IT Department as a Profit vs Cost Center

Lately, I've been party to a lot of discussions around how IT should be run-as a cost center or as a profit center? A few CIOs I've met proudly say that they're running their setup as a profit center, where every IT resource, be it software or hardware, is mapped to a P&L sheet, and the RoI for the same is measured. Yet there are others who simply treat it as a cost center, which is the typical approach wherein the company assigns an IT budget, which is then apportioned across various departments in the company. There are pros and cons to both approaches.





When you run your IT as a profit center, it can be done in two ways. One is where your IT department is hived off

as a separate company, so that it offers IT services to other companies besides your own. Everything is charged for,

because the motive is profitability. The challenge here is that the new company would have to take all the pains that a

newly setup company would take-hire its own staff for accounts, marketing, HR, etc, prepare its P&L accounts, etc.

Moreover, it may not offer the same level of services to your own company as it used to earlier. Market forces

would come into play here, so the newly formed company might end up giving higher priority to its topmost customers. This approach could find value for very large enterprises that have multiple group companies, and the IT department itself incurs a huge cost. So the parent company might consider hiving it off to offset that expense.

The other approach of running IT as a profit center is where the IT department charges back all other departments for

every service it offers to them. At the end of every month, this cost sheet is shared with each department and

mapped against their output. In this case, the RoI for each department is measured and shared with the top

management. Low RoI is questioned so that corrective measures can be taken. In this setup, the departments can't raise undue requests for resources from the IT department. For this also, a proper governance model has to be created and followed, wherein the IT department tries to ensure that IT is actually helping the organization meet its business objectives.

This approach could actually be used by any company, but the IT has to reach a level of maturity where it can become

a business enabler for the company. It requires management support and the CIO must act as a business leader and not as a mere technical support manager.

The second approach is of course to run your IT department as a cost center, which is how it's typically done in a lot

of organizations. The IT budget is fixed in this case, and apportioned across all departments as a service charge.

Which is the best approach? There's no black and white answer. It depends upon the maturity level of IT in your

organization. Whichever approach you choose, keep in mind that you should try and calculate the RoI from your

investments in IT. Don't just blindly follow what others are implementing. Understand your own requirements,

identify the right technology, and then prepare the metrics to measure the returns.

Happy New Year!