlieSpencer

but it isn't the 'be all and end all' as reisen55 and jdiasq seem to think.

srose211
srose211

You take out IT you have to add time and/or resources to every process in your business for it to be as effective. Try it, give your finance department pens and paper for a day, or better yet at month end. Watch those calculators smoke for a week or more before they ask for their systems back. Let's not forget space for file/record storage, etc. IT was developed because it filled a need, it was not some frivolous expense that someone thought would be "neato".

CG IT
CG IT

or better yet, open your own business and see how fast the idea that IT makes you more competitive, profitable, goes down the toilet. IT doesn't do that. Might make things easier, but more profitable? how when the general life cycle is 3 years and so every 3 years you buy new stuff which is a capital outlay. That capital outlay takes money away from profit or reinvestment in new mfg processes, to sell the widget. Or more advertising to get people aware of the widgets or services one sells. If no one knows your selling something, no one is going to buy it and money spent keeping up with the technology changes every 6 months is less money for advertising, marketing, sales.

jck
jck

the boss and his secretary gets "engineering" level PCs. However, some of the CAD people here still have to use "desktop" level PCs. It is stupid. I agree.

jck
jck

If you go and get your PhD in Business, then go to work as a manager and the director says "Meet budget or you're fired.", you're going to meet budget one way or the other so your house payment gets made. I've seen great managers made to make decisions they didn't want to simply because the bean counters think they know what's best for an organization better than the people who actually maintain the operation of that organization. Case in point where I work: Instead of buying a $65k Cisco setup, they were forced by the finance/budget people to "streamline" and "find more creative solutions" and bought some other, off-brand $20k setup. So far in a year:4 failures. Previously with our old Cisco setup: None in 2.5 years. Bean counters = degradation of IT quality

jdclyde
jdclyde

it gets them to give a ratsa$$ about how much they spend, and what they spend it for. Of course it is often poorly applied, where some incompetent "managers" improperly manage their resources with the sole goal to keep under budget. Effective vs efficient, one of the first things they teach in business 101. Maybe they should do a refresher near the end of the degree?

CG IT
CG IT

Still nothing more than marketing pitches to convince the ignorant that buying the product will make one richer, better, cheaper faster, [bionic man]...