Cost centre vs. Profit centre – the debate continues!
This debate has been on-going for a number of years, and continues to be still relevant. The reason for this debate is rather simple, accountability. Business wants to know what they get for sinking millions of bucks into IT, and IT wants to prove that they are worth the money given to them. The debate starts when the return on investment and productivity of the IT department must be proven on the financial statements. In essence the core of this debate is to prove the performance of the IT department and to show that business gets a proper return on their investment.
What is a cost centre?
In a cost centre scenario, the IT department will produce a budget consisting of the cost of maintenance, staffing cost and then a projection on the time that will be available for new projects, and what they can deliver. In this definition it is easy for the IT department to “overspend” on maintenance, where the IT staff will only be partially productive because of all the maintenance they need to do. This means that business get less time from the IT department for new and enhanced software and functionality.
The bigger problem with a cost centre scenario is that more often than not there is very little insight into IT from the business point of view. Although business was told on a high level what the budget is for, they do not know the specifics of the budget and the productivity of the staff. It is difficult to calculate a true ROI, as most of the budget can disappear into maintenance and the project delivery will be secondary to environment maintenance.
What is a profit centre?
In contrast to this, with a profit centre business list a number of projects they want the IT department to do. The IT department then has to work out costs of the projects and from there calculate a profit that will enable them to do the necessary maintenance on the environment. This provides business with a better model and platform to calculate the return on their investment and the productivity of IT staff. The problem with this type of scenario is that all but the most critical maintenance on the environment might be skipped, especially when project overruns influence the “profitability” of the IT department.
In my opinion an IT department can only be a profit centre if it generates money from outside the traditional core business of the organisation. Amazon is an example of this, where their IT department generate money from their cloud services, and not the core business of Amazon which is to sell media and goods over the internet. It does not have to be as drastic as Amazon, but only once an IT department starts to generate an income from outside the organisation, can it be called a profit centre.
Steps to move IT to profit centre
The first step would be to define the role of IT within the business structures. IT should be core to business, it is not a nice to have anymore, but critical to outperforming the competition. In my view, the majority of IT departments should be cost centres, because that is just what they are. If they do not generate additional income to the business, they are a cost centre. The problem with this is to create an environment of trust and openness between business and IT. Business should put more trust in the IT department and make them part of the long term objectives and goals. IT should be part of the business decision making process, and in turn business will then play a bigger role in the IT project management and development cycle. More collaboration between business and IT is needed whether IT is a cost or profit centre.
To ensure a positive collaborative environment where IT and business work together in a progressive way I would propose the use of a mediator. The easiest way of getting a mediator would be to outsource the infrastructure to a public cloud company, let them build and manage your cloud infrastructure. This step in itself has a number of advantages namely:
- Best of breed processes and procedures for a modern IT infrastructure
- Knowledge and experience from the cloud company on implementing cloud based solutions in the company
- Lower cost of IT infrastructure and better performance with improved productivity
- Easy achievable hybrid model between private and public infrastructures.
Because of the experience and knowledge of a public cloud company, where they work with many different requirements and even more different software solutions, they would the perfect partner to act as mediator between business and IT. They would be application neutral, and would be able to help both parties make proper decisions to the benefit both parties and ultimately makes the organisation more competitive.
The ideal for IT would be to operate as a profit centre. The only realistic way of doing this would be to create software or services that the rest of the industry can use. This however means that business would share some of their intellectual property with the rest of the world. This can be detrimental or extremely beneficial to the organisation, it would depend on a good partnership between business and IT. So the ideal would be a LOT of trust between business and IT, where IT can use some of the intellectual property and turn that knowledge into a profit outside of the traditional income stream of the organisation.
The bottom line however would be for business and IT to work more closely with one another, no matter the labelling of the department. And then both of them can look for opportunities for IT to turn intellectual property into a profit stream to benefit the organisation as a whole.