IT Needs to Run Like a Business

By Michael Vizard Print this article Print

How can an internal IT organization avoid being usurped by an external IT service company?

Here’s one of the biggest challenges facing an IT organization today: Some third-party service provider is always telling the business side of the house that it can do the IT job better than the internal staff. Of course, IT never works as smoothly as advertised, so it’s relatively easy for a third-party service provider to get a hearing with business managers who might be frustrated with the internal tech team.

The key question is, How can an internal IT organization preserve its authority over technology and make sure it doesn’t leave itself open to being usurped by an external IT service company?

Sometimes, the best way to do that is to adopt the tactics of potential competitors. When you look at how a typical IT service company operates, every service has both a price and an allocated cost. Their profit, naturally, is the difference between what they can charge for the service and what it costs to deliver it.

In most instances, IT service companies are betting that they can scale the costs of a particular service across multiple customers to give them a price advantage over internal IT organizations that deliver the same service. The biggest weakness in that model, however, is the amount of profit these firms make. Since the typical IT department is not trying to make a profit, that usually negates the cost advantage of the IT service provider.

This scenario is playing out at Cummins Business Services, where an internal IT group, led by executive director Floyd Rutan, has essentially turned IT into a nonprofit service organization dedicated to supporting a business that makes diesel engines and power systems for heavy-duty transportation vehicles. This approach allows Cummins’ IT department to effectively compete head-to-head against any IT service company in terms of breadth of services and pricing.

To make that happen, Rutan has created 23 discrete IT services offered in eight physical locations. To create that menu of services, Rutan worked with a company called Digital Fuel, which many IT service companies rely on for the service management software that helps them run their business. In effect, Cummins is reaching past the IT service companies to utilize much of the same technology these firms use to set up their own IT service practices.

As a result, the business side gains more visibility into exactly what they are paying for. According to Rutan, the internal IT organization can always beat an external provider on pricing. Furthermore, he notes, the internal IT department is closer to the business, so it can provide a higher level of service.

This doesn’t mean that an internal IT group should exclude all third-party service providers. After all, internal IT departments have access to only so much budget and expertise. But it does mean that when an internal IT department does decide to work with a third-party service provider, it can do so on its own terms.

The challenge facing most internal IT organizations is that they never really learned to operate as businesses. Instead, they are usually viewed as an opaque cost center that most business executives don’t understand: These execs don’t know how much money is invested in what technologies or how many people are needed to deliver what level of service.

It’s the responsibility of senior IT executives to bring a higher level of financial management and business professionalism to the IT department. If they don’t, they will continue to be out-maneuvered by voracious third-party IT service companies that can’t necessarily do the job any better than they can. What these firms can do is wrap IT services into a transparent pricing system that creates the illusion that they’re delivering more value for less money than the internal IT staff.

As the economy continues to tighten, the tension between internal IT organizations and external service providers has the potential to escalate. The fact is that labor continues to make up the largest segment of the overall IT budget. Many IT departments are investing in a new generation of IT management tools as a way to keep those costs in line as the enterprise computing model becomes more complex.

But investing in all the tools in the world won’t matter if the internal IT organization can’t clearly explain the value and cost structure around any given IT service. In this economic climate, it’s never been more critical to run IT as an independent business within the larger company, because, at the end of the day, it’s going to be a matter of survival of the business fittest.

This article was originally published on 2008-10-30
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