Wednesday, January 05, 2011

The "IT as a Business" Train Wreck

I just read this year-old article by InfoWorld's Bob Lewis titled Run IT as a business -- why that's a train wreck waiting to happen. It reminded me of comments on a CIO article I posted in 2008 as The Limits of Running IT Like a Business. Here I would like to emphasize a few of Bob's points via excerpts from the 2010 article.

When IT is a business, selling to its internal customers, its principal product is software that "meets requirements." This all but ensures a less-than-optimal solution, lack of business ownership, and poor acceptance of the results...

Tim Hegwood, CIO of MRI Companies, is trying to steer his company's mindset away from a focus on software delivery. "We're still struggling to institute the concept that 'there are no IT projects -- only projects designed to solve business problems,'" he reports...

Larry Sadler, IT service manager at ONFC, experiences similar difficulties. "The 'customer' concept is deeply embedded in the departmental silos here," he says. "This results in an attitude of 'I want this or that aspect done, and without any interruption.'"

According to [Bassam Fawaz, CIO of a large global logistics company], "IT should relinquish its increasing stance as an order taker, and earn and advance its intended role as the qualified engineer of what makes a business hum..."

Another unintended consequence of running IT as a business with internal customers, while less tangible, might be even more important: Defining IT's role this way creates an arm's-length relationship between IT and the rest of the business...

When IT acts as a separate, stand-alone business, the rest of the enterprise will treat it as a vendor. Other than in dysfunctional, highly political environments, business executives don't trust vendors to the extent they trust each other...

Businesses that take running IT as a business seriously have to bill IT's internal customers for services rendered. That means instituting chargebacks, also known by the more impressive-sounding synonym "transfer pricing," but more accurately described as "full employment for accountants..."

When the only incentive managers have to promote efficiency is the impact of chargebacks on their departmental budgets, chargebacks are just a Band-Aid. They won't fix the real problem: that nobody cares about the success of the business, only their own fiefdom.

Anita Cassidy, president of IT Directions and coauthor of "A Practical Guide to Reducing IT Costs..." [says] "I watched one company make several poor strategic decisions for the enterprise as a whole," she adds. "Because of its chargeback system, its managers were more concerned about reducing their individual costs than doing what was best for the enterprise. I watched another significantly increase shadow costs and inefficiencies within the business.

Chargebacks had a chilling effect on using the central IT services."

Chargebacks are an attempt to use market forces to regulate the supply and demand for IT services. If that's the best a business can do, it means the business has no strategy, no plans, and no intentional way to turn ideas into action...

The alternatives begin with a radically different model of the relationship between IT and the rest of the business -- that IT must be integrated into the heart of the enterprise, and everyone in IT must collaborate as a peer with those in the business who need what they do.

Nobody in IT should ever say, "You're my customer and my job is to make sure you're satisfied," or ask, "What do you want me to do?"

Instead, they should say, "My job is to help you and the company succeed," followed by "Show me how you do things now," and "Let's figure out a better way of getting this done."


Cassidy sees proper governance as the superior alternative to using chargebacks to set IT's priorities. The company's leaders have to collaborate to determine how funds are spent, or the company won't be able to set and implement a strategic direction...

When IT is integrated into the heart of the enterprise, its priorities aren't defined by who has the budget to spend (by chargebacks). Rather, they're defined by a company leadership team whose members have a shared purpose, who understand what the company must do to achieve that purpose, and who understand the role new technology will play...

Companies that have integrated IT and no internal customers define success differently.

IT's job is to recommend better ways to operate, using technical capabilities business managers might not even know are possible.

These enlightened companies don't have IT projects -- they have business change projects that aren't done until the planned business change has been accomplished...

Where did the standard model [i.e., "IT as a business] come from in the first place? The answer is both ironic and deeply suspicious: It came from the IT outsourcing industry, which has a vested interest in encouraging internal IT to eliminate everything that makes it more attractive than outside service providers...

Take it all away and start acting like a separate business, and what do you have? A separate business, but without a marketing department, sales force, or possibility of turning a profit.

My advice? Don't act like a separate business. Do the opposite -- be the most internal of internal departments. Become so integrated into the enterprise that nobody would dream of working with anyone else.


This article makes so many great points. I strongly recommend reading the whole story if you have time. At the very least, consider what I've emphasized here the next time you interact with IT or the rest of your company.

5 comments:

Jet said...

I like the "chargebacks are an attempt.......no strategy, no plans, and no inentional way to turn ideas into action...."

Anonymous said...

Great highlights - I see that kind of fiefdom stuff at the time in my university.

Anonymous said...

working for a company with medium-large sized companies i can only applaud the mentality depicted in these writings ... just before i turn back to the very saddening everyday reality ...

Nelson said...

Just remind the "IT" is layered. e.g. comparably, a company may outsource some financial services, but never the "finance".

From perspective where technical persons are, the "Infrusturcture Services" is however a low level component in the IT building. Enterprise Architecture and its frameworks, programs and governences are concreting the bridges between IT and business, which is (must be) handling by the enterprise board (so meaned "be the most internal of internal " in the article).

When the EA is visionly positioned beyond both business and IT by the Board, the most of the concerns in the article can be mitigated. - guess it is what many enterprices is working. In those companuies, CIOs are playing roles to assist and enhance EA, rather than fight with business, accounting and finance in frustrating ways.

You would always feel difficult to approach ideas from infrastructure directly to business - that is why need EA to play a super crossing role as communicating business interests and technology trends.
Compare with EA, the outsourcing is in operational level - significant, but tunable, depends on how the EA is working.

When we are suggesting, we'd better to structure our mind at first, then make sense to particular ones in certain context, rather than sounds meaningful to "anyone".

Lenny Zeltser said...

I agree that there are problems in many implementation of internal cost accounting systems. Many companies institute incentives in a way that encourages decisions that result in local optimum, rather than behavior that benefits the organization as a whole. Yet, I find it naive that a system based on everyone collaborating in good faith to help each other will be much better. Sure, in a perfect world everyone would be kind, generous and empathetic.

Perhaps the problem is in the overly narrow interpretation of what a customer-provider relationship entails, be the arrangement internal or external to the organization. A good provider doesn't position itself as a separate business. He follows the advice of becoming so integrated int he customer's enterprise "that nobody would dream of working with anyone else." He also recognizes that the only way for IT projects to succeed is if they are tied to business objectives.

Many good points were brought up in the InfoWorld and CIO articles you mentioned. They highlight many issues that are preventing businesses from deriving as much value from IT than it could. At the same time, the solutions they provide could be implemented within a model that incorporates internal cost transfers/chargebacks.