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February 02, 2005

Comments

DM

At last! You've uncovered the great IT conspiracy to keep corporate profits to a minimum.

Your argument about keeping IT to the absolute minimum necessary to support the company is precisely one of the reasons that many enterprise software deployments fail. That and that companies buy software that don't actually do what they need. Damn those IT folks for pushing SFA, CRM, Finance and HR software down your throat and stealing your calculator and legal pads.

Stuart Berman

I'll take the other side of the argument.

If you fail to fund an (IT) initiative properly it will risk failure, but I don't think that is what was meant by 'minimum'.

I am an IT guy and we just don't do a very good job understanding the business or even speaking the language. There are trends to offer IT services to the business which are designed to compete with external offerings. This means we need to think in ways we aren't comfortable. We now look at marketing our service, being competitive, making sure that the 'customer' is satisfied and using metrics to show what we are delivering.

The problem I see on the business side is that the financial side of running IT has been very sloppy - too hard to break down where all of the money is really going. I look at the IT budget and we look like a bloated tick. Then I look at all of the stuff we are doing (responding to all of the business requests and rather efficiently I might add) and realize that the costs are being swept under the rug. When sourcing has us install that new supplier management system - they don't pay for it, IT does. At least from a managerial accounting standpoint you ought to track all of those related expenses _and_ the ongoing maintenance back to that business unit. So in this example sourcing looks like they are really saving the company money while the IT tick has swollen a little more.

One clever approach to this problem was the way USAA spun off its IT group as a separate business with its own president and profit targets (which were ploughed back into IT R&D). I think the story was posted to baselinemag.com - but the interested results were that IT costs for the first time started falling and the other business units really complained because they were having to fully 'pay' for what they were getting. Luckily the CEO of USAA wouldn't budge and the consumers of IT came to discover the real costs of their requests and then made sound business decisions based on those costs.

Another example is the recent reversal by JPMorganChase of its outsourcing deal with IBM. They were unable to control costs so they now brought IT back inhouse. I hope they sorted out the IT management piece or that won't help either. My experience is that a lot of IT managers were IT professionals that simply got promoted without having to learn how to be good managers.

I believe there are plenty of examples of the costs of security breaches - I will hunt some down if you are really interested.

David Foster

Stuart...how can you have a "business" and "profit targets" unless there exists a *market*...which requires the existence of *competitors*? Was the USAA IT group allowed to sell its services to other companies? Were the line organizations of USAA allowed to purchase IT services from external sources? If both of these tests aren't satisfied, then I would argue that what is happening here isn't a separate business, but merely a sophisticated cost- allocation / transfer-pricing scheme...probably worthwhile, but hardly all that innovative.

I think the application of IT in most American corporations is very poorly done, and fault lies on both sides. Too many IT people think in terms of "justifying" a particular technology, rather than thinking out the business problem and how they can help solve it. And too many line executives fail to develop adequate awareness and to exercise proper supervision and control. There are lots of customer-visible corporate web sites that have clearly never been looked at by a member of senior management, or they wouldn't be so poorly designed and difficult to use.

Chris Walsh

Wow. Somebody read Nicholas Carr and just had to vent.

Wake me up when we get to the part about internal audit or marketing being a waste of shareholder value too, 'k?

chad

I am not a CEO or even a corporate executive. I work for a company which tries to make IT implementations more effective so I spend a lot of time looking at various areas that are connected.

First let me say if you have never read about an IT security breach at a company you haven't been looking very hard. The blaster worm was an IT security breach. How much did that cost companies that were affected? Or citibanks loss of 40,000,000 credit card numbers, what is the potential cost there?

Now about IT propaganda. IT is not a profit center and in my opinion shouldn't be treated like one. It is really a profit maximization center. If you are using a Just In Time inventory system you are probably very IT dependent, otherwise how do you know what and when to order? If you are using the pen and paper method you are probably paying more in personell costs than the server and appropriate software would cost. Your point about large scale roll outs of ERP software is well taken, but generally that is not that fault of the IT department, but of the other stakeholders in not adequately documenting the needs. In addition from what I have seen companies always try to save the money in the short term rather than looking at the long term so they end up repeating the process multiple times. In short the point of the IT department is to allow other people to generate profits for your business at the lowest possible cost. Anyway that is my uninformed opinion.

Stuart Berman

Sorry - I was wrong, the USAA article was in CIO not Baseline - see the article at: http://www.cio.com/archive/050104/incorporated.html
They make the case - it is an article worth reading.
USAA had a clever way to deal with the problem of having a culture that is inflexible to the needs of business. This resulted in ehausting the ordinary persuasive tactics and chose an alternative akin to throwing them overboard to make them swim.

(Excluding IT companies that sell IT as its product or service) IT is just a tool or resource. If I think of it like electricity, it is often impossible to compete without it. But if you are so enamored of IT that you are building Tesla coils because they are so cool... or if the electricians are allowed to replace the wiring each year because the new wires are 'better' then you have a problem - a management problem. An important issue is that IT can be so complex that very few are able to really understand what is going on and are forced to rely on the opinions of those who don't have a balanced opinion.

Frank Scavo

Provocative post. I've written a response on my blog at http://fscavo.blogspot.com/2005/02/it-strategic-investment-or-cost-of.html

Michael Barry

IT investment by non IT centric firms is never strategic unless the investment is made in an IT paradigm shift that has a direct bearing on the company's competitive position. IT investment within the confines of a single paradigm is always an exercise in risk/cost mitigation. So the investment in migrating from paper based IT to electronic IT could be seen as strategic since it directly affected HR costs, time to market, product quality, etc. The resulting competitive advantage, however, is only realized by first mover organizations as the resulting shift rapidly becomes commoditized.

Today’s commodity line-of-business systems are based on a model that is fundamentally static, retrospective and dependent upon almost constant user interaction for the completion of any meaningful operation. Therefore, the opportunity for significant competitive advantage through IT investment will not occur until such time as systems that are adaptive, dynamic, prospective and autonomous are commercially available. Until then, budget requests from IT are purely utilitarian propaganda.

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