Aligining IT – 1

recently there were couple of articles on how best to align IT and should it be a profit center or a cost center?

i came across an article in itbusinessedge website – http://www.itbusinessedge.com/blogs/tve/?p=373 on how Bausch & Lomb has aligned IT with its customers.

that article set me thinking – can IT be aligned to both, internal and external customers? and if so, will both the alignments have same effectiveness measurement parameters?

basically the question that cropped up was – how practical is it to have IT service both, internal and external customers effectively.

as IT service organizations are undergoing a change from being cost centers to profit centers, hence is it possible to have a model where the nuances of being a cost/profit center does not impact IT teams to service enterprise customers?

can IT be both, a cost center and an investment center at the same time??

the figure below alignig-IT captures my thought in brief (i am a firm beliver that a picture is worth thousand words and basically i am too lazy to type too ;-))

basically split the IT function into multiple centers. an ‘innovation center‘ and a ‘transformation center‘. from accounting point of view, initially i thought of ‘profit center’ and a cost center’ as the two possible accounting models around which IT could be structured.

(I borrow the definition of innovation from a good article on innovation in the context of IT in reuters; highly recommended – http://www.reuters.com/article/pressRelease/idUS192234+07-Apr-2008+BW20080407 )

now, if you explore the definition of the two accounting terms – profit & cost centers, it provides very interesting viewpoints:-

profit center definition from wikipedia – Profit Centers are parts of a Corporation that directly add to its Profit (http://en.wikipedia.org/wiki/Profit_center).

cost center definition from wikipedia – Cost centres are divisions that add to the cost of the organization, but only indirectly add to the profit of the company (http://en.wikipedia.org/wiki/Cost_centre).

Profit Center – The profit center is no brainer. enough articles are there about setting up of a IT as a service provider to the IT users and having service catalog and charge back mechanisms to make it into a ‘profit center’.

for internal users/employees of an enterprise, it makes sense for some organizations to structure their IT as ‘innovation center’ on the lines of aprofit center’ for accounting purposes. by being an internal service provider and with a good service catalog and charge back mechanism, IT can effectively demonstrate its efficiency & profit relative to other business units.

also being an innovation center, all new initiatives can then be structured to reduce cost, improve the efficiency and possibly address business problems thus bringing the alignment of IT closer to business

Cost Center – however, if IT is aligned to customer services organization and treated as a cost center, it will have to live with the usual negatives associated with cost centers, namely – cost cutting initiatives under revenue or budget pressure. also, investments in new technologies are difficult to sell to senior management due to lack of quantifiable means (at times) to measure direct or indirect impact to profits.

ALternative – IT as Investment Center – so, what about treating the part of IT which is aligned to customer services or ‘operations’ as an ‘transformation center’ with accounting principles of an ‘investment center’?

by making that part of IT which is aligned to customer services, an organization can ensure that all the transformation initiatives are centric around enterprise customers and customer services. usually, transformation requires investment and this alignment will ensure – ‘make houte couture dress for the one who pays the bill’ (bad analogy? maybe but i couldn’t come up with something witty at this hour :P)

but, why realign?

most of the customer facing or interactions that an enterprise have now depend heavily into IT. hence to expect the customer services organization to improve the customer experience without giving them direct control over the associated IT dependancies make them handicapped and less effective in either process or operational improvement. Hence it makes some sense to align that part of IT, which is directly responsible for running & supporting business processes critical for customer services. also by making it as investment center, it can ensure that it is not handicapped with traditional drawbacks associater with cost centers & profit centers.

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