IT Cannot be a Profit Center - Page 2

Feb 16, 2005

Sourabh Hajela

Product Mix

An ITO cannot manage its product mix for profitability either. It cannot reject projects or discontinue services because they are not profitable. Often business requirements dictate investment in "unprofitable" initiatives. These could be requests for one-of-a-kind or custom-tailored products and services which do not provide economies of scale or require specialized resources and invariably cost more.

If there is a one-of-a-kind request from a business unit, should IT engage in price increases, just like any "profit-driven" business would? If there is a need for express delivery, can the charge be different?

In the absence of the ability to price products and services to market conditions, the discussion on IT as a profit center is moot because a profit center's profitability is determined by using all levers at its disposal.

For example a profit center can use:

  • Innovation to generate substantial profits: New and improved products are priced at higher margins. IT cannot introduce new products that its internal market does not need. Consequently, it cannot reap the benefits from innovation, to the extent real profit centers can.
  • Financial management to impact profits: IT does not have the freedom to invest its "spare" cash and generate higher returns.
  • Distribution channels to creatively leverage partnerships for profits: IT cannot leverage its channels to deliver other providers products for a profit.
  • If an internal ITO overcame all these issues and considered operating as a profit center it would not meet the expectations of alignment and value placed on it because the ITO is created to address the unique needs of aspecific business.

    Hence, the more IT hones in on its business customers' requirements, the more shareholder value is generated. This is the converse of focusing on many client's needs and leveraging economies-of-scale to save cost and therefore increase returns.

    Over time business and IT alignment results in increasingly lower costs as the logical benefit of climbing the learning curve but there are no economies-of-scale to speak of unless the company grows significantly without expanding the current infrastructure and/or base of applications.

    Independent IT

    Some have argued that for IT to succeed as a profit center it must become an independent entity. But this type of organization is profit-driven and serves both internal and external clients (partners, suppliers, VARs, etc.). It also competes for business with other providers even for internal clients' projects.

    While this model is market-driven and hence fulfills the premise of profitability driven enterprise it fails on the alignment and value criteria outlined above and will not result in the desired benefits to the enterprise.

    An external provider is not motivated to align its capability to one business' requirements as it will loose other customers -- it is nearly impossible for any provider to align themselves with all or most of their customers.

    An open-market model also dictates that companies have multiple suppliers. As with the above example, it would be impossible for a company to align with all or most of its suppliers either.

    Strategic Value

    Strategic advantage from IT comes when it is tailored to a specific business' needs. By definition, profit-driven providers focus on economies-of-scale. Hence, they will create generic products that are of use to many customers. Customizing these products to meet specific needs of a particular business will, in the least, cost extra.

    This lesson was learned by many companies, when they implemented off-the-shelf ERP packages. The package cost a fraction of what it took to implement it!

    Using financial measures and placing "profit" expectations are unreasonable and unproductive. If the goal is to ascertain and assure that IT is efficient and effective there are many more accurate and reliable ways of accomplishing this.

    Sourabh Hajela is a management consultant and trainer with over 17 years of experience creating shareholder value for his Fortune 50 clients. His consulting practice is focused on IT strategy, alignment and ROI. For more information, please visit Or feel free to contact Sourabh at or post your questions at

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