Should IT run “like a business” or “like a non-profit?”


Why is it so hard to run IT like a business?  Because, I can choose to be a customer of a business, and I can choose not to be a customer.  Businesses don’t mind because there are usually lots of potential customers, so getting a market share of 1% can lead to a great deal of success.

IT does not have that luxury.  If IT is to run like a business, then its services have to be consumed by some or all of the business units.  It has to win MOST of the time that IT is in competition with an outside vendor.  The more successful any particular IT service is, the less expensive it gets because much of the overhead is spread out over many customers.  Economy of scale.  This is how businesses work.  Unfortunately, there is not an infinite supply of business units!  IT does not have a broad array of customers to compete for.  IT has a small handful of customers, and that is a problem.

If there are only three business units interested in a particular IT service, and two of them sign up, you have a 66% market share.  That’s great… until one of them decides to outsource.  Then you have dropped from a 66% share to a 33% share.  If I was an automaker, or even a consulting firm, and I have a product line that goes from 66% to 33% market share in a year, I’d go through organizational chaos.  Most businesses cannot scale back that quickly and neither can IT.  In addition to the human cost, financial costs for the service’s remaining customer will soar.

You also have the fact that IT works for the same CEO as the customer (business unit) does.  That means the CEO can issue an edict, and both the business units and IT must comply.  If the business unit chooses not to comply, but IT does comply, then the business unit has little choice but to outsource. 

You could be thinking “but how can a business unit ignore the CEO?”  For many organizations, accountability to the CEO’s edicts are governed very differently within IT than they are within the lines of business.  That is because IT is a cost center, while a line of business is a profit center.  Profit centers are given a LOT more flexibility.  Therefore, IT has a constraint that few successful businesses have: it has to comply with rules that its competitors do not have to follow. 

Running IT like a business, with these economic and market constraints, is nonsense. 

The more rational approach is to run IT as a two-headed organization.  One is a governmental agency, able to levy and collect taxes and responsible for providing uniform services to all citizens (the business units).  The other is a non-profit service provider that is under contract to the government, providing subsidized services to those citizens who need them.

The Governmental approach

Whether we want to admit it or not, this is often how IT runs.  The cost of IT is simply deducted as a corporate expense.  In other words, the cost of running IT is a tax.  In large organizations, a simple formula may be applied to determine the amount of money each business unit needs to pony up.  In Microsoft, your business unit pays a flat fee for each employee or contingent staff member that you have.  For that money, you get a wide array of networking, collaboration, security, and information management services that you don’t even think about.  The stuff is free and it runs.

The Subsidized Non-Profit Service Provider approach

While there are services that we all need, like a secure network and good collaboration and messaging tools (like Exchange and SharePoint), there are also services that some teams need while others really do not. 

For small companies, or companies with very simple business structures, this is not even an interesting conversation except to say that the line-of-business funding pays for line-of-business software.  It is still subsidized, because once the line of business application is running, the “government” side covers many of the operating, networking, and data management costs.

However, for a very complex organization like Microsoft, business-service funding can be a good bit more difficult.  That is because any single service may have five, ten, fifteen different business units that could, potentially, be their customer. 

This is where the “non-profit service provider” idea starts to take shape.

Here you can use some principles of business, like setting up a mechanism to insure that the business units who make the most use of a service are the ones that pay the most to use it. 

For example, let’s say that your company is a retailer that operates branded stores (like Gap and Old Navy).  Your company also sells uniforms to hospitals and health care institutions.  Marketing to these two different markets is quite different.  The marketing team for the branded stores will directly consume individual customer data at a far higher rate than the marketing team for the uniforms business.  Therefore, they should pay more for the “Customer Marketing Profile” services.

It is a non-profit model because you are billing the customer, but you are not billing them for the full costs, and you cannot make a profit on it.  The advantage of running IT this way is that the services provided are always competitive with market rates (due to the subsidy), while IT itself is buffered from the chaos that ensues when a business unit decides to use the cloud for a service and stop paying IT to do the work.

Conclusion

For years, we’ve heard the old saw: If only we could run IT like a business!  But really, we cannot.  IT does not have a market the way a business does, and IT cannot ignore the edicts of the CEO like an outside service provider can. 

It is far better to make a clear distinction between the services that need to run as cross-organizational “platform” services and those that support one or more lines of business.  The services that support one line of business can be funded by that line of business.  The ones that support many lines of business can use a “non-profit” model like I outlined above.   These are really two variations of the same model: the subsidized non-profit service provider.

One is government, the other is non-profit.  Both live together under one IT umbrella. 

Comments (8)

  1. Udi Dahan says:

    This is really an *excellent* explanation. I’ll be pointing many clients to it.

  2. Leo de Sousa says:

    Nick,

    Thank you for a great post. I really like the two headed organization approach you propose. I suppose that it is a structure that resonates with me because that is where our IT Services organization is.

    An example, we assist a business unit to put together a business case for document management. Where our EA practice comes in, is ensuring the document management system has the capability for scaling to an enterprise platform and uses our EA standard technology.

    "Pilot implementation in a business unit and then scale out to others."  

    Ongoing maintenance and support costs are covered by the central IT budget.

    Hope things are good with you. Cheers! Leo

  3. Martin says:

    Under the "government" approach, how can the organisation guard against under-investment in core infrastructure and services?

    All organisations are under pressure to save costs. Many will think that reducing spend on these services can be done without affecting the bottom line of the profit centres.

    the IT department then has a problem. Does it actually reduce its spend on the core infrastructure (making everyone unhappy and the whole organisation considerably less productive) or does it start to charge more for the line-of-business services and use that to cross-subsidise the infrastructure spend?

    I would argue that all infrastructure needs a defined owner and they should have the budget and that budget should be spent with the service provider (the internal ICT organisation) for a set of defined benefits. Then any reductions in expenditure can be made transparently and the company as a whole knows what the outcome of their reduced infrastructure spend will be.

  4. NickMalik says:

    Hi Martin,

    These are hard times.  Some companies are struggling for their lives.  Nearly everyone is cutting costs.  Even the notoriously cash-rich Microsoft has laid off significant staff and we’ve cut back hard.

    But fiscal hardship goes beyond companies.  Governments of every industrialized nation (except China) have all had to cut services.  In my home state of Washington, there are hard cuts in place, and more coming, in Education, Transportation, Public Health, and Law Enforcement.  In California, it is far worse.  Don’t get me started on the EU and the troubles in Greece.  God help Iceland.

    Think about it.  The "government" model in a commercial organization is not all that different from an actual government.  When times are hard, it is really TOUGH to justify an increase in taxes, and core infrastructure investments have to be cut back.  

    So when you ask "Does [IT] actually reduce its spend on the core infrastructure (making everyone unhappy and the whole organisation considerably less productive)," I’d say that the answer is easy.

    yes.

    But now, let’s also remove the emotion and look at the facts here.

    Cutting costs on core infrastructure may not actually make the business "considerably" less productive.  There are normally quite a few investments that are "long term" investments.  This includes things like version upgrades, refactoring for reduced maintenance costs, and configuring new workflow scenarios to reduce human overhead.  These are investments that should pay off, but if you don’t have the money, you cannot invest.  You won’t get the payoff.  In other words, efficiency will not *improve.*

    Think about it.  Efficiency will not improve.  So what.  That means that we run as well (or poorly) this year as we did last year.  

    There’s always next year.

    Honestly, with the exception of things like "compliance" concerns and day-to-day operations, a wide array of IT costs can safely be deferred for one year, or even two years, with little or no negative consequence.  Not everything can be put off,  but quite a bit can.

    I’m not suggesting that we allow IT infrastructure to rot for a decade.  The Comair debacle a few years ago (written up in CIO magazine) clearly illustrates what happens when you allow IT infrastructure to decay for a decade to the point of collapse.  

    But if we hold off that upgrade for a year, or put off enough projects so that we can reshuffle resources and let go of the contractors, the business probably won’t LOSE productivity for this year or next.  

    In fact, in pure economic terms, it will likely GAIN productivity.  

    When the economy comes back, it will be time to invest again… in our IT systems, and in our schools and roads.

    — Nick

  5. Here is my take on it.

    IT has to be run like a business from a performance and an efficiency persepctive. Does it have "to make money" like the business itself? Of course not because as you point out, it doesn’t compete on the market and has a single customer that dictates the price.

    But IT has to understand that it is benchmarked against other segments of the business in terms of efficiency, service levels and metrics like project success rates.

    There are statistics that say that 30% of all IT projects fail or are never completed and an even higher percentage never delivers the promised benefits.

    What would you say if 30% of the products that a company delivers are not working or have quality problems?

    I think you would argue that this company has some serious design or manfacturing problems.

    If indeed 30% of all IT projects fail, IT has some serious delivery problems and it has to accept that it is being held to the same standards and expectations that other parts of the organization are being held against.

  6. NickMalik says:

    Hi Markus,

    I agree that IT project frequently fail.  I do not see how “running IT like a business” will fix that.  I’m asking readers to recognize that IT has a charter, income, expenses, and resources.  A non-profit business, and a government entitity, and a commercial business, all have those same things.

    My goal is to change the mindset from running IT like a “for profit” business to running like a “non-profit” business.  

    I’m not attempting to correct the problem you point out, nor am I able to draw the connection between the two.  

    If you go back a couple of months, you will see an exhaustive analysis that I did on the causes of project failure.  I doubt that “fixing the business model of IT” would affect more than a tiny percentage of those failure conditions.

    — Nick

  7. Lalit Kolhe says:

    IT is a support functionality to any business and so should it remain. In that sense, it has to be a cost centre and in a way like a non-profit. Objective of the IT is to increase the business value; value of IT may increase but more like an inventory value.

    Rather than trying to look at IT as a business, IT must stive how best it can support the business needs. 99% of the times I have seen, IT really struggle to understand business goals. Usually, it’s a supplier – customer relationship which inherently brings the distrust in the equation. Another side effect to this relationship is "cover your own back" syndrome where business do not and perhaps cannot recommend an IT solution and IT do not want to take any decisions about the IT solution. Not a fault of IT as such but if IT had to survive as an organisational unit, IT has to understand the business. What I mean by that is if the business cannot decide the course of actions that heavily depend on the IT choices, IT must take the leadership and guide business in selecting the solution rather than leaving it to them. IT must take responsibility for the business.

  8. RHWhite says:

    Hi Nick,

    Interesting topic and one that should get more airtime. Before IT can be run like a business or non-profit, IT has to be aware of what a business model is and what it can do support optimization and innovation. Rarely have I heard IT leaders discuss the business model of a company and how IT supports that business model. Even if the CIO tells IT "We must align to the business.." what does that really mean to the service desk analyst, sysadmin, dba or security engineer? Nothing if they do not understand how their job function supports or devalues the company’s business model.

    This leads to a greater discussion of expectations of IT professionals from a learning perspective. Why aren’t IT professionals expected to take business related courses that enable them to intuitively ask themselves during the course of their duties how their actions support or derail their company’s business model?  While taking a Windows 2010 admin class would be beneficial to a sysadmin, taking a business process modeling class can help the sysadmin to understand how the services he will offer from his technology pool supports the business. If the sysadmin is logical and innovative, then they can architect a system that supports the business rather than a system that is architected around tinkering behavior (ohhh this feature seems cool, I’d like that on my resume).

    I worked on a business modeling book project this past year. It was very insightful for me. I now include it as a must read to my IT/Infosec colleagues. During the writing of the book I requested some visibility for IT. The authors agreed and gave IT two pages. The basis of the IT business model is EA <grin>. I have also suggested that they write a book completely dedicated to IT and business modeling. We’ll see if that happens <grin>.  There is also a portion on non-profits as I suggested as well.

    As always, your posts are insightful, innovative and inspiring. Check out Business Model Generation

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